Before raising rates, I would like to have more confidence than I do today that inflation is indeed beginning to head higher. Given the current low level of core inflation, some evidence of true upward momentum in actual inflation is critical to this assessment. I believe that it could well be the middle of next year before the headwinds from lower energy prices and the stronger dollar dissipate enough so that we begin to see some sustained upward movement in core inflation. After liftoff, I think it would be appropriate to raise the target interest rate very gradually. This would give us sufficient time to assess how the economy is adjusting to higher rates and the progress we are making toward our policy goals.

Since the end of the recession, real GDP has grown at an average annual rate of just 2.1 percent. In contrast, in the 60 years before the recession, real GDP grew at an average annual rate of 3.5 percent. Based in part on that long track record, many forecasters, myself included, were expecting growth to pick up to a more robust pace. More recently, however, I have come to the conclusion that a sustained acceleration of growth to something over 3 percent in the near future is unlikely. Given what we know, it strikes me as more likely that growth will continue to average somewhere between 2 and 2 1/2 percent. Let me briefly explain why.

It's helpful to start by thinking of the growth in real GDP as the sum of two components: growth in employment and growth in GDP per employee, a measure of productivity growth. When you calculate these two components, you find that both have slowed considerably since the Great Recession.

Taking these in turn, the rate of growth in employment has been about two-thirds of the rate we saw in the decades prior to the Great Recession. Part of that decline reflects structural developments such as slower growth in the working-age population, the aging of the baby boomers and the rise of enrollment in educational institutions. In addition, we've seen a gradual secular decline in the labor force participation rates for people in the prime working-age group aged 25 to 54. Some economists attribute this to workers becoming discouraged about their job market prospects and argue that the unemployment rate is understating the amount of "slack" in the labor market. Our research indicates, however, that there is always more slack than indicated by the standard unemployment rate, and by some measures there seems to be no more additional slack now than is typically associated with the current level of the unemployment rate.

Productivity growth, the other component of real GDP, grew fairly rapidly in the early postwar period, rising at a 2.7 percent annual rate from 1948 to 1969. Productivity growth then slowed, rising at a 1.4 percent annual rate from 1969 to 2007. And since the fourth quarter of 2007, productivity growth has averaged only 1.0 percent per year.

An active debate has sprung up concerning prospects for future productivity growth. Some economists have suggested that major, broad-based advances in technology are far less likely than in the past, and that we should prepare for a relatively stagnant productivity trend. I am not so gloomy, however, in large part because of the amazing historical record of technological innovations that solve current problems and simultaneously open up new possibilities for future innovations. Having said that, the difficulty of forecasting output per worker suggests that the middling productivity gains we've seen over the last few years are probably the best guide to near-term productivity trends. Thus, I am not expecting an imminent acceleration in productivity growth.

Productivity growth is critically important because it's what drives growth in real wages and real household income, which in turn ultimately drives consumer spending. Some proponents of the view that GDP growth will soon accelerate argue that a pickup in productivity growth will boost disposable income trends and thereby set off an acceleration in consumer spending. Data earlier in the year seemed to indicate that such an acceleration might be in train. More recent household spending figures suggest otherwise, however

The housing market has also perplexed forecasters over the course of this expansion Potential homebuyers now seem to be more conscious of the financial risks of homeownership than before, and housing demand has been shifting toward multifamily rental units. Moreover, the overhang of homes associated with foreclosures and seriously delinquent mortgages remains elevated, and this is dampening housing market activity. Thus, I am expecting residential investment to make only modest contributions to overall growth over the near term.

These three factors subdued productivity growth, moderate consumer spending growth and a more tempered expansion in housing construction are keys to my assessment that overall economic growth is likely to average between 2 and 2 percent over the near term, which is around the average rate we've seen for this expansion.

During the Great Recession, GDP fell by 4.3 percent over a six-quarter interval, but other indicators document even greater hardship. Payroll employment fell by 8.7 million jobs in the recession and its immediate aftermath... The scale and scope of the loss in income and wealth experienced by Americans was far greater than anything seen in the previous 20 years. Given that experience, lenders are bound to re-evaluate the riskiness associated with extending credit to a typical household. Indeed, consumers themselves appear to be re-evaluating the riskiness associated with indebtedness, no doubt reflecting a sense that their income and asset returns may be substantially riskier than they had come to believe during the Great Moderation. Under these conditions, it's no surprise that credit is no longer available on the same terms. And it's no surprise that consumers have been paying off debt and building up savings in order to restore some sense of balance to their household finances... Businesses also appear to be quite reticent to hire and invest. A widely followed index of small business optimism fell sharply during the recession and has only partially recovered since then. Interestingly, when small business owners were asked about the single most important problem they face, the most frequent answer in the latest survey was "government regulations and red tape..." Adding to the uncertainty is the continuing cloud over our nation's fiscal policy. The most recent round of budget deliberations has certainly been a welcome relief from the recurrent legislative cliffhangers of the last several years. The lower odds of an imminent budget showdown may ease some business and consumer concerns, and that may aid growth. But overall government spending has been declining lately, and, given continuing fiscal pressures, that category is likely to make little, if any, contribution to GDP growth in coming years.

One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011. The temporary factors I mentioned earlier--the rise in commodity prices, which has hurt households' purchasing power, and the disruption in manufacturing following the Japanese disaster, which reduced auto availability and hence sales--are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.

The drag of uncertainty on economic activity persists as we enter 2011. That said, I would argue that the pall of uncertainty has lifted somewhat, and improved visibility could encourage more business risk taking and consumer spending.

Consumers will reengage slowly as confidence, income, and balance sheets strengthen.

In my view, sustainable global growth requires a shift toward a higher consumption share in the emerging world matched by a shift away from consumption in the United States.

Because households tend to base their consumption plans on their income prospects, any improvement in consumer spending growth likely will depend on a shift to a more optimistic assessment of those prospects. Once households are convinced that an end to the deterioration in labor market conditions and the fall in equity and home prices is in view, however, consumer spending growth will be based on improving longer-run income prospects and is likely to pickup substantially.

Slower income growth, falling consumer sentiment, higher food and energy prices, lower housing and equity wealth, and tighter credit conditions are all restraining household spending, and are likely to do so in the near term.

Lacker expressed skepticism about declines in various gauges of consumer confidence or consumer sentiment. He called them "kind of crude measures" and said "it's hard to make anything out of them."

"Sometimes they dip sharply without any deflection in the path of consumer spending," he said, while "sometimes they are a harbinger of significant (slowing) of consumer spending."

From comments to press, as reported by Market News International

 In fact, the contraction in spending on housing construction subtracted a full percentage point from U.S. real GDP growth last year, and nearly as much the year before. It seems likely that this sector will be a major drag on the overall economy through the end of this year and into 2009.

Until recently, the deflating housing bubble had not spilled over to the rest of the economy. But now it has. It appears that growth in consumption and business investment spending has slowed markedly after years of robust performance, and, as a result, the economy has all but stalled and could even contract over the first half of the year.

The factors weighing down consumer spending go beyond the effects of the credit crunch and the falling house prices. Consumers also face constraints due to the declines in the stock market, which have diminished their wealth. Furthermore, energy, food, and other commodity prices have risen sharply in recent years, essentially “taxing” their incomes. Finally, and very importantly, labor markets have weakened.

Until recently, the deflating housing bubble had not spilled over to the rest of the economy. But now it has. Based on monthly data that cover most of the first quarter, it appears that growth in consumption and business investment spending has slowed markedly after years of robust performance, and, as a result, the economy has all but stalled and could contract over the first half of the year.

With respect to consumer spending, a long list of factors can be expected to have a depressing effect going forward.

Mishkin said he believes that long-run inflation expectations will remain consistent with increases in PCE; "in the neighborhood of 2% per year." Accordingly "over time core PCE inflation will move back to around 2%," he said.

From Q&A as reported by Market News International

There is concern that there are in fact structural limitations on the ability of consumers to finance consumption.

From audience Q&A as reported by Market News International