Much of this decline [in fourth quarter 2005 GDP growth], however, reflects fluctuations in government spending, imports, and motor vehicle output that look to have been temporary. Indeed, the most recent monthly indicators of activity have been favorable, and we think that growth in output is rebounding smartly from the low fourth-quarter number.

There is also the possibility, however, that housing markets will remain solid—for example, because of support from the continued low level of long-term interest rates. This would then heighten the risk of above-trend GDP growth and the further development of pressures on resources.

My view is similar to the consensus of private sector forecasters. I would expect growth of around 3 ½ percent (Q4/Q4) for 2006, which is just slightly above most estimates of trend GDP growth. That said, growth in the first quarter may come in well above 3 ½ percent, as the economy rebounds from the sluggish fourth quarter. But over the course of the year, I would expect to see GDP decelerate to around its trend growth rate...

The solid growth forecast for the economy also should translate into steady growth in employment. The increases will be somewhat less than employment gains seen in the past two years due to two factors.  First, as growth slows and converges toward the economy’s trend growth rate, fewer additional workers will be needed. And second, strong productivity growth over the past few years is expected to continue, suggesting that the existing workforce will be able to produce a sizeable portion of the projected increase in output.  Based on these factors, I would expect that employment will grow by between 1.5 million and 2 million jobs in 2006. That translates into an increase of 125,000 to 167,000 jobs per month.

This relatively low unemployment number [4.8%] raises the question of whether the economy has already gone a bit beyond full employment. If it has, then, with real GDP growth expected to exceed its potential rate in the first half of this year, the strain on resources could build further, intensifying inflationary pressures. Additional inflationary pressures at this point would be particularly unwelcome, because inflation is now toward the upper end of my “comfort zone.”

While we face a great deal of uncertainty, the economy appears to be approaching a highly desirable glide path. First, real GDP growth currently appears to be quite strong, but there is good reason to expect it to slow to around its potential rate as the year progresses. Second, it appears that we are operating in the vicinity of “full employment” with a variety of indicators giving only moderately different signals. Finally, inflation is near the high end of my comfort zone, but it appears well contained at present, and my best guess for the future is that it will remain well contained.

GDP grew at only about 1.6 percent in the fourth quarter last year—about half the pace of the previous 2 ½ years. The analysis done by my staff and others suggests this relatively weak reading was an aberration that does not imply a loss of momentum going forward.

Although they are imprecise, simulations from the Federal Reserve Board staff's large-scale econometric model, which account for these effects, suggest that increases in spot and futures prices of energy from late 2003 to the present subtracted a 1/2 percentage point from real GDP growth in 2004 and more than 1 percentage point in 2005. The model suggests the subtraction this year will be about a 1/2 percentage point.

With the IT revolution continuing and a flexible U.S. economy operating in a more global marketplace, I expect labor productivity to grow by around 2-1/4 percent per year. These estimates imply a potential for output growth of about 3 percent per year on a sustained basis.

Some may see the trend toward output growth of 3 percent as a failure of policy. But if the estimates [of labor productivity] above are correct, it is not. The economy must be allowed to move along its path of potential growth if we are to achieve monetary policy’s dual mandate of sustainable growth and price stability. Attempts to maintain consistently higher growth than this will only produce inflationary pressures and erode the price stability that is monetary policy’s most important contribution to macroeconomic stability.

Our economy continues to steam along at a pace that the consensus of economists estimates will be somewhere north of 4 percent in this current quarter, after netting out inflation, which we have maintained at or near the 2 percent level despite record-high energy prices.

It would not surprise me too much to look back and see that some of the growth we thought would occur in the final three months of last year was actually spread across the third quarter of 2005 - when GDP growth was stronger than expected - and the first quarter or two of this year.

[GDP growth] slowed to a still solid 3.5 percent in 2005, although I would not be surprised if GDP were revised upward when we take a more definitive look at the fourth quarter.

The overall outlook therefore is for a healthy expansion next year. Real GDP should grow at about 3.5 percent.

Looking ahead, I expect the favorable performance of the economy to continue.  Most private forecasters expect the momentum from the solid growth in 2005 to continue into 2006.  Although monetary policy has become less accommodative, it will continue to support economic activity.  Because of the lags with which monetary policy affects the economy, monetary policy accommodation over the past year will continue to act as an economic stimulant, though clearly far less so than in the past several years...My own view is that we will see growth in the 3 1/4 to 3 1/2 percent range, which encompasses the consensus estimate.

My own view is that we will see growth in the 3 1/4 to 3 1/2 percent range, which encompasses the consensus estimate.