This combination of fiscal sustainability problems, large external imbalances, and the tension in the existing exchange rate system creates the risk of unanticipated shocks to financial prices, even in a context where monetary policy credibility is strong. The probability of these shocks may be low, but it is higher than it has been, and higher than we should be comfortable with. These shocks could be large enough to lower future growth outcomes.

By many measures, the economic landscape looks reasonably good.

As we are in the fourth year of recovery, we have to be vigilant. And as long as the Fed is, people are aware that we are watching closely, I think the expansion can move in a very constructive way through 2005.

The business sector is in good financial shape...In my view, even with a rise in interest rates and some moderation in profit growth, the business sector should remain financially strong and continue to expand.

I think the economy is fundamentally sound, fundamentally resilient.  It doesn't require policy-makers getting things precisely correct, indeed it has a great ability to absorb shocks and surprises, positive and negative, and continue to advance.

Adaptability will be increasingly important in the years ahead.  A worker can no longer count on an initial occupation to maintain its relative position over time.

Our underlying fiscal position is stronger, our debt to GDP burden lower, our demographic cliff more moderate, and our trend growth rate substantially higher than that of the other major economies.

We may be expecting too much if we think we can return to the late 90’s combination of unemployment in the low 4’s and low inflation.

Relative to other recessions, this recession was shallow and did not appear to impart an unusual drag on investment, despite the sharp asset-price correction.

The key improvement in 2004 has been the long-awaited pickup in net job growth.

Looking forward to 2005, it seems reasonable to project a continuation of growth along a quite similar trajectory.

My discussion of the outlook for 2005 has placed productivity trends rather than inflation at center stage, because it strikes me that greater uncertainty surrounds productivity over the coming year.

We are well-positioned for fairly healthy economic conditions next year. Real growth, led by healthy capital formation and solid consumer outlays, should boost employment more rapidly than the working age population grows, and inflation should remain well-contained. A central banker couldn’t ask for much more than that.

Both equity prices and capital goods spending have turned up over the past year, and the probability that economic activity might stagnate has receded.

In retrospect, last year appears to have marked a transition from an extended period of subpar economic performance to one of more vigorous expansion.