I see the economy improving as we move through this year.  Our expectation is that inflation rates will continue to come down as well during this period and I would expect the unemployment rate will not go up a great deal.

As reported by Bloomberg News

Real gross domestic product has expanded a little more than 2 percent over the past year, compared with an average annual growth rate of 3-3/4 percent over the preceding three years.  The cooling of the housing market is an important source of this slowdown.  Sales of both new and existing homes have dropped sharply from their peak in the summer of 2005, the inventory of unsold homes has risen substantially, and single-family housing starts have fallen by roughly one-third since the beginning of 2006.  Although a leveling-off of sales late last year suggested some stabilization of housing demand, the latest readings indicate a further stepdown in the first quarter.  Sales of new homes moved down to an appreciably lower level in February and March, and sales of existing homes have also come down on net since the beginning of this year.

...given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.  The vast majority of mortgages, including even subprime mortgages, continue to perform well.  Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.

[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well.

It has been in some ways a difficult year.  We've seen that the U.S. economy has slowed and at the same time we've seen inflation pressures rise.  We will see the economy strengthen.  And if we do it in the right sequence, we have the opportunity to see inflation that will recede further.

As reported by Bloomberg News

An “asymmetric policy tilt” seems appropriate given the risks to inflation.  However, the complexities of the current situation—including uncertainties concerning the behavior of output and employment, as well as growing downside risks to economic growth and the possibility that the neutral level of the funds rate has been lowered by a productivity slowdown—make it appropriate for policy to retain considerable flexibility in responding to emerging data.  The statement thus emphasizes that “Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”  What all of these considerations add up to is that the stance of monetary policy will undoubtedly need to be adjusted in ways that are dictated by shifts in our forecasts for inflation, output, and employment in light of incoming data. 

The puzzle, as I put it then, was: Why is the labor market apparently going gangbusters, while growth in real GDP has turned in only a middling performance? The reason I’d like to revisit the puzzle is that, in the intervening period, its mystery has deepened: economic growth has unexpectedly slowed from “middling” to a crawl, while the unemployment rate has actually inched down and employment growth has remained robust.

More recently, developments in the subprime mortgage market have raised some additional concern about near-term prospects for the housing sector. The sharp rise in delinquencies on variable-interest-rate loans to subprime borrowers and the exit of a number of subprime lenders from the market have led to tighter terms and standards on such loans. While these problems have caused undeniable hardship for many families and communities, spillovers to other segments of the mortgage market or to financial markets in general appear to have been minimal. Variable-interest-rate loans to subprime borrowers account for a bit less than 10 percent of all mortgages outstanding, and at this point the expected losses are relatively small. Moreover, because most subprime mortgages are securitized, the risks associated with these loans are spread widely. Banks and thrift institutions that hold mortgages are well-capitalized, and exposures of individual banks to possible subprime losses do not appear to be large. On the whole, some borrowers may find credit more difficult to obtain, but most borrowers are not likely to face a serious credit constraint.

More recently, some home builders have reported tentative signs of stabilization in demand, and some data—for example, applications for mortgages and sales of existing homes—are consistent with this assessment. Furthermore, conventional mortgage rates remain low by historical standards, lending support to housing demand. However, other data are weaker, such as the inventory of unsold new homes, which has increased further this year. Unless sales rebound dramatically (and unexpectedly), construction will be depressed for some time in order to reduce inventories to more desirable levels.

...After considering the various developments, including the problems in the subprime mortgage market, I expect that residential construction will stabilize as we move through 2007. However, it could be next year before we see any noticeable increases in home building.

"Consumption growth is strong," Plosser said following a speech at the University of Delaware Tuesday night.  "Employment growth is strong.  Business investment is weaker than we thought."

" The economy is not as strong as we thought it was two months ago. Inflation is higher than we thought it was going to be two months ago."

"What do you do? Your guess is as good as mine."

From the audience Q&A, as reported by Dow Jones News

"We have a responsibility to make sure inflation does not get out of the bag," Fisher told attendees at a luncheon held by the Dallas Fed in McAllen, Texas. "I am among those ... that believe we still have some more work to do on that front," Fisher said.

...

He said of the U.S. economy, "I believe that we will continue to grow, and the pace of growth will pick up as we go through the year."

In his remarks to the audience, Fisher said that a measure of inflation produced by the Dallas Fed, the trimmed mean personal consumption expenditure rate, remains too high for his taste.

As reported by Dow Jones news

As always, my view on economic growth and inflation emphasizes longer-run conditions. I could point to numerous past episodes of either faster or slower growth for a few quarters that we now ignore because long-run developments dominated the outcome and indeed dominate our current assessment of these periods. In assessing short-run developments, it is also essential to keep in mind that forecasts have standard errors. Over a four-quarter horizon, a GDP forecast has a standard error of about 1.5 percentage points and an inflation forecast has a standard error of about 0.5 percentage points. We know also that data are often revised. Finally, monetary policy cannot affect near-term conditions anyway. Thus, a focus on medium- and long-term fundamentals is always appropriate.

[Poole] expressed relatively little concern about the probability of recession on the heels of Greenspan's prediction of a 1 in 3 chance of recession before year's end. Poole noted that recession probability models always show a 10%-15% chance of recession even during what are viewed in retrospect as solid business cycles.

However, he did say that the chances of recession are "slightly elevated." "My own take is that it's somewhere between that [Greenspan's prediction] and normal [10-15%]," he said.

From Q&A session, as reported by Market News

Our statement included a description both of the situation on the real side of the economy and on the inflation side and our sense was both, that the risks had increased on both sides, that the outlook for output was a bit weaker, as we indicated in our statement, but that, also, the inflation situation had become slightly riskier, as well.

From Q&A session

Our general outlook, the contour of how we expect the economy to evolve, is very much unchanged, at least it's not materially changed. In particular we expect the economy to continue to grow at a moderate pace. We expect to see some strengthening later on as the housing market returns to something closer to equilibrium. And we expect inflation to moderate gradually. But as I discussed this morning, we do see risks to all of those forecasts.

From the Q&A session

Even if the demand for housing falls no further, weakness in residential construction is likely to remain a drag on economic growth for a time as homebuilders try to reduce their inventories of unsold homes to more normal levels.