susan schmidt bies : economic outlook and developments in mortgage markets remarks by ms susan schmidt bies, member of the board of governors of the us federal reserve system, at the eller college of management distinguished speaker series, tucson, arizona, 18 january 2007. * * * to begin, i would like to thank dean portney and everyone at the eller college of management here at the university of arizona for the invitation to speak this evening. i know that this audience includes both experienced business leaders as well as students preparing to apply the knowledge they have learned in the classroom to the real world. accordingly, my remarks will first touch on the economic outlook. then, i will offer some thoughts on the challenges facing consumers as they navigate today ’ s changing mortgage loan market. economic outlook economic activity slowed in the middle part of last year. after rising at an annual rate of 3 - 1 / 4 percent over the previous two years, real gross domestic product ( gdp ) increased at an annual rate of 2. 6 percent in the second quarter of last year. real gdp growth in the second half of last year slowed after accounting for some measurement difficulties in the automotive sector. despite the recent slowing in output, however, resource utilization remains relatively high by historical standards and thus continues to be a potential source of upward pressure on inflation. in the aftermath of the 2001 recession, the federal open market committee ( fomc ) eased monetary policy substantially. however, the degree of easing in place in 2003 and 2004 was clearly unsustainable. since mid - 2004, the fomc has gradually moved monetary policy from an accommodative stance to a more neutral position. as a consequence, the elements now appear to be in place for some easing of resource utilization rates over the next year or so and a reduction in inflationary pressures. however, substantial uncertainty surrounds the near - term outlook. in determining the future path of interest rates, the fomc will be guided by the incoming data on both output and prices, so let ’ s begin by reviewing recent developments. economic activity the slowdown in the growth of real gdp since last spring largely reflects a cooling of the housing market : sales of both new and existing homes dropped sharply after their peak in the summer of 2005, the inventory of unsold homes has soared, and the number of single - family and multifamily housing starts has fallen nearly 30 percent since the beginning of last year. at the same time, homes are appre

of the rules do deliver the same recommended course of action. suppose the fomc observes an increase in available measures of inflationary pressures and a decrease in labor market slack – that is, the gap between maximum employment and observed employment. then many monetary policy rules would recommend that the fomc not ease policy further and in fact consider reducing the level of monetary policy accommodation. that recommendation – don ’ t ease further if you ’ re doing better on your mandates – makes sense to me. with that recommendation in mind, let ’ s go back to november 2010. at that date, the fomc took a significant policy step by announcing its intention to buy $ 600 billion of longer - term treasury securities. until the most recent meeting in august, this was the last major policy step undertaken by the committee. what did available measures of inflationary pressures and labor market slack – the “ mandate dashboard ” – look like back in november? in terms of inflation, i generally think that core inflation does a better job of tracking underlying inflationary pressures, because it does not include the highly volatile and transitory fluctuations in food and energy prices. in november, pce core inflation over the preceding 12 months had been less than 1 percent and had decelerated throughout the year. of course, a good mandate dashboard should also include some measure of the future course of inflationary pressures. here, it is worth noting that, even with the large - scale asset purchase in place, fomc participants expected core inflation to remain very low : less than 1. 3 percent over the upcoming calendar year of 2011. in terms of labor market slack, i ’ ve argued elsewhere that it ’ s hard to find reliable measures of this key variable. 8 but the fomc statement makes specific reference to the unemployment rate as a gauge of labor market slack, and so i ’ ll use that measure on my notional mandate dashboard. the unemployment rate was 9. 8 percent in november 2010. with the help of the see kocherlakota ( 2011 ). bis central bankers ’ speeches large - scale asset purchase, fomc participants expected it to fall to about 9 percent a year hence. how had the mandate dashboard changed in august 2011? pce core inflation rose sharply : from december 2010 through july 2011, the annualized core pce inflation rate was over 2 percent. fomc participants did not submit forecasts of core pce inflation in august. however, the most recent survey of professional forecasters