The Current Situation

Glenn Rudesbusch on the macro outlook:

FedViews (4/14/2006): The Current Economy and Outlook: FedViews: April 14, 2006: 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:

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... factors restraining the fourth quarter were temporary, and we expect a substantial rebound in growth this year.... [F]irst-quarter growth... may reach 5 percent at an annual rate. But that rapid pace is not expected to endure.... 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....

[T]here 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.... A second key risk is that we may be underestimating the effect of the past tightening of monetary conditions on the economy.... 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....

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.