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

Thank you, Mr. Chairman. I didn’t deliberately set out to be the last speaker today. I was just a little slow getting on Norm’s list.

One might liken the economy today to early spring in Michigan. One can see some scilla here, some spring beauties there, and trillium over there. Ah, one says, “Spring is coming!” True, it is coming, but there are still three inches of snow covering the yard! [Laughter] There are a number of bright spots in the recent data, and previous speakers have mentioned all of them, so I will pass over them in the interest of time. Bright spots aside, we should not forget that we need to see many signs of spring before we conclude that warm weather is here to stay. Moreover, despite the bright spots, there are still some not-so-bright spots. Industrial production is down again; the workweek is down; the state and local fiscal situation looks ever more dire; and foreign growth seems to get revised down every time we hear about it.

The baseline in the Greenbook forecast incorporates much of what is known about spending demands in the near term in the framework of a structural model that has a good forecasting record. As the Greenbook forecasters will be the first to admit, they need to see a lot of good news to bring about the healthy growth implied by the Greenbook forecast for the latter half of this year and all of next year. This growth is healthier than that in the Blue Chip forecast by ½ point this year and a full point next year. But even this reasonably optimistic forecast leaves continuing output gaps and an unemployment rate of 5.6 percent by the end of next year. Indeed, even if investment were to be stronger than anticipated, the output gap would still persist because, the way the Greenbook forecast is done nowadays, both aggregate demand and aggregate supply are raised in response to a positive investment shock.

Over the past several years we have often had a situation where output looked weak and inflation benign. We would typically argue that we could pursue one part of our mandate, output growth, without sacrificing the other, stable prices. One arrow seemed to be pointed down, and one was in neutral. Today, however, as many of you said, that is not the case. Now inflation has fallen to dangerously low levels, and both arrows are pointed down. Evidence of the disinflationary dangers is widespread. The Greenbook probability of deflation has risen to 35 percent, which is getting pretty close to even odds by my count. The increase in the key market component of core PCE inflation has dropped very sharply, with the index essentially flat for the last three months. It is possible that this high-frequency reading will not be sustained, and it’s also possible—as the Chairman, for one, suspects—that this measure is inordinately influenced by declines in the value of rental housing. But taking out the influence of rents, growth in the market component is still dropping, as is growth in the overall core PCE. In terms of my own desires, the core PCE is now growing at a rate that is arguably below the band that I personally would be comfortable with over the longer run. Non-oil commodity prices are very cyclical, but they’ve been moving down recently; and, of course, oil prices are way down. Both measures of wage change are growing at low rates in the latest data. All of these are current measures. With output gaps forecast to persist, measures of inflation are likely to drop further. As I said, both of the arrows reflecting our mandates are pointed down.

So, what to do? Many of us I think have already made a strong case for easing policy right now. At the same time, there are market uncertainties. There is some chance that the war was a big factor in holding down spending and some possibility that this damping influence has already been lifted. So there is some chance that we will soon start to see better spending data. I, for one, would like to see much better spending data. We should never let uncertainty become an excuse for prolonged inaction. We might let it be grounds for a slight further delay. Here I would support Tom Hoenig in the view that a slight further delay would also give us more time to organize our whole strategy in this new non-inflationary atmosphere. Thank you.

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