From the FED: Glenn Rudebusch, Senior Vice President and Associate Director of Research at the Federal Reserve Bank of San Francisco, states his views on the current economy and the outlook:
frbsf.org
Check out these charts from the FED:
frbsf.org
> Last year at this time, we anticipated continued steady growth in real output. As it turned out, the economy decelerated sharply in the fourth quarter. Part of the reason the economy hit this pothole, of course, is related to last year's hurricanes, which depressed oil and natural gas production along the Gulf Coast and, through higher energy prices, damped spending and production in other sectors as well. Furthermore, given the data in hand, it is apparent that the various other factors restraining the fourth quarter were temporary, and we expect a substantial rebound in growth this year. Notably, first-quarter growth—boosted in part by unusually good weather and the start of some rebuilding along the Gulf Coast—may reach 5 percent at an annual rate. But that rapid pace is not expected to endure; instead, we anticipate a quick return to a fairly steady trend rate of growth this year and next as part of a robust and sustainable expansion.
>A year ago, we were expecting the core inflation rate to moderate a bit from the highs posted in 2004. In the event, core inflation did edge down a bit in 2005. Going forward, we now anticipate that core inflation will remain contained.
>A risk-management strategy stresses an assessment of the range of possible alternative outcomes. At a broad level, there are probably two key risks to the forecast. First, we may be underestimating the underlying strength of aggregate demand in the economy and the impetus for higher inflation. The unemployment rate has been falling fairly steadily for the past three years with no sign of a slackening in pace. More broadly, a strengthening global economy has also helped push up prices for energy and other commodities. There is a possibility that overall capacity may be strained and upward pressure put on price inflation. Total PCE price inflation, which has averaged about 3 percent for the past few years, clearly has been boosted by higher energy prices. So far, however, core inflation, which is a good measure of underlying inflation going forward, has remained contained.
>A second key risk is that we may be underestimating the effect of the past tightening of monetary conditions on the economy. For example, the economy, and particularly the housing sector, may be especially sensitive to the past monetary tightening already in train. The housing sector has been an important source of support during this expansion—especially through the large increases in housing wealth. Even after correcting for inflation, recent prices have been increasing about 10 percent per year. Although we do not anticipate these recent gains to continue, there is a risk that a more marked slowdown might have more precipitous effects than we anticipate. The recent removal of monetary accommodation has started to have some effect on mortgage rates, which should damp housing demand. Indeed, by one survey measure, home buying attitudes have soured recently, as the number of people assessing that this is a bad time to buy a house doubled in 2005. This shift in attitudes is consistent with evidence that home sales have cooled a bit from their record pace.
>There are a host of other risks to the forecast as well, including those related to the trade deficit, energy prices, the federal fiscal deficit, productivity growth, bond term premiums, and the household saving rate.
>Over the past 45 years, the real funds rate has averaged about 2-1/2 percent, which is probably close to the center of a neutral range for monetary policy. Monetary policy now appears to be positioned at the upper end of this neutral range, but the future path of policy is quite uncertain and very dependent on how the incoming data shape the outlook. |
