Quote from gharghur2:
Remarks by Governor Donald L. Kohn
Economic outlook
"Several factors have propelled reasonably strong economic growth. A critical element has been supportive financial conditions. Despite the tightening of monetary policy that began in mid-2004, short-term interest rates were at fairly low levels until recently, and the effects of those low rates have continued to spur household and business spending. In addition, although longer-term yields have moved up notably in recent weeks, they too have been low by historical standards.
Our economy has been able to register this good performance despite rising energy prices. This audience knows well that since late 2003 the price of West Texas intermediate crude oil, for delivery at Cushing, has soared from about $30 per barrel to nearly $70 recently. Nonetheless, the rise in energy prices has apparently had only a limited negative effect on the national economy. Energy costs are not nearly as important today as they once were...Of course, reactions to higher energy prices are hard to predict, but the measured response of activity over the past couple of years suggests that the most recent price increases will have, at most, only a small effect on economic growth during this year.
Despite the relatively moderate increases in prices and costs that we have observed lately, the capacity utilization rate and the unemployment rate have recently reached zones that on occasion in the past have been associated with the beginnings of upward pressure on inflation...In the current circumstances, as the Federal Open Market Committee has said, the economic climate appears to be one in which further increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures.
Sales of both new and existing homes are down substantially from their levels last summer, and information on mortgage applications and pending home sales point to further softening in the next few months. With demand slowing, house prices also seem likely to decelerate. Indeed, we are beginning to see hints of moderation in some of the data on housing prices.
At this time, even with housing markets cooling, the fundamentals remain favorable for solid gains over the coming months and quarters in both consumer spending and business investment. In part, that assessment reflects the sizable increases in employment that we have been seeing over the past year or so.
Meanwhile, in the business sector, order books for nondefense capital goods are full, sales prospects appear good, profits have been strong, balance sheets are in healthy shape, and companies are flush with cash. As the growth of consumption eases back a little, so too should the increase in capital spending as firms come to anticipate slower growth in sales. But judging from rising global commodity prices and equity valuations abroad, foreign demand looks to be increasing, and rising exports should offset some of the scaling back of domestic sales prospects. In addition, technological advances will continue to boost demand for capital equipment by reducing its costs and increasing its usefulness in improving efficiency...If the economy does not moderate somewhat, pressures on resources will increase, further raising the odds of higher inflation.
My job as a policymaker is to work with my colleagues to identify the path of short-term interest rates that has the best chance of realizing that favorable central-tendency forecast of solid growth and continued low inflation. I do not know how much policy firming will be needed to accomplish this objective...My forecast is that the economy is in transition to a sustainable pace of growth, in which case policy likely will be in transition as well. At this juncture, given the apparent strength in demand and the narrowing margin of unused resources, I am focused on making sure that inflation and inflation expectations remain well anchored. A tendency for inflation to move higher would put economic stability and the long-term performance of the economy at risk. Accordingly, for me, the critical indicators in the time ahead will be the ones that signal whether growth is indeed likely to proceed at a sustainable pace and whether inflation remains on a favorable track. This is a judgment my colleagues and I will need to make meeting by meeting as the incoming information--both the data and, critically, the timely feel for developments that we get from the Reserve Banks' contacts in the community--help us assess the paths for the economy and price pressures."
