October 2005 Archives

What would it have taken in the last few weeks to cause the Fed to refrain from raising rates when it meets later today?

Ok, now come back to reality.

The meeting today isn't the big story anymore, either. The real story is what kind of chairman Ben Bernanke will be when (pending Senate confirmation) he takes office in 2006. And that's a whole lot more interesting than talking about foregone conclusions.

In fact, a week ago, the Bernanke nomination was all that anyone could seem to talk about. Though a new Supreme Court nominee has taken some of the spotlight off Bernanke for a while, do not despair. There's still a lot to talk about. All in good time.

The only question about today's meeting concerns the wording of the statement. "Measured pace"? Probably. Chalk it up to inertia. The phrase has been there so long that it will take compelling evidence that the rate hikes are about to pause. In the last few weeks, that evidence has dried up. Will there be a change in the risk assessment? That's a tough one. On the strength of the GDP report and given the inflation numbers, I think a stronger case can be made for tipping the risk assessment towards higher inflation. But I'm not sure the Fed really wants to put that out there at this point. I'd have to continue to expect the risk assessment to be balanced. Those two phrases are going to be among the first that people will look for, and I don't expect them to change.

Will the statement be slightly more hawkish, even if the risk assessment is the same? Probably either the same or more hawkish, but nothing drastic.

As always, I'll have my take on the statement itself as soon as it's on the Fed website. Tim Duy has an interesting take on the situation.

Beyond December, things get a bit fuzzier, in my opinion.

Read the rest. I'll add that as we get into to January, the question of whether the rate hikes are finished or not will depend on the incoming data. If we don't see some serious retreat on the inflation front, I don't see how Greenspan would leave without getting in one last shot. I'm inclined to predict rate hikes all the way to March. The difference between what I was expecting several months ago and what I expect now is that a few months ago I would have expected a pause by this time unless there was evidence in favor or more hikes. Today, a rate hike is the default position, and I have to see evidence to get me to think otherwise.

Beyond March, my view of the future is worse than "fuzzy"--it's like pea soup. But today is crystal clear. As always, I'll have some comments on the statement when it's up.

Returning from a meeting, I glanced over at my phone to see if there were any messages. I did a double-take when I saw the time on the clock built into the phone. I could have sworn that the meeting was longer than my clock was telling me...an hour longer, in fact.

Then I realized that the folks who run our digital phone system jumped the gun on the return to standard time this weekend. So, remember to set those clocks back on Saturday night.

Here's what I wrote about daylight saving time last year.

When I worked in the dorm at Concordia College, the 1-4am shift on this night was the most sought after desk shift of the year. On the last Sunday morning of October, that shift was, after all, 4 hours long. That's an extra $4.25 or so, as I think that was the minimum wage at the time. (Conversely, no one wanted the corresponding shift in the spring.)

We had a big clock on the outside of our dorm. (The clock is visible on the upper right hand picture on this page.) As building manager, one of my duties was to keep the clock on time. Generally, it kept perfect time, and only needed to be reset when going on or off daylight saving time. The mechanism was controlled by turning a key that had three settings: stop, run (normal), and run (fast). Resetting the clock one hour back in the fall was the first time that I had to adjust it, so I figured that it wouldn't take too long to wind it forward 11 hours at the fast setting and get it back to 1am. So, I turned the key and walked outside to watch the hands move. That's when I learned that "fast" was not very "fast". But it was sort of interesting to see this big clock turning faster than normal, so my friends and I let it go, checked on it periodically, and got it set by about 2am. That's right, it would have been more efficient to just stop it for an hour.

But I'll never pass into or out of daylight saving time without thinking of the clock on Livedalen Hall.

Click here for the full news release from the BEA.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.8 percent in the third quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.3 percent.

...

The major contributors to the increase in real GDP in the third quarter were personal consumption expenditures (PCE), equipment and software, federal government spending, and residential fixed
investment. The contributions of these components were partly offset by a negative contribution from private inventory investment.

The acceleration in real GDP growth in the third quarter primarily reflected a smaller decrease in private inventory investment and accelerations in PCE and in federal government spending that were partly offset by decelerations in exports, in residential fixed investment, and in state and local government spending.

Final sales of computers contributed 0.11 percentage point to the third-quarter growth in real GDP after contributing 0.32 percentage point to the second-quarter growth. Motor vehicle output contributed 0.48 percentage point to the third-quarter growth in real GDP after subtracting 0.01 percentage point from the second-quarter growth.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 4.0 percent in the third quarter, compared with an increase of 3.3 percent in the second. Excluding food and energy prices, the price index for gross domestic purchases increased 2.2 percent in the third quarter, compared with an increase of 2.1 percent in the second.

...

Real personal consumption expenditures increased 3.9 percent in the third quarter, compared with an increase of 3.4 percent in the second. Durable goods purchases increased 10.8 percent, compared with an increase of 7.9 percent. Nondurable goods purchases increased 2.6 percent, compared with an increase of 3.6 percent. Services expenditures increased 3.2 percent, compared with an increase of 2.3 percent.

Real nonresidential fixed investment increased 6.2 percent in the third quarter, compared with an increase of 8.8 percent in the second. Nonresidential structures decreased 1.4 percent, in contrast to an increase of 2.7 percent. Equipment and software increased 8.9 percent, compared with an increase of 10.9 percent. Real residential fixed investment increased 4.8 percent, compared with an increase of 10.8 percent.

The NY Times has a story as well.

More later... off to class.

UPDATE: One of the stories related to 2nd quarter GDP was the strong growth in final sales. That number was buoyed by a drawing down of inventories. Well, real final sales of domestic product increased by 4.4% in the 3rd quarter, which isn't that bad either. The change in inventories subtracted about 0.55% from 3rd quarter growth. In other words, firms are still drawing down inventories as sales growth leads GDP growth. Consumer demand continues to be the economies strength (like we didn't know that already). Investment (nonresidential fixed) increased by less than in the 2nd quarter, and we know from many other sources that residential investment may be slowing. The net export sector was basically flat compared to the 2nd quarter, which is good when you consider how much net exports grew in the 2nd quarter. (We didn't give any of it back in the 3rd.)

All in all, not a bad report. This is the 10th quarter in a row where real GDP growth has exceeded 3%.

Inflation is starting to show up in the GDP deflator, however. The rate hikes are not over, not by a long shot.

UPDATE 2: David Tufte (voluntaryXchange) gives it a letter grade of "B". Mark Thoma (Economist's View) has more links. Kash (Angry Bear) also weighs in.

UPDATE 3: King Banaian (SCSU Scholars) mentions the slowing growth of personal income and expects that production will pick up in the next two quarters as rebuilding begins in earnest in the hurricane affected areas.

Via Reuters:

NEW YORK (Reuters) - SBC Communications Inc. ... , nearing the completion of its AT&T Corp. ... acquisition, on Thursday said it will adopt the AT&T name, unveil a new logo and stock market symbol when the transaction is completed late this year.

More of a reunion than a merger, really.

Couldn't pass this one up. From CNN concerning Ben Bernanke's financial disclosures:

Bernanke was paid $162,100 to be a Fed governor in 2004, and took a slight pay cut to become the chairman of the White House's Council of Economic Advisors earlier this year. He received royalties on one textbook from Pearson worth between $50,001 and $100,000 in 2004, and royalties on a another textbook from McGraw Hill worth only between $201 and $1,000. As of 2005 the Fed chairman is paid $180,100.

For those keeping score, his principles text with Robert Frank is the McGraw Hill book and his intermediate text with Andrew Abel is the Pearson book.

Take care not to generalize too much, as it is just a sample size of one author who happens to have two books. We also don't know the full terms of his contract (if he received an advance from the publisher, and if so, how much). Gregory Mankiw is another macroeconomist with both a principles and an intermediate book (and both are strong sellers). Not sure if he had to disclose his finances when he was on the CEA. (Bernanke is currently on the CEA, but it wasn't until now that the media reported on his finances.) David Colander also has written books for principles and intermediate macro.

Does producing a textbook at another level in the same field lower the average cost of production (writing)? (That is, are there economies of scope?) Does it depend on the field? (Probably.) Not having done it yet, I couldn't tell you from experience, but it's an interesting question.

The comparison of Bernanke's and Greenspan's finances in the article is interesting too.

It's going to seem like a broken record pretty soon. When Brad DeLong sees things like this, he says, "Why, oh why...?" But it just doesn't stop. Enter James Grant with a NY Times op-ed.

But there is one rub. The man with the gray beard and the perfect résumé - winner of the South Carolina state spelling bee, Ph.D. from the Massachusetts Institute of Technology, former chairman of the Princeton economics department - professes to believe the impossible. He insists that the Fed can keep the economy chugging and prices stable just by pushing a single interest rate (the so-called federal funds rate) up and down.

...

Wall Street, of course, has other ideas. Thus the rally in stock prices following word of Mr. Bernanke's nomination was no vote of confidence that the presumptive chairman would settle on the right, or true, federal funds rate. It was, rather, an expression of hope that he would do his all to ensure a speculatively appropriate (meaning very, very low) rate.

Balderdash. Absolute nonsense. But he goes on...

Perhaps. But Mr. Bernanke's history shows he is not so much a believer in easy money as in the capacity of the Fed to take the right anticipatory action. Is the rate of inflation too high? Not high enough? With a twist of the monetary-policy dial, the problem is on its way to being solved. Let the Fed announce its target for inflation - say, 2 percent a year - and juggle its interest rate to cause that desired inflation rate to materialize. In so many words, the nominee contends, policymakers control events, rather than the other way around.

Here's a quote from one of Bernanke's speeches. You tell me if Mr. Grant is characterizing Bernanke's position accurately.

The person in the street might tell you that the Fed "controls interest rates." That statement is not literally accurate. In fact, the Fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on Treasury securities. Instead, the Fed affects these key rates, as well as the prices of financial assets such as stocks, only indirectly.

For a speech to an audience of nonspecialists, that's pretty clear. There are nuances, of course. And the fact that Bernanke's research focuses so heavily on the transmission mechanism is in a way an admission that there is a lot we don't know about the indirect part. That's hardly a characteristic of someone who thinks we can simply "twist the monetary policy dial" and solve the problem.

Mark Thoma (Economist's View) links to a paper by Bernanke and Blinder in this post. The paper is about the credit channel for monetary policy, a topic that Bernanke would revisit a few more times, including this paper (joint with Mark Gertler) in the Journal of Economic Persectives titled "Inside the Black Box: The Credit Channel of Monetary Policy Transmission" (JSTOR link--subscription required).

Also important is this paper in the American Economic Review titled "Agency Costs, Net Worth, and Business Fluctuations." Quoting from the introduction:

First, since borrower net worth is likely to be procyclical..., there will be a decline in agency costs in booms and a rise in recessions. We will show that this is sufficient to introduce investment fluctuations and cyclical persistence into an environment which is rigged to exhibit neither of these features when agency costs are not present; a kind of accelerator effect emerges. Second, shocks to borrower net worth which occur independently of aggregate output will be an intitiating source of real fluctuations. A possible example of this is "debt-deflation," first analyzed by Irving Fisher (1933): During a debt-deflation, because of an unanticipated fall in the price level (or, alternatively, a fall in the relative price of borrowers' collateral, for example, farmland), there is a decline in borrower net worth. This has the effect of making those individuals in the economy with the most direct access to investment projects suddenly un-creditworthy.... The resulting fall in investment has negative effects on both aggregate demand and aggregate supply.

At the root of the problem is the information asymmetry between the borrowers and lenders which gives rise to agency costs. Bernanke and Gertler find that this specific friction can have balance sheet implications which give rise to real fluctuations. It is another example of the credit channel, but a very specific one. It highlights one of the reasons that deflation (or a fall in the value of collateral) is such an important problem. Deflation has balance sheet implications, and with information frictions (agency costs), there is a real effect on output. This kind of research linking the financial and the real sector is present in much of Bernanke's work.

If we are to make progress on the current puzzles confronting policymakers, a good framework for thinking about the linkage between the real sector and the financial sector is vital. One of the Fed's most important roles is as lender of last resort. The are a provider of liquidity in time of crisis, whether that crisis takes the form of a terrorist attack across the street or a currency collapse across the globe. Understanding seemingly esoteric subjects like the transmission mechanism has important implications for the way the Fed thinks about the real consequences of balance sheet problems.

With all the attention on Ben Bernanke today, I looked back at some of my past posts. Here's one from April.

This excellent speech by Ben Bernanke should be read by every macroeconomics student. I think it is good that Fed governors actually get out there in the public and make speeches like this once in a while.

Here's a sample.

The person in the street might tell you that the Fed "controls interest rates." That statement is not literally accurate. In fact, the Fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on Treasury securities. Instead, the Fed affects these key rates, as well as the prices of financial assets such as stocks, only indirectly.

I like that speech more every time I read it. It fits perfectly with the way I teach macroeconomics. The truth is that when Bernanke was appointed to the Board of Governors the first time I was really pleased. I had heard his name bandied about for a while as a potential governor. I think most dedicated Fed watchers had him on their short list back then. Once he joined the Board, his speeches were some of the most refreshing, at least to an academic economist. They were perhaps too refreshing--too open and honest--to be appropriate for a Fed chair. But, and this is important to remember, he wasn't the chair (or even the nominee) back then. Academic candor isn't always what the financial press wants. One sentence in one speech, and he is forever known to some as "Helicopter Ben." That is unfortunate, because that is not an accurate assessment of the totality of his writing (or even of that speech). But then, how many of us remember anything else from the speech where Greenspan said "irrational exuberance"?

Remember that Bernanke will be forging a consensus of the whole FOMC. That group includes some pretty dedicated inflation hawks right now, but it also includes some that will be reluctant to embrace explicit inflation targeting. He will also have to be the public face of the Fed in front of members of the House Banking Committee like Representatives Ron Paul, Bernie Sanders, and Maxine Waters, who will be sure to remind Bernanke at every opportunity that the Fed still does officially have a dual mandate.

When Ron Paul or Bernie Sanders would chastise Greenspan up on the Hill, the Chairman would just sit their with that trademark look on his face, waiting for an actual question that he could answer (or not). That's a skill that Bernanke will have to learn. Academic lectures won't work on the Hill. Pity. But it's true. Academic lectures explore the issue from many sides. We academics like to play "what if?" games. Fed chairmen must be more circumspect about what economic indicators play into interest rate decisions and related matters.

I'm pleased with the nomination of Bernanke because he is a good economist. It's too bad that in order to fit the central banker mold he'll now have to largely abandon the open, questioning, analytical, academic persona that my profession has been praising today. In many ways, he seemed more suited to the job of governor than chair because a governor can afford to be a little more (but only a little more) open. However, if he causes us to have a real debate about the value of inflation targeting, rules vs. discretion, and whether there really is a "global savings glut," I think it will be a positive step in the history of the Fed. At the end of this very exciting day for Fed watchers, I find myself looking forward to these debates on the horizon. He's an excellent choice to lead the Fed at this critical time.

I tip my hat to David Altig for alerting us to this Bloomberg article. (While you're there, read Altig's post on core vs headline inflation!)

The new chairman ``needs to commit themselves very firmly to the Fed's commitment to price stability in deed as well as word,'' said J. Alfred Broaddus Jr., former president of the Richmond Federal Reserve Bank.

...

Bernanke is an advocate of a strategy called inflation targeting where a central bank specifies a numerical goal for prices. The Federal Open Market Committee debated the strategy as early as February, and decided to defer the discussion.

Bernanke is unlikely to push the strategy unless he has unanimity, and Governors Roger Ferguson Jr. and Donald Kohn are opposed. Both may be willing to discuss a numerical description of what defines low inflation, and that could help solidify the Fed's inflation-fighting credibility with financial markets, households and businesses.

``Certainly, an inflation target that is explicit is one more step toward greater transparency,'' Broaddus said.

Since he was sworn in at the CEA on June 21, Bernanke has testified twice before Congress and given five speeches on non- controversial subjects. As a Fed chairman, his second test will be gaining credibility on Capitol Hill.

...

The Fed is unusual among the world's central banks in that it has two mandates: stable prices as well as sustained growth that will result in low unemployment. Bernanke will have to at least express concern about jobs and growth in his nomination hearing, and, if confirmed, during his semi-annual testimony in February.

Delivering on the expansion will be tricky, however.

Economists expect U.S. growth to slow, even as inflation expectations rise in the aftermath of a 51 percent increase in retail gasoline prices this year. Fed officials have made it clear they intend to keep leaning against inflation by pushing up the federal funds rate, even after Hurricanes Katrina and Rita hurt third-quarter growth prospects.

St. Louis Fed Bank President William Poole even said that the Fed could err on the side of raising interest rates too high to clamp down on inflation because it could them cut them quickly if growth began to falter.

And in this post, Brad Setser lays out the problems with the "global savings glut" hypothesis as well as the parts he thinks Bernanke got right. In my comment on "Econoblog", I mentioned that this would be a subject for discussion.

Nouriel Roubini has some thoughts at his blog as well.

UPDATE: King at SCSU Scholars has a nice post which begins:

Should we make any big deal of the fact that the bond market sold off today, with Ben Bernanke replacing Alan Greenspan at the Fed? No, because looking at the inflation-indexed bond market shows that both indexed and non-indexed bonds fell by roughly the same amount. Were the concern about Bernanke that he would be softer on inflation, the non-indexed bond should have fallen more than the indexed bond. That link also includes a reminder that the bond market sold off when Alan Greenspan replaced Paul Volcker in 1987.

...

Everyone wants things to stay as they are with monetary policy, and the market prices uncertainty by asking for a higher real yield. Thus today's bond market.

Go read the whole thing.

Writing for the Wichita Eagle, my old friend Alan is looking for someone to talk to about aviation.

The point is that connections matter everywhere -- maybe they matter more in China, but having four years of reporting experience in Washington, D.C., I think I understand the power of guanxi. And that's why I'm worried -- because I'm coldly aware that in China, I don't have any. Put yourself in the position of the Chinese for a minute. You're an aviation official. This American reporter wants to interview you, on-record, about topics that touch the core of a sensitive trans-Pacific relationship. You don't know this reporter, you've never heard of this reporter. You'll probably never talk to him again, and after he leaves, he could write something that could damage your career without giving it a second thought.

What would you say to the request? "I don't think I have time to schedule that interview." That's the position I'm in now.

Daniel Gross has the lastest installment in the NY Times:

Prices of food and energy are notoriously volatile, and susceptible to supply shocks and acts of nature. Inflation in these vital sectors doesn't necessarily indicate inflation across the economy. Mr. [Steven] Roach notes that in the last year, consumer energy prices have risen 35 percent, while prices of other goods and services are up just 2 percent.

Economists also say the utility of the inflation measure depends on the question you are trying to answer. "If you want to know how much more it costs you to live this year than last year, look at the headline C.P.I.," said Ann L. Owen, associate professor of economics at Hamilton College in Clinton, N.Y., and a former economist at the Federal Reserve. "And from a consumer's perspective, there's nothing good about a 4.7 percent increase in headline inflation in 12 months."

...

What's more, the Fed tends to focus on things that it can control. Not even a Fed chairman as powerful as Alan Greenspan can affect the price of oil by manipulating interest rates. "There's nothing the central bank can do about that, unless it figures out how to produce more oil," said Michael F. Bryan, vice president and economist at the Federal Reserve Bank of Cleveland.

But the Fed can control the amount of money circulating in the economy relative to the quantity of goods available. "So it tries to find the inflation signal common to all prices throughout the economy," Mr. Bryan said.

Thus considered, the core C.P.I. may be the best tool the Fed has to monitor long-term changes in prices.

Still, economists see two good reasons not to ignore the headline number today. First, inflation in a crucial category like energy can worm its way into the entire system. "If high energy costs persist, and if they continue to rise, they may ultimately seep into the core," Professor Owen said. The second reason has less to do with hard economic realities than with softer perceptions. The cost of gasoline is the economy's most visible price. People see it every day even if they don't buy gas every day, said Matthew Martin, senior economist at Economy.com. And most people buy food every week.

And with this, I inaugurate the "inflation" category on the blog. Previously, inflation had been categorized under "data" or "Federal Reserve" depending on the context. Someday I might even have time to totally overhaul the categories. We'll see.

A number of economist bloggers were asked by the Wall Street Journal for comment on the Bernanke selection.

You can read all of our comments at the WSJ Econoblog page.

NY Times story here.

More to follow.

UPDATE: Greg Ip writes a very nice article in the Wall St. Journal with many links in the sidebar. (subscribers only) The quote I wish to highlight comes from across the Atlantic.

In Europe, Jean-Claude Trichet, President of the European Central Bank, was quick to praise Mr. Bush's choice. "Ben Bernanke is a highly respected central banker, a remarkable economist and a man of experience. I will be very happy to have the possibility to develop with him the same highly close and fruitful cooperation, and enjoy the same confident and friendly personal relationship that I had with Alan Greenspan."

And, now that you've read the quick comments posted on Econoblog, it's time to see the longer versions coming out in the blogosphere. After all, people have been holding all of this in a long time.

Larry Kudlow posts on his blog and at The Corner (NRO):

Thank heavens that Fed board member Donald Kohn, who is a demand-sider and a Phillips Curver, did not get the nod.

This prompts Brad DeLong to tear his hair.

But Ben Bernanke is a demand-sider and a Phillips Curver. Here's a representative speech:

FRB: Speech, Bernanke--An unwelcome fall in inflation?--July 23, 2003: Much of the analytic framework used by the [Federal Reserve] staff and other leading forecasters can be summarized by an expectations-augmented Phillips curve, of the type implied by the work of [Milton] Friedman (1968) and [Ned] Phelps (1969), further augmented by measures of "supply shocks," as suggested for example by the work of Robert Gordon (for a recent application, see Gordon, 1998). This model is familiar from many textbook treatments. In addition, most variants of the model include dynamic elements, in order to capture aspects of expectations formation, multi-year contracts, and other factors.... If aggregate demand is below potential output, implying a positive output gap, the rate of increase in labor compensation and other input costs should slow, firms should be less able to pass price increases, and thus inflation should slow....

DeLong quotes even more of the speech, but you get the idea. For the record, DeLong is happy with the choice

Tyler Cowen runs down a list of Bernanke's major contributions to economics. Can't say I disagree. I was just starting grad school about the time that his paper on the Great Depression came out. As a first year grad student, I hadn't been introduced to some of his previous work yet, so this is the first thing I remembered him for. Of course I followed his work as he started to write about inflation targeting as well.

Over at the Volokh Conspiracy, Juan "Non-Volokh" writes,

If Cowen and DeLong agree — and the markets are up — who am I to suggest otherwise. (After all, I'm just a law professor.)

The New Economist has a great opening line:

After a serious of dubious political appointments it seems common sense has finally prevailed at the White House when it really matters...

Mark Thoma is pleased. He links to Bernanke's homepage. He closes his post with these thoughts:

Who will oppose Bernanke? The strongest statement against him is this tirade by John Tamny from the NRO. As noted in the write-up on Tamny's statement and by Brad Delong, Tamny's arguments have little validity. The piece seems to have been motivated by Bernanke's refusal to drop solvency as part of Social Security reform.

The speculation isn't over as this brings up more questions. Who will be the next chair of the CEA? Who will fill the other open seat on the Federal Reserve Board of Governors?

Well, I think that Bernanke will face some questions about his "helicopter drop" speech. (The speech was about the possibility of deflation.) Now hear me well: I didn't find anything objectionable in the speech, but some financial reporters didn't understand the context. I mention this only because I think I heard this come up in Scott McClellan's White House press briefing today before the announcement (I'll check the transcript when it's up). He will also have to answer some questions regarding the "global savings glut" (I mentioned this in the Econoblog comment).

As more is written, and as he answers those questions, I'm sure there will be more to talk about. The bottom line is that I'm very happy with the choice. I expect Ben Bernanke to be a good communicator of the policy of the Fed (even though he will need to learn how to obfuscate a little bit). He's got his ear to the ground regarding the latest economic research. And he doesn't wear his politics on his sleeve. All of these are good traits to have in a Fed chair.

I expect more discussion in days ahead, but I'll stop here for now.

UPDATE 2: James Hamilton sums it up nicely:

He absolutely has a first-rate mind, just as sharp as they come. And he'll need all the gray matter that can be mustered in his new job, I fear, to figure out how to respond to simultaneous threats of recession, inflation, global imbalances, and systemic financial risk.

I've disagreed with Bernanke on a number of specific issues over the years. Some of those arguments I admit that he won, and some I still view as unresolved. I certainly reserve the pundit's prerogative to start criticizing whatever he does with monetary policy the day he takes charge, nay, even before he assumes the office, I shall feel free to kvetch. But I will be doing so from a position of respect for the new office holder.

Noted sports economist Brad Humphreys is blogging at The Sports Economist. He writes:

Claiming that a playoff game generates positive economic impact is similar to claiming that weekends generate positive economic impact. Imagine the headline in the business section: Bar, Restaurant Sales Surge on Friday and Saturday Night! Postseason appearances generate civic pride and contribute to fans and city residents feeling good about themselves and their home. They also give cities national and international media exposure that would not have taken place in the absence of postseason appearances. But a large body of evidence indicates that postseason play generates no significant economic impact on the local economy.

Together with Dennis Coates, he authored a paper on the subject (subscription required). This link to another paper by Victor Matheson and Robert Baade which comes to a similar conclusion is free. Check out the tables at the end.

Also on the subject of the World Series, John Palmer, Phil Miller, and King Banaian did a podcast on Radioeconomics. I'm listening to it now.

Oh, and apparently scalping is now legal in Illinois. (Hat tip: John Palmer)

When they invited Bono to the White House...

...they had to realize that it would remind people of this...

That is all.

Kash at Angry Bear discusses the disconnect between the core and the headline numbers.

...individuals are finding that the purchasing power of their paychecks have been sharply eroded, as the price for the average bundle of goods that they buy has risen by nearly 5% over the past year. If workers can successfully demand higher nominal wages to compensate for this loss in purchasing power, then we might start to see nominal wages rising faster.... However, this depends crucially on the ability of workers to extract wage increases from their employers, which in turn depends largely on the strength of the labor market.

FYI, here's a 10 year series on year-on-year earnings growth from the BLS (not adjusted for inflation).

UPDATE: David Altig (macroblog) responds to Kash:

I don't have a lot to quarrel with in that assessment, but I think I would avoid phrases like "depends largely on the strength of the labor market." As we know, rising wages are not inflationary as long as unit labor costs are not rising -- that is, as long as higher wages are being driven by advances in labor productivity. A perfectly strong labor market is wholly consistent with perfectly stable prices.

I am away from my access to the dusty old FOMC transcripts at the moment, but my recollection from the record of the early 1970s was that Arthur Burns on several occasions pronounced that it was just not reasonable to expect inflation to persist because labor markets were so weak. History, I believe, revealed that as not such a good call. The reason it was not, in my opinion, is because it neglected the fact that inflation was, and still is, primarily a monetary phenomenon.

The issue really is not weak or strong labor markets. It does not take falling real wages to generate a decline in the inflation trend. What matters is the inflation psychology of the moment. The dreaded wage-price spiral can arise because workers and businesses alike believe that individual nominal wages and prices can be increased simply because all other wages and prices are changing. And they can come to those beliefs if they are convinced that the central bank will make it so. In this case rising wages are a symptom of the problem, not a cause.

He's entirely right that labor market slack, or lack thereof, is not the whole story. Productivity is critical as are inflation expectations and the perceived level of the central bank's commitment to inflation fighting. According to the BLS, productivity growth was 3.4% for 2004 (the lowest since the recession year of 2001). In the first two quarters of 2005, productivity growth was 3.2% and 1.8% respectively. I hope that this is a temporary setback and that we're not heading into an extended productivity slowdown reminiscent of the late 1970s. In just a few days (November 3) we'll get our first look at 3rd quarter productivity. In light of this discussion, I'm sure the usual suspects will be all over it, and I'll reserve additional comment or speculation on the future direction of productivity growth until then.

Labor market slack is still relevant to the matter at hand, but if a supply shock causes wage growth to exceed productivity growth, that would test the Fed's inflation fighting resolve--with or without slack. In fact, a central bank might even be more tempted to ease up on the price stability goal if there was slack. (I think that is Altig's point about Burns in the 1970s.)

It's too early to say if a process like this has begun. Such things are more apparent after the fact. However it is appropriate, I think, to have it on the radar at this point. And because it is on my radar, I'm really anticipating the November 3rd productivity release.

Read the entire speech on the Cleveland Fed website. Here is the part people will be talking about.

The important thing to recognize is that, unless energy prices continue to grow at the rate we saw this summer — something I consider very unlikely — their effects on the overall rate of inflation should prove to be temporary. The inflation statistics we see in the near term may look discouraging. However, most professional forecasters — the Blue Chip forecasters, the Congressional Budget Office, and others — share my expectation that inflation should moderate substantially next year.

Looking forward into 2006, the most probable course for the economy after the hurricanes is very close to the course that seemed likely before the hurricanes. We are likely to have a moderately expanding economy, in which the headline inflation numbers gradually slow down and move into line with the much-lower core inflation rate.

Likely, that is, if monetary policy does its part to keep those temporary pressures from translating into more persistent inflation. Temporary inflation will turn into longer-term inflation only if the FOMC allows expectations of persistent inflation to build. The key question is what course monetary policy should take to keep inflationary expectations from taking hold.

That brings me to my outlook for monetary policy. I have come to think of monetary policy as a plan — a plan that contemplates the many paths that the economy might take, and that formulates an appropriate response in anticipation of those possibilities.

...

We have continued with that plan of removing policy accommodation over the past year-and-a-quarter, as we have adjusted the federal funds rate target from 1 percent to 3.75 percent. As I said, Katrina and Rita did not change the broad contours of my forecast for continued economic growth and lower inflation into 2006. So, to me, the plan of continuing to remove the remaining amount of policy accommodation still looks like a sound one.

We have already removed a substantial amount of that accommodation, and it is fair to ask how much further we might have to go. Although the hurricanes did not change my best estimate of future economic activity, they did — as our last FOMC minutes indicate — increase the degree of uncertainty surrounding that estimate. The answer to how much higher the federal funds rate needs to go depends on how economic conditions unfold. So, let me share my thinking about a couple of possibilities that I have been contemplating.

First, it is possible that consumers will retrench their spending by a greater degree, and for a longer period of time, than we expect. Households have yet to experience the full impact of the recent energy-price increases, especially in the form of higher home-heating bills this winter. The long run-up in energy prices could finally prove to weigh heavily on consumers and significantly reduce their spending on non-energy items. In that case, the economy could become fragile and further increases in core inflation could prove to be even less of a worry than today. If consumer spending and inflation pressures appear to be weakening across the country, then the appropriate federal funds rate might prove to be lower than it would be otherwise.

Alternatively, total spending could bounce back more strongly than I anticipate — while at the same time consumers, businesses, and financial markets react to sustained increases in energy prices by raising their longer-term inflation expectations. In this case, a higher federal funds rate may be required, so that monetary policy does not unintentionally support an inflationary environment - one in which prices for a broad range of goods and services steadily rise.

Monetary policymaking requires managing risks. That means having a plan that is flexible enough to take into account sudden surprises and changing conditions. While I may be uncertain about which path the economy will take, I am clear about the goals of the central bank. I believe being prepared means, first and foremost, being in a position to respond if threats to price stability arise. Removing the remaining monetary policy accommodation puts us in the strongest possible position to react as evolving economic conditions require.

Like economists are so fond of saying, "It depends." Kash's post today falls into the same category. Will consumers cut back on non-energy purchases when heating costs go up this winter? Will the labor market be strong enough in that environment for people to ask for wage increases? The ultimate level at which the funds rate will reach in this tightening cycle depends on those and other factors.

UPDATE: The Beige Book is up at the Fed's website.

UPDATE: Reuters summarizes the day's speeches.

Links to speeches by Donald Kohn and Richard Fisher.

The sustained winds are at 175 mph as of this mornings reports. The increase in intensity has been truly amazing. The pressure reading was 882 millibars, breaking the old record of 888 millibars for the lowest pressure reading in the Atlantic basin.

This page from the National Weather Service will carry the latest updates.

CNN also has an article up.

If we have more tropical storms before the end of the season, they will be named after Greek letters (alpha, beta, gamma,...). This is the first time since the naming of storms began that we have used all the names. Q, U, X, Y, and Z are not used. We have also tied the records for most named storms (21) and most hurricanes (12) in the Atlantic basin in a season.

American manufacturers won't be happy, but I think it's the right thing to do. I've been saying for a long time that we should back off on the revaluation talk.

Read the whole story from the NY Times:

BEIJING, Oct. 17 - For two years, Treasury Secretary John W. Snow has pushed and prodded China to let its currency float more freely. On Monday, he declared his satisfaction and changed the subject.

After a week of meetings from Shanghai to Beijing, Mr. Snow buried his specific demands for the yuan beneath a broader call for China to overhaul its system of banking and investment.

The stance sounded bolder and more ambitious, a demand for China to clean up its banks, build a sophisticated market for trading currencies and let Wall Street firms become full-fledged players in the stock market.

But the new call was also a retreat. By closely linking the narrow issue of the currency to long-term goals of "financial modernization," Mr. Snow implicitly gave Chinese leaders years to adopt anything close to a floating exchange rate.

"We are here to encourage the progress, to support the progress," he said on Monday. "Moving toward a truly flexible exchange rate regime requires quite a large number of steps," he added. "We recognize that will take some time."

Christopher Elliot of the NY Times considers this weighty question:

United Airlines ... recently announced a logistics ploy it calls Wilma - shorthand for window-middle-aisle - that it claims will cut boarding times by four to five minutes, an eternity in the industry's on-time takeoff sweepstakes. The idea is to fill the window seats in economy class first, then the middle seats, then the aisle seats, thereby eliminating the free-for-all chaos that clogs the cabin when passengers are sent in by row numbers.

Not to pick on United, because it is, after all, flying under bankruptcy protection and Wilma could save it millions a year. But hasn't this already been tried?

Yes, it has. The now-defunct Shuttle by United tried it a decade ago, according to Michael J. Boyd, an airline consultant for the Boyd Group in Evergreen, Colo. Back then, he called it the product of "a deranged M.B.A." He feels the same way today. "It's not going to change anything," he said. "These initiatives sound good, until it becomes clear that you are boarding humans, and not cattle. The cattle will line up and get into a pen. People won't."

...

What is the fastest way to board a plane? "Back to front," said Robert W. Mann, an airline analyst in Port Washington, N.Y. That's because bottlenecks do not happen only in economy class. First-class passengers also can obstruct the boarding progress as they try reach into the overheads for their laptops or make their flight attendant run into the galley for a cocktail.

There is an economic observation to be made here. If all the airlines improve their boarding times by five minutes, I suspect that the new equilibrium would look a lot like the current one. Maybe they would all start boarding a couple minutes closer to take-off than before, but other than that, little would change. It just doesn't strike me as a money-maker.

Boarding from the back is my vote for the fastest way. The window-middle-aisle plan makes no sense. If a few window people arrive late from their connection, the time savings are lost.

Besides, if I had to guess at the ratio of minutes my flights have been delayed because of other problems (excluding weather) relative to problems in the boarding process, I'd guess that ratio to be about 20 to 1. I'd suggest some other time savings ideas--like reducing the number of keystrokes required for a ticket agent to issue a boarding pass. (Of course, I print my boarding passes on-line now, so I'm already doing my part.)

Michael Mandel alerts us to this article in BusinessWeek by Rich Miller. Here's an interesting passage.

In past crises, Greenspan was able to act independently, backed up by the most powerful central bank in the world. For example, in 1998 the Fed moved quickly to avert a disaster after Russia's debt default and the near-collapse of giant hedge fund Long-Term Capital Management threatened to bring global financial markets to a standstill. "We were acting as central bank for the world," says Alice M. Rivlin, who was Fed vice-chair at the time and is now at the Brookings Institution.

That's no longer possible. A crash landing of the dollar could trigger a financial meltdown and put the Fed in a quandary: It could flood the banking system with dollars to buoy the financial markets. But that would then run the risk of triggering an even faster fall of the dollar and a sharp spike in long-term interest rates as foreigners dumped their U.S. bonds.

In that scenario, the U.S. could not act as global lender of last resort, as it did in 1998, says Karin Lissakers, a former U.S. director at the IMF, in a paper presented at a recent Institute for International Economics conference. Nor is there any other institution that could easily step into the role. The IMF is an obvious candidate. But its decision-making apparatus is cumbersome and its finances limited for handling a mega-crisis like a dollar crash. The Bank for International Settlements in Basel, Switzerland, sometimes called a club for central bankers, could serve as a forum for collective action. But it has no finances of its own to contribute.

In the end, what would likely happen is that a small group of central banks, including the Fed, would band together to prop up the global financial system. That approach puts a premium on having a Fed chairman who can collaborate effectively with overseas counterparts to defuse the crisis. The chief would also have to work closely with the Treasury Dept., while being independent enough to reassure skittish foreign investors.

CNN.com weighs in with this piece.

Usually the market's reaction to a new Fed chief was short-term, with the more surprising the person, the bigger the market's move.

Stocks and the dollar both rose in the first few sessions after Paul Volcker's appointment in 1979, as he was seen as picked to cool inflation, said Ken Kuttner, Danforth-Lewis Professor of Economics at Oberlin College.

Investors were less sanguine about G. William Miller in 1978. Stocks slipped and the dollar sank 2.4 percent in the first three days after he was named, Kuttner said.

After Volcker's resignation and Greenspan's appointment in 1987, stocks hiccuped, the dollar fell and bond yields rose, but then recovered pretty quickly, Kuttner said. "Greenspan was something of an unknown quantity at the time, while Volcker had built up very strong anti-inflation credentials over the years."

In each of those cases, the turnover was something of a surprise, Kuttner said, noting that in 1978, Arthur F. Burns was eligible to serve another term, but President Carter opted not to reappoint him, instead appointing Miller.

Not warmly received by anyone, Miller was yanked after less than a year-and-a-half and sent to the Treasury, and Volcker's resignation was a surprise.

"By contrast, everyone knows Greenspan is leaving in January," Kuttner added.

Another contrast is the economic environment itself. "In the 1970s we were in an environment that no Fed chair had been through in a modern economy," Naroff added, referring to soft growth and soaring inflation.

In the BusinessWeek piece, some new names are mentioned. Both pieces broach the subject of an unexpected pick. I'm just sayin'...

From the BLS:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.2 percent in September, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The September level of 198.8 (1982-84=100) was 4.7 percent higher than in September 2004.

Further down in the report we find that the SAAR of CPI-U inflation for the first 9 months of 2005 is 5.1%. These are some of the highest inflation readings in about 15 years.

And the NY Times chimes in...

The inflation figures were the first, and perhaps most closely followed, slate of economic reports released today that showed retail sales rising at a moderate pace after sliding in August, consumer confidence dropping for the third month in a row, and industrial production declining as the two hurricanes and a strike at Boeing idled assembly lines, oil rigs, chemical plants and refineries.

The Commerce Department reported that retail sales increased by 0.2 percent in September, slower than the 0.5 percent gain may economists had expected. Sales had fallen by 2.1 percent in August, as big discounts by Detroit's big three automakers wound down.

Retail sales in September were also depressed by the end of heavy discounting by the domestic automakers; excluding cars, sales rose 1.1 percent. But last month's sales figures were also skewed by a sharp increase in the dollar value of gasoline purchases as prices at the pump soared past $3 a gallon in many parts of the country. Excluding both cars and gasoline, retail sales rose by 0.6 percent last month.

Reuters reports on the consumer confidence numbers...

NEW YORK (Reuters) - U.S. consumer sentiment fell unexpectedly in early October to its lowest level in 13 years, as high gasoline prices and the fallout from hurricane damage continued to take their toll, a report showed on Friday.

The University of Michigan's preliminary October index of consumer sentiment fell to 75.4, according to sources who saw the subscription-only report. That was below a final September reading of 76.9 and much below Wall Street's median forecast of an increase to 80.0.

"We were anticipating that we could see a little bit of an improvement in October because the rebuilding after the hurricanes appears to have started and energy prices have stabilized, but it appears that it will take a little longer for consumers to feel better about things," said Gary Thayer, chief economist at A.G. Edwards and Sons in St. Louis, Missouri.

The survey's expectations component eased to 62.4 from 63.3, also defying Wall Street forecasts for an increase to 67.0. The early October expectations reading was the lowest since March 1992.

I doubt that rebuilding is making much of an impact yet. Gas prices are coming down in some areas (IN-FORUM article-registration required). If that is to help at all, it might start kicking in next month.

Oh, and in the bond market, the 10 year is down 5/32 pushing the yield to 4.48%.

Once again, the Fed is in a tough spot, but clearly all of the recent talk from Fed officials has been that they are worried about inflation and will pursue a course of action designed to contain inflation. All along the word has been that the policy would be data-dependent. My guess is that the inflation figures will weigh more heavily on their deliberations. The consumer confidence numbers will improve if energy prices stay contained and as the hurricanes fade from memory (or at least fade away from the forefront of national consciousness). I don't think that the Fed would weaken its stance on inflation based on the consumer confidence survey.

Months ago, I would have anticipated a pause in the rate hikes by years end. As inflation has ticked up over those months, I have been revising my priors every now and then. Another data-point and another revision in my probabilities. A pause in the rate hikes by the end of the year seems almost out of the question unless something out of the ordinary happens. Then it will depend on data from the next few months and perhaps on who is selected to replace Chairman Greenspan. As long as inflation is creeping up, the rate hikes will continue, perhaps into March before we get a break.

Not a hard landing yet, but we are experiencing some turbulence. We're leaning hard against the wind, but the wind is picking up. It's an uncomfortable situation, to say the least.

Primarily inflation expectations and long term growth prospects.

Federal Reserve policy actions affect the long rate indirectly through inflation expectations. Using the (short term) fed funds rate to try to affect long term rates would be ill-advised. So says Fed Governor Mark Olson: (Reuters)

SEATTLE (Reuters) - Federal Reserve Board Governor Mark Olson said on Thursday it would neither be appropriate nor effective for the U.S. central bank to use official interest rates to try and influence longer-term borrowing costs.

After a speech at Seattle University that largely echoed one in Vancouver on Wednesday, Olson said during questioning from panelists and audience members that he thought financial markets were increasingly looking at whether risk was being priced correctly.

"We would not try to use monetary policy to fix or to determine the shape of the yield curve. That would not be appropriate, nor could that be conducted I think," Olson said.

On the same topic, Dave Altig (macroblog) had this to say today.

Higher short-term interest rates may indeed be the response required to keep inflationary pressures in check. But that, in the long-run, will mainly impact the inflation premia required of borrowers by lenders. It is certainly possible that an overly restrictive will temporarily drive up real interest rates. But that strikes me as policy mistake, not a prescription.

Greenspan found the lack of movement at the long end of the yield curve to be a "conundrum". That lack of movement in long term rates undoubtedly contributed to the housing boom (bubble, if you prefer). It has fueled a lot of consumer spending and increased debt. All that is true. But the main policy tool of the Fed just isn't set up to fine tune long rates.

Conducting monetary policy in a low, stable inflation environment is not without its own set of difficulties. But consider the alternative--when policymakers are forced to raise the short term real rate to bring down inflation expectations (and therefore the long term real rate). This chart will jog your memory. Expectations do not turn on a dime.

I'll take the current set of difficulties anytime.

Start with Michael Mandel at BusinessWeek.

Game theory is no doubt wonderful for telling stories. However, it flunks the main test of any scientific theory: The ability to make empirically testable predictions. In most real-life situations, many different outcomes -- from full cooperation to near-disastrous conflict -- are consistent with the game-theory version of rationality.

To put it a different way: If the world had been blown up during the Cuban Missile Crisis of 1962, game theorists could have explained that as an unfortunate outcome -- but one that was just as rational as what actually happened. Similarly, an industry that collapses into run-amok competition, like the airlines, can be explained rationally by game theorists as easily as one where cooperation is the norm.

Tyler Cowen at Marginal Revolution replies:

I can think of possible responses:

1. Behavioral approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.

2. Computational approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.

3. Evolutionary approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.

4. Experimental approaches will flesh out how humans actually behave. Game theory will end up with clear predictions, just give it time.

5. The real world is in fact indeterminate or close to indeterminate. The indeterminacy and multiple equilibria of game theory are not a problem, but rather reflect how closely the theory mirrors reality. Yes you might prefer sharp, clear predictions, but tough tiddlywinks, you're not going to get them. Faithfulness to reality is more important than fulfilling abstract methodological strictures.

Any one of these answers would suffice and allow us to push full steam ahead, or in the case of #5 declare victory and go home. The problem is that we don't know which one is true.

The bottom line: Like so much of economics, the strongest argument for game theory is simply to chat with someone who doesn't know any.

Mandel, now posting from his blog, returns the volley,

I completely agree with Tyler's #5, about the essential indeterminacy of the real world, but I don't agree that game theory helps us think about it in the right way. The set of possible equilibria of a repeated game is far too broad to be useful. We can get good equilibria, bad equilibria, and everything in between.

Behavioral economics embodies uncertainty as well, since the reference level or status quo can be hard to determine. But in the end I feel more comfortable that I've learned something general about the way that people behave from behavioral economics (i.e. the principle of loss aversion) than from game theory.

There's also a broader question: What do we expect from economics-accurate predictions, falsifiability, or what? I sometimes get the feeling that economists are applying too low a standard.

Enter Russell Roberts (Cafe Hayek)

Here's one I'd suggest:

6. Game theory generates no predictions about the real world but it is a useful way of organizing your thinking about various real-world phenomena. It's a language that helps avoid mistakes or confusion.

That having been said, I think the kind of phenomena that game theory helps with are more limited than most of the profession seems to think. Competition reduces the role and importance of strategic behavior and makes game theory less useful.

Lynne Kiesling (Knowledge Problem) joins the fray,

But I do have a snarky follow-up question for Tyler: to what extent do you think that our colleagues are interested in understanding human action? What about the extent to which we economists are enamored with our tools, and engage in "math for math's sake" work? Just asking ...

For good measure, let's also include Daniel Drezner, who takes issue with a piece in Slate. Drezner says:

Kaplan's essay contains a grain of truth about the dangers of social science. Too often, theorists come up with great models of the world by assuming away petty inconveniences like bureaucratic politics, implementation with incomplete information, or the effects of rhetorical blowback. But before he throws out the baby with the bathwater, Kaplan might want to ask himself the following question: if policymakers choose not to rely on social science theories to wend their way through a complex world, what navigational aid would Kaplan suggest in its stead? Policymakers across the political spectrum always like to poke fun at explicit theorizing about international relations. The problem is that they usually rely on historical analogies instead -- which are, in every way, worse than the use of explicit theories.

Game theory, like any model building apparatus, is a way of keeping track of what's going on so that you don't contradict yourself. I certainly understand the frustration of Mandel and others over the non-falsifiability of models with multiple equilibria. (See also the story Roberts relates in his post.) However, I think a number of important real-world situations may be characterized by coordination failures and multiple equilibria. It is worth having a framework that can accommodate that, as long as you don't start seeing multiple equilibria behind every tree. It's not a theory of everything... at least not yet, and it may never be. It's one more tool in the toolbox, useful for identifying the effect of changes in the rules or institutions and making sure you don't violate your own assumptions.

It's that time again. Click here for the minutes.

This is a long post due to the fact that these minutes have some potentially important implications, and because of that I am quoting large segments. This will be food for thought for a while, so do read them carefully.

Some choice segments:

The Committee's decision at its August meeting was widely expected in financial markets and evoked little price reaction. Over the intermeeting period, however, investors marked down their expectations for the path of policy, partly in response to the devastation caused by Hurricane Katrina. Nominal Treasury yields decreased about in line with the revision to policy expectations. Yields on inflation-indexed Treasury securities fell a bit more than their nominal counterparts, leaving inflation compensation slightly higher. Spreads on investment-grade corporate bonds were little changed over the intermeeting period, but those on speculative-grade bonds increased from very low levels. Major equity indexes appeared to be supported by lower interest rates and posted modest gains despite the increases in energy prices. The trade-weighted foreign exchange value of the dollar depreciated slightly over the intermeeting period.

...

In the forecast prepared for this meeting, the staff lowered its projection for economic growth over the remainder of 2005 in light of the economic dislocation associated with Hurricane Katrina. At the same time, however, the staff increased the growth rate forecast for 2006 to reflect the boost to economic activity from the rebuilding effort. By 2007, the level of output was expected to move back to the path it would have followed in the absence of the storm. The staff revised upward its forecast of overall inflation for 2005 and of core inflation for 2006, reflecting the effects of higher energy prices, but lowered its projection for overall inflation slightly for 2006. It was recognized that there were considerable near-term uncertainties and that many data series in coming months would be influenced by the effects of the storm.

Emphasis mine. Reference my comments here and here. In the former, I remark,

Is there any reasonable scenario in which real GDP in 2007 ends up higher than it would have been without the hurricanes?

The Fed appears to understand that broken windows can alter the timing of spending, but have little effect on potential GDP.

It was also interesting that they revised their forecast for overall inflation downward for 2006 but core inflation upward. (I can't wait for Barry Ritholtz's take on this.) Moving on in the minutes:

...On balance, participants thought that there would likely be a significant shift in the timing of aggregate economic activity over the next several quarters but probably little effect on the economy's intermediate-term growth prospects. Several participants voiced concern that the effects of the hurricane were likely to add to already considerable pressures on prices.

The investment picture is cloudy as well...

Meeting participants noted that, even prior to the hurricane, business fixed investment had been somewhat weaker than expected. The softness was somewhat puzzling, as sales were growing, business balance sheets appeared quite strong in the aggregate, profitability was high, and financing was readily available and relatively inexpensive for most firms. Although the apparent sluggishness could reflect only short-term fluctuations in volatile data series, some evidence suggested that it may also have stemmed from concern among business executives about the effects of high energy prices. The anecdotal information on commercial real estate markets was mixed, with some districts reporting firming markets while activity elsewhere was said to remain subpar.

And you knew this was coming...

With regard to fiscal policy, meeting participants noted that federal outlays would increase sharply in order to assist with recovery and reconstruction efforts in the aftermath of the hurricane. The eventual size of the increment to federal outlays was unclear, but it was likely to be quite large. The substantial step-up in government spending would add to federal deficits that were already large and underscored the