I anticipate that the core PCE price index will edge down slightly further over the next few years.  This view is predicated on continued well-anchored inflation expectations.  It also assumes the emergence of some slack in the labor market, as well as the ebbing of the upward effects of several special factors-including energy and commodity prices and owners' equivalent rent.    

Another benign possibility is that labor markets may not actually be particularly tight. There are a variety of ways to estimate conditions in the labor market, and some of these don't suggest much in the way of inflationary pressures. For example, the Conference Board index of job market perceptions, which is based on a survey of households, suggests that labor markets are only very slightly on the tight side. Moreover, if labor markets were tight, this could be expected to show up in robust growth of labor compensation. Instead, some of the data present a different picture: for example, the employment cost index shows remarkably restrained increases of only a little more than 3 percent over the past year.

We expect to end 2008 with an unemployment rate only somewhat higher than it is now.  Core inflation should gradually come down, moving closer to the levels I view as being consistent with price stability.  

On the policy outlook:
     ``It is highly data dependant in that it is responding to what happens over time. So I remain comfortable with the current stance of policy.  I'm alert to the fact that there are upside risks to inflation and with respect to growth, it could go either way.''

On unemployment:
     ``I expect it to inch up ever so slightly, not greatly but marginally. Perhaps by the end of the year to be a little closer to 5 percent."
     ``A period of slightly subpar growth in the economy would in principle create a little more slack in the labor markets.''
     ``Tight labor markets can be a source of inflation pressure and there are a lot of questions about truly how tight labor markets are."
     ``The unemployment rate is low enough that it should be a red flag to policy makers. ''

On whether she has a bias toward raising rates:
     ``I did indicate in the speech that I do remain concerned about upside risks to inflation. That is essentially what the last statement said. There are upside risks to inflation and we remain concerned. ''

From audience Q&A as reported by Bloomberg News

I think that there are pockets of tightness in both the physical capacity and the labor market but there are a lot of other places where there's a lot of excess capacity. So I think the economy is on a good solid course and I don't see any reason, in my own view, to say that we're in any sort of difficult situation.

Flexibility is most readily achieved by fostering an environment of maximum competition. A key element in creating this environment is flexible labor markets. Many working people equate labor market flexibility with job insecurity. Despite that perception, flexible labor policies appear to promote job creation. An increased capacity of management to discharge workers without excessive cost, for example, apparently increases companies' willingness to hire without fear of unremediable mistakes. The net effect, to the surprise of most, has been what appears to be a decline in the structural unemployment rate in the United States over the past quarter century.  Protectionism in all its guises, both domestic and international, does not contribute to the welfare of workers. At best, it is a short-term fix for a few workers at a cost of lower standards of living for a nation as a whole. Increased education and training for those displaced by creative destruction is the answer, not a stifling of competition.

Measures of labor compensation have given somewhat mixed signals about how tight labor markets have become. The rate of increase in the measure of compensation per hour derived from the national income and product accounts moved up appreciably over the four quarters ended in mid-2005 compared with the preceding year. This rise was apparently due in part to bonuses and stock options that may be only loosely related to labor market slack, however. Moreover, according to the employment cost index, which is based on a survey of firms, and to the growth in average hourly earnings in the payroll employment report, compensation pressures remained quite subdued. On balance, I do not believe conditions in labor markets have become excessively taut, but experience suggests remaining humble in making any such assessment.

Labor market developments have improved considerably...We’ve seen solid job growth in business services, leisure and hospitality, and retail, among other industries. These additional paychecks are crucial to keeping growth on track.

... I expect them to continue increasing at a rate of 150,000 to 200,000 jobs per month this year. With those kinds of employment gains, the unemployment rate should continue its gradual decline.

In the labor market, the behavior of compensation in recent years has been consistent with standard models of wage dynamics incorporating a natural rate still somewhat below the current unemployment rate. Moreover, one of the surprising developments of the current cycle has been the extent of the decline in labor-force participation. Many analysts have adopted the working hypothesis that this decline reflects a type of "discouraged worker" effect, albeit one that is not captured in the standard statistical series attempting to measure that phenomenon. Presumably, many of the people who exited the workforce in the face of poor employment prospects now stand ready to resume competing for jobs as the market improves. If that is correct, then the current level of the unemployment rate relative to estimates of the natural rate, may, if anything, understate the availability of labor resources.

The limited evidence since the November easing has supported our view that the U.S. economy has been working its way through a soft patch. And the patch has certainly been soft. The labor market has remained subdued, as businesses apparently have been reluctant to add to payrolls. The manufacturing sector remains especially damped, and nonresidential construction has trended lower. By all reports, state and local governments continue to struggle with deterioration in their fiscal conditions. Oil prices have recently risen and, not least, the economies of most of our major trading partners have shown little vigor.

The already shrunken pool of job-seekers and considerable strength of aggregate demand suggest that the Federal Reserve will need to be especially alert to inflation risks. Should productivity fail to continue to accelerate and demand growth persist or strengthen, the economy could overheat. That would engender inflationary pressures and put the sustainability of this unprecedented period of remarkable growth in jeopardy.