As a policymaker, I feel acutely the tension between the need to promote growth and guard against the specter of higher prices. Implicit in my view is the forecast that inflation will moderate, allowing policy to focus on the very apparent near-term risks to the broad domestic economy.

For 2007, the consumer price index increased 4.1 percent—the largest calendar-year increase since 1990. The core CPI (excluding food and energy costs) increased 2.4 percent, which is above my comfort zone.

As I prepare for each FOMC meeting, I gather real-time anecdotal economic intelligence from a variety of sources. I talk to, among others, bankers, hedge fund managers, and other financial market players. In my most recent conversations in December, they voiced serious concern about further—and spreading—market deterioration and potential spillover into the broad economy. From my contacts in the nonfinancial world, I generally get less strident impressions of current economic circumstances. Not long ago, I heard qualitatively different perceptions from Main Street versus Wall Street. But in recent weeks almost all were quite worried about the economic outlook.

In my view, the degree of substantive action to support economic growth and insure against downside risk will be conditioned by what we see coming down the inflation pike. To deliver on its dual mandate, the Fed must keep one ear cocked toward signs that inflationary expectations are drifting upward as we execute additional monetary measures. 

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The challenge to monetary policy, as I see it, is to achieve the growth part of our mandate in the short term and get “ahead of the curve” without shaking faith in the currency over the long term.

A weak December employment report, combined with a falloff in retail spending and flat industrial production, supports my view that the economy has shifted to a lower growth track. Although I expect that the restraining influences to growth will diminish over time, and that the economy will gain firmer traction later this year and into 2009, I am concerned about the downside risks to that outlook.

Of course, I know that our economy is confronting a number of challenges as the new year begins. The residential real estate market still appears to be in freefall. In addition, oil prices have risen, and housing and equity prices have fallen. These factors are restraining the economy beyond the housing sector.

Even as economic growth was slowing, inflation at year-end was clearly elevated. Rising energy prices were a big part of the increase in overall inflation, and some of those costs were passing through to the core inflation measures as well. So, too, the falling dollar seems to have boosted import prices. But I continue to believe that the economy's inflation trend will move lower over the forecast horizon as the growth rate of the economy slows and the influence of energy and import prices diminishes.

Since our last meeting in December, economic conditions have weakened.

From audience Q&A as reported by Market News International.

I think the economy has slowed considerably. My own forecast for the first half of ’08 is a rather slow economy.  I think what’s happened recently is that the data that have come in in the last few weeks on the end of the 4th quarter of last year have suggested more weakness.  I think the challenge is going to be, going forward, is to thinking about what data comes in and how that’s affecting our forecast going forward. So I am certainly open to that [additional interest-rate cutting] and there is a lot of uncertainty right now about the economy.

Employment growth  has been strong and that supports consumer spending.  However, the combined weakness in wealth… that is both housing wealth and stock market wealth… and some softness in employment growth seem to be suggesting that the robustness of consumer spending going forward may not be as healthy as we thought it was just a few months ago. So that’s the source of concern, and whether that spending and employment growth will continue to support consumer spending going forward.

 I am more uncertain about the future path of the economy than I once was. But my forecast at this point does not include a recession.

I think we need to use a multipronged approach to help reduce the downside risk to the real economy.

From remarks as delivered, as reported by Market News International

Pulling this altogether, I expect GDP growth for the year to be in the range of 2 percent to 2.5 percent measured on a Q4-over-Q4 basis.  I also expect the rise in overall inflation to moderate as the U.S. economy slows, but I do not expect any quick reversal of inflation trends, and therefore I expect core inflation to remain above 2 percent. 

The current financial turmoil will take awhile to play itself out. The fundamentals of our economy remain strong, however, and 2008 looks to be a year of rising growth. Economic forecasters expect slow expansion in the first half of the year and a quickening pace in the second half. Meanwhile, if borrowers, lenders and investors can refocus on financial basics and re-emphasize critical lessons about credit and risk, the financial future can be brighter than the second half of 2007. For that brighter future, we need to infuse our education at all levels with the lessons of 2007—old lessons to be sure but easy to understand at a very practical level from 2007 experience. With continuing effort we can expect that financial upsets such as the current one will be infrequent and milder when they do occur.  

"I'm not trying to put a gloss and say the economy is great," Poole said. "I'm trying to say the data to me are not clearly decisive on the downside" and "I would say the uncertainties are probably greater."  He added views about the outlook both within and without the Fed are "more diverse than typically the case."

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The circumstances that we would see to justify a substantial policy easing would be the same as the people in the markets would see ... Having said that, keep in mind that interest rates have already come down quite a bit so given the lags in the process we would have to make a judgment about how much more would be appropriate given the new information.

From Q&A session as reported by Market News International and Dow Jones News