in the stance of policy by reducing the target range for the federal funds rate. this is the natural next step in executing our strategy to achieve our dual mandate goals. looking ahead, with inflation moving toward the target and the economy in balance, the stance of monetary policy can be moved to a more a neutral setting over time depending on the evolution of the data, the outlook, and the risks to achieving our objectives. in terms of the fed's balance sheet, the committee began to slow the pace of decline of our securities holdings in june. that process is going smoothly and as planned, and the level of reserves remains well above ample. the economic outlook before i close, i'll share my forecast for the other " e, " the economy. i expect gdp growth this year to be around 2 to 2 - 1 / 2 percent. i expect the unemployment rate at the end of this year to be around 4 - 1 / 4 percent, and thereafter to move gradually down to my estimate of its longer - run level of 3 - 3 / 4 percent. with the labor market in balance, i expect the process of disinflation to continue. specifically, i expect overall pce inflation to moderate to around 2 - 1 / 4 percent this year and to be near 2 percent next year. 3 / 4 bis - central bankers'speeches that's my base case. but it's important to emphasize that the outlook remains uncertain, and i am attentive to signs of a shift in economic conditions. three areas are particularly in focus. one is the possibility of a significant further weakening in the u. s. labor market. the second is a sharp slowdown in global growth that could spill over onto our shores. and third, the experience of the past year shows that the process of disinflation is not always smooth and can surprise both to the upside and downside. conclusion we've come a long way from the unacceptably high inflation and overheated labor market that we experienced two years ago. monetary policy has been unequivocally focused on returning inflation to our 2 percent longer - run target. the risks to our two goals are now in better balance, and policy needs to adjust to reflect that balance. of course, one clear lesson of the past several years is that the future is highly uncertain. therefore, our decisions will be data - dependent, with a keen eye on the achievement of our maximum employment and price stability goals. 1

i j macfarlane : recent influences on the exchange rate speech by mr i j macfarlane, governor of the reserve bank of australia, to ceda annual general meeting dinner, held in melbourne, on 9 november 2000. * * * i am very pleased to have been asked to address ceda ’ s annual general meeting for the third time in melbourne. when deciding on a topic for tonight, i realised that it would be very difficult to discuss the australian economy without spending some time on the exchange rate and the various reasons advanced for its recent fall. so i have decided to plunge in and devote the whole speech to this topic. obviously, we have been doing a lot of thinking about it, and i will see if i can say something useful about it in the 20 minutes i have available tonight. what has happened? the exchange rate has behaved during 2000 in a way that noone predicted. there used to be some elements of predictability for the australian dollar in that its broad movements could usually be explained by changes in our terms of trade ( or its close relative, commodity prices ) and the difference between domestic and foreign interest rates. the relationship was not close on a month - to - month or quarter - to - quarter basis, but it could explain the large swings. this broad relationship is shown in diagram 1 which compares the predicted exchange rate and the actual exchange rate using an equation which has been used in the bank over the years. ( by the way, there is nothing unique about this equation as several of the large banks active in the foreign exchange market have also used a similar formulation. ) what diagram 1 shows is that, on the basis of previous experience during the floating rate period, we could have expected a rise in the exchange rate in 2000. instead, we have seen a fall and the gap between actual and predicted is over three standard deviations - the largest in the past fifteen years. something therefore has changed, at least for the present. diagram 1 real trade - weighted exchange rate index index predicted * actual 1985 - 1999 average * shaded area represents + / - one standard deviation from predicted value. another way of making the same point is to say that the australian dollar has never previously shown a significant fall with economic conditions as they presently are. over the course of 2000, we have had a strong world economy, improving australian terms of trade ( rising commodity prices ), a buoyant domestic economy, a declining current account deficit, a fiscal surplus and rising domestic interest rates. in