Here, in their own words, are the 2005 forecasts from Federal Reserve policymakers. Most of these speeches were given in the past two weeks. There are a lot of them, so I'm breaking the post into two parts.
From Cathy Minehan at the Boston Fed:
So what lies ahead of us in 2005? The most likely answer is the economy will grow again at about 4 percent or so. I also expect to see some acceleration in job creation as the economy continues to expand. And inflation seems likely to be well behaved, at least over the near term. But that said, as always, this depends on a number of things going right.
Through most of 2004, consumption growth seemed to be buoyed by rising housing prices and later in the year by a surging stock market. Further encouraged by low interest rates, consumers kept spending and reduced savings as a share of disposable income close to zero. This is problematic for the long run to be sure, but it was helpful in sustaining overall spending and production in the short run. Will consumers decide to retrench and moderately increase their savings in 2005?
... In fact, the strong balance sheets and cash positions of many firms suggest the possibility of more rapid capital spending. But will businesses continue to defer such spending as they had earlier in the cycle?
Perhaps so. Press reports this fall in the Wall Street Journal and other media outlets, suggest that some firms still have a fair amount of unused capacity embodied in the computers and other equipment they bought during the tech and Y2K spending booms of the late '90s...
There are good reasons to believe that the impact [on inflation] of last year’s oil and gas price increases will be transient. As I noted earlier, core inflation was well-behaved at the end of 2004. Moreover, it is unlikely that we will experience the pace of oil price appreciation this year that we did last year. Certainly, energy futures markets do not expect such a movement... Economic growth could well tighten pressure on resources faster than I expect, but right now most of the ways we have to gauge whether that is occurring -- rates of employment and wage and salary growth, unit labor costs, profit margins and labor force participation -- suggest we have some way to go before we reach the yellow -- much less the red zone -- regarding inflation. Add to that the fact that inflation expectations remain well grounded, and a forecast of a continuation of core inflation at a 2 percent pace or so in 2005 seems more than reasonable.
From Timothy Geithner the New York Fed:
By many measures, the economic landscape looks reasonably good. The qualified optimism that now seems to prevail about the global expansion is reflected in low risk premia, unusually low credit spreads, low and quite stable inflation expectations, and low actual and implied volatility...
The U.S. expansion has proven quite resilient. We enter the new year with what appears to be a pretty solid underlying pace of growth. Core inflation is moderate, and various measures of inflation expectations suggest confidence in the outlook for price stability. Estimates of structural productivity growth remain high, although there has been some moderation recently.
The pace of global growth has moderated a bit, but most forecasts anticipate a quite strong and broad based expansion. The IMF’s projection is just over four percent for real global GDP growth. The consensus of private forecasters sees growth in Europe and Japan close to estimates of potential, or in the neighborhood of two percent.
Growth in the major emerging markets looks impressive, reflecting not only the benefits of a positive external environment, but also the impact of better economic leadership and policies more supportive of macroeconomic stability and reduced external vulnerability. In China, officials now seem more confident that they have induced the desired moderation in growth to a more sustainable, but still high pace of growth...
What are the broader challenges and forces that will dominate the policy agenda and affect economic outcomes? I want to touch on four, though this is a selective list.
First, all of the major economies face difficult fiscal sustainability issues, and these will be exacerbated by the approaching demographic cliff...
Alongside these fiscal challenges, the size and concentration of external imbalances in the system are at an unprecedented scale, between five to six percent of GDP in the case of the U.S. current account deficit. This imbalance is the result of a combination of a sharp decline in U.S. net national savings, driven by increased public sector borrowing and a large rise in household debt, and a sustained increase in the relative strength of U.S. demand growth compared with Europe and Japan...
Third, the U.S. and the major economies have an important role to play in encouraging further evolution in the international monetary system. Policy makers in Asia are well aware of the complications and costs involved in sustaining their current regimes... They are looking for a world in which they can have more monetary policy independence, progressively more financial integration with the globe, and face less risk of large destabilizing moves in the major currencies and less vulnerability to acute pressure on their own currencies.
Finally, it is important that the world’s major private financial institutions run themselves with a sufficiently strong financial cushion, a cushion calibrated not just against the risks they confront in this uncertain world, but to the much more central role they play in many markets.
(Geithner's speech was previously noted by Brad Setser and by Brad DeLong.)
From Anthony Santomero, at the Philadelphia Fed (emphasis in original):
Looking ahead to 2005, I expect growth in real GDP to remain in the range of 3-1/2 to 4 percent. This kind of growth, combined with a return of productivity to its long-run trend, should support solid gains in employment while keeping price pressures well contained...
However, let me add three important caveats to my forecast. Two refer to international developments: the future path of oil prices, and the future path of the U.S. trade deficit. The third is closer to home: the future course of the federal budget deficit...
Let me now turn to the outlook for inflation. Accompanying my most likely scenario of moderate growth is a relatively benign inflation outlook, provided that inflation expectations remain well anchored. However, as the economy continues on its path of expansion, price dynamics are prone to shift...
As long as the public remains confident in the Fed’s commitment to essential price stability — and the Fed conducts its policy in a manner consistent with that commitment — transitory adjustments in prices will not generate persistently higher inflation.
From Jeffrey Lacker, at the Richmond Fed:
Looking forward to 2005, it seems reasonable to project a continuation of growth along a quite similar trajectory [as in 2004]. Consumer spending, fueled by expectations of sustained income growth, should continue to expand at something near the strong pace we have been seeing. Business investment spending might well show a temporary slowdown in the first quarter after the expiration of the tax incentives, but should resume expanding at a robust pace shortly thereafter, reflecting assessments that substantial opportunities remain to enhance efficiency by installing new capital goods, particularly IT and communications equipment.
Output growth next year should also be helped by a reduction in the drag from net exports. Although exports will be dampened somewhat by moderating growth among our major trading partners, the recent fall in the dollar ought to support export growth and contain imports as well. On the other hand, the declining fiscal policy impetus and the likely downward trend in housing starts will both detract from output growth. On balance, GDP growth seems most likely to lie in the three and one half to four percent range next year, barring a large unforeseen economic shock.
The outlook for productivity is pivotal to next year’s economic prospects, and it is especially hard to project at the present time...
Productivity optimists see the recent surge in productivity growth as evidence of the extent to which fruitful efficiency gains remain to be discovered and exploited by firms, and they expect productivity growth to come in significantly above the long term average rate of around two and one quarter percent, perhaps closer to three percent.
An alternative view sees capital deepening and TFP [total factor productivity] gains as to some extent substitutes. Business managers face a trade-off, in this view, between planning and adding capital infrastructure, and devoting efforts to reorganizing business processes to use existing infrastructure and resources more effectively. If so, then TFP gains are likely to decelerate as investment continues to climb, which may to some extent offset productivity gains from the current growth in capital deepening.
Unfortunately, we do not now have in hand the analysis necessary to distinguish between these two views, or to pin down their likely quantitative implications. As a result, there is significant uncertainty about whether productivity gains at elevated rates are likely to continue, or whether they will revert toward the longer run trend rate of around two and one quarter percent...
As I noted earlier, inflation expectations have been relatively stable. For 2005, I expect inflation to come in between one and two percent, as measured by the PCE price index, and I expect inflation expectations to remain contained.
From Jack Guynn, at the Atlanta Fed:
Looking into 2005, I think our economy is positioned nicely to continue solid growth. I’m comfortable with consensus forecasts for annualized GDP growth for this year of about 3 ½ to 4 percent. That projected output growth rate is in line with the past 11 quarters, although GDP growth has picked up recently and averaged about 4 ½ percent for the past 6 quarters—about the same as the late 1990s. I would say that our recent output growth has been and should remain pretty doggone good.
Let me mention some of the other economic issues I’m watching in 2005. Consumer spending last year grew at just under 4 percent, and this year we’ll see how consumers adjust to interest rates consistent with a strengthening economy and high levels of household debt. But I am reluctant to bet against the American consumer, and I expect consumer spending growth for 2005 to keep supporting our economic expansion, especially if energy prices continue to moderate.
Even if the growth in consumer spending eases a bit, most of corporate America is flush with cash. During the third quarter, non-financial corporations increased their liquid assets by 14 percent to more than $1.3 trillion.
Slowly but surely, this liquidity will make its way into the economy. Business investment in equipment and facilities increased about 9 percent in 2004, and computer and software spending rose 16 percent. Forecasts of continued strong business spending growth in 2005 are, in my view, entirely plausible.
(Guynn's comments on monetary policy made a bit of a splash in financial markets when this speech was released last week.)
To be continued.
UPDATE: Philadelphia's Santomero hasn't changed his mind.