Inflation had been buffeted by large swings in food and energy prices, but underlying inflation rates had edged down since the summer of 2006; on balance, we expected relatively low inflation ahead, although we were concerned that tight labor and product markets could lead to further price pressures. When the FOMC met in early August, this basic picture had not changed much.
The housing sector had continued to weaken; indeed, with subprime mortgage markets increasingly impaired and problems becoming evident in some other segments of mortgage markets, the contraction in residential construction seemed likely to be even deeper than we had previously anticipated.