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

Thank you again. Looking at the information that has become available in the few weeks since our last meeting, if one filters out the likely effects of the severe winter weather in parts of the country, the equity market gyrations, the waxing and waning of concerns over terrorist attacks and a possible war with Iraq, along with the fact that there are fewer shopping days than usual between Thanksgiving and Christmas, there’s nothing left to say. [Laughter] We have all this time to fill up before lunch!

Nevertheless, I will report that the participants in a recent meeting of our Community Bank Advisory Council as well as our twenty-three directors are less gloomy than they were a few months ago. Whether this cheerier mood will last beyond the holiday season won’t be known for some time, of course. But clearly the group dynamics have shifted from a competition to report more negative anecdotes than the others to a desire to point out things about which to be positive. For example, one director said he believes that a 15 percent increase in order backlogs and a 25 percent increase in shipments of forklift vehicles versus a year ago will prove to be a leading indicator of a stronger investment sector. I’ve never studied the leading indicator properties of forklifts, but my suspicion is that the Chairman has. [Laughter] In any event, the Cleveland staff is already on the case.

That same director is also on the board of a very large insurance company, and he reported that premiums at that company are on a pace to increase 150 to 200 percent this year. One banker reported that the most significant development to him is that lending on recreational vehicles has been his strongest line of business this year. I don’t know whether that was supposed to be good news or not. In a go-around of the bankers, most said that the local economy they serve will be better next year but that their own earnings will decline as a result of narrow interest margins and an expected decline in fee income. As a side note related to the subject of potential output and capacity utilization, most expressed the view that their mortgage departments were operating beyond a sustainable capacity. The bankers also generally believe that their customers expect higher interest rates in the future, so the bankers’ efforts to extend the maturity of their liabilities by offering higher yields on longer-term CDs have generated little response.

On the national economy, while the various threats and uncertainties about the future that we’ve been talking about all year have not gone away, there are more-positive forces at work. Those include the narrowing of quality spreads in capital markets and the ample growth of the entire constellation of reserves and money measures. Moreover, there’s an expectation that marginal tax rates are more likely to be reduced than increased in the foreseeable future. All those factors should enhance the inherent resiliency of the natural forces in a market economy.

I continue to believe that the overall performance of the U.S. economy in 2002 will be judged to have been far better than any ex-ante expectation about what the first year after the terrorist attacks would be like. I trust that the second year will be even better. Thank you.

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