The momentum in the inflationary process has clearly shifted away from disinflation. And, unfortunately, it is not always possible to distinguish short-term movements in the price indexes from the emergence of an inflationary trend until after the fact...Monetary policy makers have to anticipate the potential for inflation to creep up over time if the policy rate does not move up as well—in other words, if policy unintentionally becomes accommodative.

Interest rates are clearly not at restrictive levels...If we keep inflation low, I don't see any reason why interest rates should reach particularly high levels.

PPI didn't alter my inflation outlook perceptibly.

We need to preserve confidence that policy will move toward a positive real fed funds rate at a pace sufficient to keep inflation expectations stable at a low level. How far policy moves and the pace at which it moves will depend on how the outlook evolves. Preserving the credibility of our commitment to price stability is vitally important, not least because of the flexibility it affords us to confront future shocks that have the potential to cause damage to the financial system and the economy.

Core inflation picked up about a percentage point in 2004, reflecting the pass through of rising oil and gas prices into core goods and services which use energy as an input to production. The decline in the dollar may have also contributed, though our estimates suggest there has been a very limited pass-though from this channel.

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.

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. 

Although I do not think a significant pickup in inflation is imminent, I continue to be struck by talk of price increases that my business contacts say they are planning as the economy expands. Low capacity utilization is often cited as a factor that helps to keep prices down. But capacity utilization has been rising steadily and may be underestimated given the number of obsolete factories that have been shut down and are not expected to reopen. Moreover, there probably is a limit to how long businesses can leverage productivity gains to hold prices down.

My personal view is that if the economy stays on the present path of solid growth, then rates have not yet returned to equilibrium. As I noted earlier, I do not see an imminent threat of inflation, and I am comfortable with our gradual monetary policy adjustments—at least for now.

We should be able to move forward without significant increases in inflation.

We can't wait until we see the whites of the eyes of inflation picking up.

Monetary policy is capable of preventing oil price increases, or changes in the foreign exchange value of the dollar for that matter, from showing through to the underlying inflation rate.

It is true that markups are now elevated by historical standards, and thus are likely to trend down in the near term. But should the emerging step-down in productivity growth persist and markups not decline rapidly, real interest rates may need to rise more rapidly than is now anticipated.

Even if inflation remains low and constant, as we would like, we may still need to move the Fed funds rate fairly often.

In an endeavor to exploit current high margins, businesses are being driven to expand their use of capital and labor resources. If history is any guide, this will tend to increase both real wages and interest rates. Fears of losing market share should dissuade businesses from passing these high costs fully through to prices. Accordingly, the forces of competition should cap the rise in profit margins and ultimately return them to more normal levels.