Thank you very much, Henry. It's a pleasure to return to Charlotte again at the end of the year to discuss the economic outlook.1 I'll begin by discussing current conditions in a bit more detail, before going on to discuss the outlook for the coming year. Before we begin though, let me note that the usual disclaimer applies – the views I express are my own and are not necessarily shared by any of my colleagues on the Federal Open Market Committee.
By now I'm sure the events of this past summer are very familiar to most financial market professionals.1 Since these events form the backdrop for my discussion of the central bank's role in credit markets, I will begin with a quick review. As the housing downturn that began early in 2006 deepened, delinquencies, defaults, and loss rates rose on high-risk mortgages, particularly more recent vintages. In response to unfolding events — including rating agency downgrades and losses and insolvencies at various intermediaries — participants in markets for instruments with mortgage debt exposure revised downward their assessments of the likely future returns on the underlying assets. At times investors had difficulty discerning the magnitude of their counterparty's vulnerability and thus distinguishing among various instruments. This became particularly acute in early August following a suspension of fund redemptions by a large European intermediary, and for several days thereafter many markets were roiled as investors appeared to pull back from a broad range of asset classes.
I am pleased to be with you here today to discuss my views on the economic outlook. 1 When this date was arranged many months ago, I was looking forward to delivering my remarks during the sleepy dog days of summer. Instead, we meet during fairly tumultuous times in financial markets. Over the last several weeks, we have seen substantial revisions in market participants' assessments of the fundamental value of securities related to sub-prime and other non-standard mortgages, financial distress related to mortgage finance at several entities, considerable widening of credit spreads, and significantly larger swings in asset prices. This turbulence makes assessing the economic outlook more challenging than usual, and of course makes central bank policymaking especially challenging.
Early childhood development may seem like an odd topic for a Federal Reserve Bank president.1 The public policy responsibility for which the Fed is best known is the nation’s monetary policy – a macroeconomic subject that would seem to stand in sharp contrast to the more microeconomic focus of Governor Kaine’s summit today. But as a regional Reserve Bank in a federated central banking system like the Fed, we spend a good deal of time trying to understand the economies that make up our District, which, as you may know, includes Maryland, Washington, D.C., Virginia, West Virginia and the Carolinas. We supplement formal data on the national economy with information we gather from numerous sources – both formal and informal – about economic conditions in our region. This process gives us an opportunity to observe and learn about the economic trends and challenges facing the people of our District. It also allows us to observe the range of public policies and private initiatives undertaken across the District aimed at promoting local and regional economic growth.
I am very pleased to be with you today to discuss my views on the economic outlook, with particular emphasis on the outlook for inflation.1 In its most recent statements, the Federal Open Market Committee has identified "the risk that inflation will fail to moderate as expected" as its "predominant policy concern." This places current inflation and the inflation outlook squarely at center stage in thinking about the economy and monetary policy. So in my remarks today, I will take a closer look at inflation's recent behavior and the prospects for its future behavior. In doing so, I'll discuss the interplay between real activity and inflation expectations. As always, these remarks should be taken as my own personal views, and not necessarily those of any of my colleagues in the Federal Reserve.
I am pleased to be with you tonight to discuss my views on the outlook for inflation.1 In its most recent statements, the Federal Open Market Committee has identified "the risk that inflation will fail to moderate as expected" as its "predominant policy concern." This places current inflation and the inflation outlook squarely at center stage in thinking about the economy and monetary policy. So in my remarks tonight, I will take a closer look at inflation's recent behavior and the prospects for its future behavior. In doing so, I'll place particular emphasis on what we've learned in recent years about inflation dynamics, particularly the interplay between real activity and inflation expectations. As always, these remarks should be taken as my own personal views, and not necessarily shared by any of my colleagues in the Federal Reserve.
Let me begin by telling you about some recent experiences. I had the opportunity earlier this year to guest-teach a couple of business school economics classes. I opened my discussions with a pair of questions, asking students to put themselves in the place of a monetary policymaker choosing a target for the federal funds rate. First I gave them a set of hypothetical facts about the state of the economy: a slowdown in housing in the wake of multi-year housing boom; rising mortgage default rates; preliminary indicators of a slowing in business investment. And then I asked them: "What are you going to do?" The students dutifully responded that this situation could call for a reduction in the funds rate. They'd obviously been doing their homework.
I recently had the opportunity to guest-teach a couple of business school economics classes. It was great to be back in the classroom. Don’t get me wrong – I like my current job. But it was nice not to have to vote on anything.
On behalf of the Federal Reserve System, I would like to add my welcome to the fifth Community Affairs Research Conference. These biennial meetings are a unique opportunity for academics, policy makers and community development professionals to gather together and consider new research findings that can inform our judgments on a variety of issues. I applaud the organizers for compiling such an interesting and provocative program.
I have to admit that I was apprehensive when Steve and Anil asked me to participate in this Forum and comment on a report on inflation dynamics, especially when I found out that one of the authors was going to be an old friend, Mark Watson. Mark is a pre-eminent time-series econometrician, so my first thought was that I was going to need to brush up on unit-root asymptotics. When the report arrived, however, I was pleasantly surprised to find a wide-ranging and insightful review of the historical behavior of inflation in the G-7 countries along with a thoughtful examination of alternative explanations of those dynamics. I think the Report makes a very useful contribution to applied monetary economics and illuminates well some of the key challenges in monetary policy today. The usual disclaimer applies here, however; the views I express are my own and not necessarily shared by my colleagues in the Federal Reserve System.
It’s a pleasure to be here again this year for what has come to be called the “Broaddus Breakfast.” I am honored to be invited back for a third appearance. Before I begin, I owe you the usual disclaimer that these views are my own and are not necessarily shared by my colleagues around the Federal Reserve System. But for those of you who have followed my voting record, this should come as no surprise.