1. Proprietary and Confidential. Not for disclosure outside Federal Reserve. What the FOMC Said: An Economic Update Prepared for the Madison County Economic Symposium 2010 Canton, MS May 4, 2010

2. A cautionary tale: Baseline forecasts have oil prices little changed from current levels.

3. Punchline: With 95% probability we can pin the price down somewhere between $40 and $170 by 2011’s end.

4. 4 The FOMC statement: What changed? “…the labor market is stabilizing… employers remain reluctant to add to payrolls.” is beginning to improve

5. Employment took a sizable step up in March.

6. The demand for workers appears to be improving.

7. 7 The FOMC statement: What changed? “…the labor market is stabilizing… employers remain reluctant to add to payrolls.” is beginning to improve “Household spending is expanding at a moderate rate but remains constrained…” has picked up recently

8. Consumer spending has surprised to the upside.

9. Personal income growth, however, has been quite tame.

10. 10 The FOMC statement: What changed? “…the labor market is stabilizing… employers remain reluctant to add to payrolls.” is beginning to improve “Household spending is expanding at a moderate rate but remains constrained…” has picked up recently “Business spending on equipment and software has risen significantly.”

11. Spending on equipment and software rose rapidly in the 4 th quarter, and looks to be on a healthy pace in Q1

12. “Core” capital goods orders have been rising.

13. 13 The FOMC statement: What changed? “…the labor market is stabilizing… employers remain reluctant to add to payrolls.” is beginning to improve “Household spending is expanding at a moderate rate but remains constrained…” has picked up recently “Business spending on equipment and software has risen significantly.” “Investment in nonresidential structures is declining, housing starts have been flat at a depressed level.” edged up but remain

14. Nonresidential construction has continued to slide at an increasing pace; residential construction is getting less bad.

15. Housing starts have shown modest improvement from a very low level.

16. Real GDP Growth Estimates Contributions to GDP Growth Q1 2010Q4 2009 2009 Avg. 2007 Avg. PCE 2.61.2-1.2 1.4 Nonres. Structures -0.4-0.60.1 0.6 Nonres. Equip. & Soft. 0.81.1-0.8 0.3 Res. Investment -0.30.1-0.8 Change in Inventories 1.63.8-0.5 -0.2 Net Exports -0.60.30.8 1.0 Government -0.4-0.30.6 0.5 Total GDP Growth 3.2 5.6 -1.8 2.5 16 Source: Bureau of Economic Analysis Inventory are adjustments are still making an outsize contribution to GDP growth.

17. 17 What’s the backstory implied by our projections? The positive surprises in consumption spending in the first quarter are not expected to continue. ” Business investment in equipment will be healthy, but will not expand at the double-digit pace some are forecasting. Employment growth will pick up substantially in 2011 -- meaning something in the range of 200K + per month. Productivity growth will fall off substantially.

18. 18 Some serious risks --- The death of the consumer has been greatly exaggerated --- The great productivity boom is about to fade Upside Risks: --- Credit headwinds are not all we are cracking them up to be

19. Employment, 2007:QI = 100 Employment losses have been more severe in the United States than in other countries.

20. Productivity is up in the United States, down everywhere else.

21. 21 Downside Risk 1: A Greek Tragedy

22. 22 Downside Risk 2: That 70s Show

23. Through March, the retail price numbers were still showing signs of disinflation.

24. Market-based measures of expected inflation are holding relatively steady – but bear watching.

25. Reports from purchasing managers do hint at some price pressures early in the production pipeline.

26. Proprietary and Confidential. Not for disclosure outside Federal Reserve. What the FOMC Said: An Economic Update