Dennis P. Lockhart
President and Chief Executive Officer
May 19, 2011
I think the overall outlook is reasonably optimistic. The outlook for GDP—gross domestic product—I would say for the remainder of this year and into next year is in the range of 3 to 4 percent. Some forecasters see it as being a little lower in the near term, but as I look out at least for, say, a two-year, or 24-month, period, I think you can generalize by saying it's going to be in that moderate range of 3 to 4 percent.
Although GDP was weaker than we expected in the first quarter, it still reflected, I think, a sustainable level of private demand. In the first quarter, there were some unusual factors that came into play. You had some weather factors early in the quarter. You also had the shock of the run up in oil prices that was reflected in gasoline prices at the pump. All of those, I think, softened the results of the first quarter. But I think it will pass, and in the second quarter and beyond, we'll see stronger growth.
Now let me say a few words on the subject of inflation. Inflation—measured inflation—in recent weeks and months has accelerated, largely reflecting the run up of certain commodity prices and the pass through of some of those commodity prices to retail prices. I continue to believe that we're looking at a temporary phenomenon, that commodity prices—which, in recent weeks, actually have come down fairly substantially—will level off and that the inflationary pressures are temporary in nature.
It's the responsibility of the Federal Reserve, of course, to ensure that short-term inflationary pressures don't translate into longer-term persistent inflation, often as reflected in inflation expectations. Inflation expectations have drifted up recently, but longer-term inflation expectations remain in…the historical range that I would deem to be acceptable.
Residential Real Estate
Residential real estate continues in a depressed state, and I expect it will continue to be a drag on the economy and is very unlikely to contribute much to economic growth. Housing starts are at an unprecedented low level. They're affected by the declining level of house sales, which are in turn affected by continuing declines of house prices—and house prices are influenced by the continuing level of foreclosures and the number of distressed sales coming from banks and other sources in the market to keep pressure on house prices. All this adds up to, in all likelihood, a continuing or at least a longer period of weakness in the housing sector.
The S&P/Case-Shiller Index, for example, shows that house prices are down 30 percent from their peak and, as I've said, are expected to continue to soften a bit, so there really isn't—in the near term, at least—a positive outlook for home prices. When you think about the housing sector, you have to think about both the direct and indirect impact. The direct impact is mostly through house construction and building materials and household goods that actually are part of home building and house construction. The indirect impact, really, is the effect that home prices have on the mentality of consumers and their relative willingness to spend money.
Declining home prices also create problems for the banking industry. Banks, of course, are carrying a lot of home or housing assets on their balance sheets that continue to have to be written down with declining prices. And so it's very important for the stabilization of the banking system that we see house prices stabilize.
Federal Reserve Communications
Federal Reserve communication has been evolving over recent years, and the general trend has been [toward] greater transparency and attempts at ensuring greater accountability. As recently as just a few weeks ago, we initiated press conferences with Chairman Bernanke after four of the eight FOMC meetings a year. This is an important step, I think, to make the chairman accessible to the press and therefore to the public for more spontaneous explanation of the reasoning behind our policy and the outlook of the economy. This is all part of a process of trying to improve communication with the public, which has an effect on the expectations of the public, which in turn has an effect on the real economy. So we have been investing a great deal of effort in trying to improve our accessibility to the public so that the positive effects of interactive communication can be felt in the economy.
Among the communication tools are press releases that occur after the Federal Open Market Committee meetings, testimony of the chairman as well as [of] governors and occasionally of Reserve Bank presidents. We also have a number of different publications. Very importantly, the governors and the Reserve Bank presidents frequently are out speaking to the public as well as answering questions of the press, and collectively, I think we have about as much communication with the public as any major government entity.
There are some who continue to maintain that monetary policy communication of the Federal Reserve lacks transparency. And in countering that argument, I would point out that monetary policy is always conducted against a backdrop of imperfect knowledge. Trying to convey false precision about the outlook and about the risks associated with the economy can actually have the opposite effect—it can undermine credibility and undermine confidence of the public over time. For that reason, I think it's appropriate to have a certain degree of ambiguity in forward statements related to the economy and to some extent what future policy is likely to be because of the uncertainty that we are always dealing with in conducting policy.
A particularly big challenge ahead of us as regards to communication will be communicating about the eventual exit from accommodative policy that has been in place now for quite some time. As we consider how that removal of accommodation is to take place, communication will be central to making sure that that's done in an effective way. Therefore, we're spending time—and should be spending time—thinking about the communication strategy that accompanies that eventual reversal of accommodative policy.