I understand that the Congress is evaluating the desirability of a second fiscal package.  Any fiscal action inevitably involves tradeoffs, not only among current needs and objectives but also--because commitments of resources today can burden future generations and constrain future policy options--between the present and the future.  Such tradeoffs inevitably involve value judgments that can properly be made only by our elected officials.  Moreover, with the outlook exceptionally uncertain, the optimal timing, scale, and composition of any fiscal package are unclear.  All that being said, with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate.

On a second stimulus package, my own sense is that we are still trying to assess the effects of the first round. It appears that it does seem to be helping, but it might be yet a bit more time before we fully understand the extent to which additional stimulus may or may not be needed.

If additional stimulus is, in fact, invoked, it would be important to find programs that would be, as in the first round, timely, temporary and targeted; in particular that would take place quickly and would put money into the economy relatively quickly.

From the Q&A session

Although the current financial and economic situation remains quite difficult, I believe that the most likely scenario over the next year or so is one in which economic activity firms during the second half of this year and then gathers some strength in 2009. In the near term, consumer spending is likely to receive a boost from the rebates that are now flowing to taxpayers. Although the timing and the magnitude of the spending response are uncertain, economic studies of the previous experience suggest that a noticeable proportion of households respond reasonably quickly to temporary cash flows. Of course, the stimulus to domestic production will depend on the extent to which the additional demand is met by a temporary drawdown of inventories or an increase in imports rather than by an expansion in domestic output. But to date, businesses appear to be keeping tight control on inventories, and a reasonable assumption is that we will see a temporary lift to the economy in coming months.

Looking ahead, our outlook at the Chicago Fed is for continued weakness in real GDP over the near term. Activity is likely to remain weak for a number of reasons. Strains on intermediation and financial balance sheets mean that credit conditions will likely continue to restrict spending for some time. Businesses and consumers could limit their discretionary expenditures because of caution over the economic environment. And housing continues to be a downside factor. The unsold inventory of homes will continue to restrain residential investment, and it will take time for this overhang to unwind.

However, eventually the cumulative adjustments in house prices will bring more buyers into the market and activity will stabilize. While we don't expect any significant contributions to growth from residential construction for some time, the drag from the sector ought to at least diminish as we move through the rest of this year and next. Similarly, as financial market participants revalue portfolios and repair their balance sheets, the drag from credit conditions ought to diminish over time. Furthermore, even given the financial turmoil, the stance of monetary policy is accommodative and supportive of growth. Productivity growth, although below the lofty rates enjoyed in the late 1990s and earlier this decade, is still solid. Finally, the effects of the fiscal stimulus bill are likely to boost spending in 2008.

[T]here are reasons that suggest the economic slowdown will be short-lived. Part of the pickup in growth will likely come from the tax cuts that are going into effect currently, part from the monetary policy stimulus provided by low interest rates and part from a boost to exports from the lower dollar. Forecasters also see moderation in energy and food costs later this year, which would provide a boost to growth but also lead to lower inflation pressures.

As I indicated earlier, we are also seeing signs of stabilization in financial markets, with improved liquidity and more transactions. Still, many markets are not functioning normally, and it will take additional time for the damage to be assessed and repaired.

As to monetary policy, the current accommodative stance should be sufficient to cushion the economy from a deeper slowdown and the risks that financial disruptions could spill over to the broader economy. As the economy recovers and credit conditions improve, however, it will be necessary for the Federal Reserve to remove the policy accommodation in a timely manner. How fast this occurs will depend on whether inflation pressures moderate or intensify in the period ahead.

I think it's worthwhile to see exactly how well the packages that have been passed work.

The stimulus package is not going to kick in for a couple of months. We're hopeful that in fact it will help the economy get through this period of slow growth.

When we see what happens there, then we'll have a little bit better idea of what we might need to do in the future.

From Q&A as reported by Reuters

With regard to monetary policy, the FOMC has taken significant steps since September, cutting the federal funds rate by 3 full percentage points to 2¼ percent. With core PCE price inflation running at around 2 percent, the real—inflation-adjusted—funds rate is at an accommodative level of around zero or slightly higher.

I consider such accommodation an appropriate response to the contractionary effects of the ongoing financial shock and the housing downturn, and I anticipate that the resulting stimulus, combined with that of the fiscal package, will foster a moderate pickup in growth later this year.

{On the question of a second stimulus package}

Well, again, if we go into next year and the economy continues weak and monetary policy is not being effective, and financial markets, for whatever reason, are not improving, then that would be a time to look at alternative options.

I think, for the near term -- and again, I'm not addressing issues like homeownership and many other things that Congress may want to deal with.

But simply, in terms of the fiscal stimulus package that was put in place, it's a fairly significant package which should add something like a percentage point, or even a little more, to growth in the second half of the year.  And I think we ought to -- on that particular issue, I think we ought to give that some time to work before we take additional steps.

Looking ahead, my forecast has been affected both by an economic slowdown that has been sharper than I had expected and the recurring spells of financial market turmoil. A few months ago our forecast at the Atlanta Fed saw growth slow in the first half of 2008, then pick up in the second half of the year. But it now appears to me that the contraction in housing and the dampening effects of financial turmoil on household and business spending could persist through the remainder of this year. The recovery in growth I had expected in the second half of this year may be delayed.

The tax rebates should provide some stimulus in the second and early third quarters of this year. But given the uncertain atmosphere I expect will continue to prevail in May and June, I do not expect full flow through of the rebates into personal consumption expenditures.

I expect it will take much of the rest of the year for house prices to bottom out and financial markets to restore the necessary preconditions of stability—that is, confidence in asset values and confidence in transaction counterparties.

Looking ahead further to 2009, my outlook becomes more optimistic. It will take longer than I earlier expected to return to solid growth, but by the fourth quarter of 2008 the conditions should be in place to support a return to healthy growth next year.

[T]here is a risk that an extended period of low interest rates may distort long-run investment decisions; lead to a search for yield that results in excessive risk-taking; and contribute to the development of asset price bubbles.

In my view, these limitations are significant, and they lead me to believe that we should look to fiscal policy to play a more important role in responding to the spillover from a financial crisis. In contrast to monetary policy, fiscal policy can work effectively even when the financial system is impaired, and its effects are felt more broadly across the economy. My own view is that monetary policy may be a good first line of defense, but should not be relied upon too heavily for too long. Of course, we would have to rely less on monetary policy to respond to financial crises if we could, instead, take measures that would reduce the likelihood or severity of financial crises.

The stimulus program signed into law by the President will provide a meaningful level of support to growth, somewhere in the range of three quarters to one and half of a percentage point of GDP growth over the next few quarters.

I do think we have tried to position ourselves with the extra push from fiscal policy that you folks and the House and the President put together for the second half of the year that the economy is in a position to rebound later this year. I think at the same time, as Chairman Bernanke pointed out, there are downside risks to this forecast and a lot of it comes from the financial market dynamics that we're talking about today.

From Q&A as reported by Market News International

Greater caution on the part of businesses and consumers will likely limit increases in their discretionary expenditures. And the strains on credit intermediation and financial balance sheets will likely hold down growth to a degree for some time. Since these financial issues are being worked out against the backdrop of a soft economy, we also have to recognize the risk that interactions between the two might reinforce the weakness in the economy.

In response to these downside influences, and with inflation expectations contained, I believe a relatively accommodative monetary policy is appropriate. At 3 percent, the current federal funds rate is relatively accommodative and should support stronger growth. Indeed, because monetary policy works with a lag, the effects of last fall's rate cuts are probably just being felt, while the cumulative declines should do more to promote growth as we move through the year.

In addition, the fiscal stimulus bill the President signed yesterday will likely boost spending in the second half of the year.

Congress has now passed a fiscal stimulus package to help the economy and it could provide notable stimulus in the latter half of this year.

Chances are that [a fiscal stimulus package] would just pull growth from the future, so that would mean more growth late into '08, less growth in early '09. The economy, in terms of the size of economic activity, would probably be in late '09 about where it would be otherwise.

From audience Q&A, as reported by Market News International