This transition also involves a downshift in China’s trend growth rate, which is inevitable given the level of economic development in China and the shrinking margin of underutilized labor market resources. Economic transitions are always difficult to manage, and invariably present policymakers with unexpected challenges. It is not surprising, then, that market participants are focused on the risk that the downshift in Chinese growth could prove to be more pronounced than anticipated. I want to be clear. The rebalancing process now underway in China is both necessary and appropriate, and will unfold over a period of years. How to pragmatically strike the best balance between progress on long-term reform and support for short-term growth is, of course, a matter for policymakers in China. You can be sure that you will have the backing of the official international community as you oversee this important transformation. Finally, the slowdown in Chinese and broader EME growth has been a key factor behind the sharp drop in global commodity prices since mid-2014. The income streams accruing to commodity export countries have been adversely impacted, requiring sometimes painful downward adjustments in investment and economic activity in these countries. Here, too, it may take time for markets to find a new equilibrium, as investment projects that were based on the price structure prevailing a few years ago are still coming online. In most cases, EMEs appear to have the tools and the resources to help manage their way through the current period of difficulties.
Assessment of Risks to the Outlook The forecast that I have just described is my best assessment of how the U.S. economy will evolve over 2016. But there is uncertainty and risk relative to this baseline forecast, which also needs to be taken into consideration in assessing the implications of the outlook for monetary policy. There are two key considerations to this risk assessment. First, are the perceived uncertainties about the forecast higher, lower or about average as compared to the past? Second, are the risks symmetric around the baseline forecast or skewed upward or downward? The level of uncertainty is important in that it relates to the expected magnitude of forecast errors. The balance of risks is important in that it relates to the expected sign of those forecast errors. At the New York Fed, we use surveys, internal models and judgment in forming our risk assessment. Some surveys, such as the U.S. Survey of Professional Forecasters (SPF), ask respondents for both point and density forecasts. The density forecasts take the form of respondents filling out a histogram of their probability assessments that the forecasted outcome will fall into given intervals. These histograms can be aggregated and the resulting aggregate distribution can be used to assess both the level of uncertainty as well as the balance of risks. Recent U.S. SPF surveys have not indicated any significant changes in the overall degree of uncertainty around growth or inflation. The balance of risks have been roughly symmetric for inflation and tilted to the downside for growth.