Interview of the Vice President by Brit Hume (VIDEO)

Interview of the Vice President by Brit Hume, FOX News FULL STREAMING VIDEO, 2:01 P.M. EST

Vice President Dick Cheney looks out the window of Marine Two, the Vice President's helicopter, as he returns to the White House from an undisclosed location. White House Photo by David Bohrer

Q Mr. Vice President, how is Mr. Whittington?

THE VICE PRESIDENT: Well, the good news is he's doing very well today. I talked to him yesterday after they discovered the heart problem, but it appears now to have been pretty well resolved and the reporting today is very good.

Q How did you feel when you heard about that?

THE VICE PRESIDENT: Well, it's a great relief. But I won't be, obviously, totally at ease until he's home. He's going to be in the hospital, apparently, for a few more days, and the problem, obviously, is that there's always the possibility of complications in somebody who is 78-79 years old. But he's a great man, he's in great shape, good friend, and our thoughts and prayers go out to he and his family.

Q How long have you known him?

THE VICE PRESIDENT: I first met him in Vail, Colorado, when I worked for Gerry Ford about 30 years ago, and it was the first time I'd ever hunted with him.

Q Would you describe him as a close friend, friendly acquaintance, what --

THE VICE PRESIDENT: No, an acquaintance.

Q Tell me what happened?

THE VICE PRESIDENT: Well, basically, we were hunting quail late in the day --

Q Describe the setting.

THE VICE PRESIDENT: It's in south Texas, wide-open spaces, a lot of brush cover, fairly shallow. But it's wild quail. It's some of the best quail hunting anyplace in the country. I've gone there, to the Armstrong ranch, for years. The Armstrongs have been friends for over 30 years. And a group of us had hunted all day on Saturday --

Q How many?

THE VICE PRESIDENT: Oh, probably 10 people. We weren't all together, but about 10 guests at the ranch. There were three of us who had gotten out of the vehicle and walked up on a covey of quail that had been pointed by the dogs. Covey is flushed, we've shot, and each of us got a bird. Harry couldn't find his, it had gone down in some deep cover, and so he went off to look for it. The other hunter and I then turned and walked about a hundred yards in another direction --

Q Away from him?

THE VICE PRESIDENT: Away from him -- where another covey had been spotted by an outrider. I was on the far right --

Q There was just two of you then?

THE VICE PRESIDENT: Just two of us at that point. The guide or outrider between us, and of course, there's this entourage behind us, all the cars and so forth that follow me around when I'm out there -- but bird flushed and went to my right, off to the west. I turned and shot at the bird, and at that second, saw Harry standing there. Didn't know he was there --

Q You had pulled the trigger and you saw him?

THE VICE PRESIDENT: Well, I saw him fall, basically. It had happened so fast.

Q What was he wearing?

THE VICE PRESIDENT: He was dressed in orange, he was dressed properly, but he was also -- there was a little bit of a gully there, so he was down a little ways before land level, although I could see the upper part of his body when -- I didn't see it at the time I shot, until after I'd fired. And the sun was directly behind him -- that affected the vision, too, I'm sure.

But the image of him falling is something I'll never be able to get out of my mind. I fired, and there's Harry falling. And it was, I'd have to say, one of the worst days of my life, at that moment.

Q Then what?

THE VICE PRESIDENT: Well, we went over to him, obviously, right away --

Q How far away from you was he?

THE VICE PRESIDENT: I'm guessing about 30 yards, which was a good thing. If he'd been closer, obviously, the damage from the shot would have been greater.

Q Now, is it clear that -- he had caught part of the shot, is that right?

THE VICE PRESIDENT: -- part of the shot. He was struck in the right side of his face, his neck and his upper torso on the right side of his body.

Q And you -- and I take it, you missed the bird.

THE VICE PRESIDENT: I have no idea. I mean, you focused on the bird, but as soon as I fired and saw Harry there, everything else went out of my mind. I don't know whether the bird went down, or didn't.

Q So did you run over to him or --

THE VICE PRESIDENT: Ran over to him and --

Q And what did you see? He's lying there --

THE VICE PRESIDENT: He was laying there on his back, obviously bleeding. You could see where the shot had struck him. And one of the fortunate things was that I've always got a medical team, in effect, covering me wherever I go. I had a physician's assistant with me that day. Within a minute or two he was on the scene administering first-aid. And --

Q And Mr. Whittington was conscious, unconscious, what?

THE VICE PRESIDENT: He was conscious --

Q What did you say?

THE VICE PRESIDENT: Well, I said, "Harry, I had no idea you were there." And --

Q What did he say?

THE VICE PRESIDENT: He didn't respond. He was -- he was breathing, conscious at that point, but he didn't -- he was, I'm sure, stunned, obviously, still trying to figure out what had happened to him. The doc was fantastic --

Q What did you think when you saw the injuries? How serious did they appear to you to be?

THE VICE PRESIDENT: I had no idea how serious it was going to be. I mean, it could have been extraordinarily serious. You just don't know at that moment. You know he's been struck, that there's a lot of shot that had hit him. But you don't know -- you think about his eyes. Fortunately, he was wearing hunting glasses, and that protected his eyes. You -- you just don't know. And the key thing, as I say, initially, was that the physician's assistant was right there. We also had an ambulance at the ranch, because one always follows me around wherever I go. And they were able to get the ambulance there, and within about 30 minutes we had him on his way to the hospital.

Q And what did you do then? Did you get up and did you go with him, or did you go to the hospital?

THE VICE PRESIDENT: No, I had -- I told my physician's assistant to go with him, but the ambulance is crowded and they didn't need another body in there. And so we loaded up and went back to ranch headquarters, basically. By then, it's about 7:00 p.m. at night. And Harry --

Q Did you have a sense then of how he was doing?

THE VICE PRESIDENT: Well, we're getting reports, but they were confusing. Early reports are always wrong. The initial reports that came back from the ambulance were that he was doing well, his eyes were open. They got him into the emergency room at Kingsville --

Q His eyes were open when you found him, then, right?

THE VICE PRESIDENT: Yes. One eye was open. But they got him in the emergency room in the small hospital at Kingsville, checked him out further there, then lifted him by helicopter from there into Corpus Christi, which has a big city hospital and all of the equipment.

Q So by now what time is it?

THE VICE PRESIDENT: I don't have an exact time line, although he got there sometime that evening, 8:00 p.m., 9:00 p.m.

Q So this is several hours after the incident?

THE VICE PRESIDENT: Well, I would say he was in Kingsville in the emergency room probably within, oh, less than an hour after they left the ranch.

Q Now, you're a seasoned hunter --

THE VICE PRESIDENT: I am, well, for the last 12, 15 years.

Q Right, and so you know all the procedures and how to maintain the proper line and distance between you and other hunters, and all that. So how, in your judgment, did this happen? Who -- what caused this? What was the responsibility here?

THE VICE PRESIDENT: Well, ultimately, I'm the guy who pulled the trigger that fired the round that hit Harry. And you can talk about all of the other conditions that existed at the time, but that's the bottom line. And there's no -- it was not Harry's fault. You can't blame anybody else. I'm the guy who pulled the trigger and shot my friend. And I say that is something I'll never forget.

Q Now, what about this -- it was said you were hunting out of vehicles. Was that because you have to have the vehicles, or was that because that's your -- the way you chose to hunt that day?

THE VICE PRESIDENT: No, the way -- this is a big ranch, about 50,000 acres. You cover a lot of territory on a quail hunt. Birds are oftentimes -- you're looking for coveys. And these are wild quail, they're not pen-raised. And you hunt them

-- basically, you have people out on horseback, what we call outriders, who are looking for the quail. And when they spot them, they've got radios, you'll go over, and say, get down and flush the quail. So you need --

Q So you could be a distance of a miles from where you spot quail until the next place you may find them?

THE VICE PRESIDENT: Well, usually you'll be, you know, maybe a few hundred yards. Might be farther than that; could be a quarter of a mile.

Q Does that kind of hunting only go forward on foot, or is it mostly --

THE VICE PRESIDENT: No, you always -- in that part of the country, you always are on vehicles, until you get up to where the covey is. Then you get off -- there will be dogs down, put down; the dogs will point to covey. And then you walk up on the covey. And as the covey flushes, that's when you shoot.

Q Was anybody drinking in this party?

THE VICE PRESIDENT: No. You don't hunt with people who drink. That's not a good idea. We had --

Q So he wasn't, and you weren't?

THE VICE PRESIDENT: Correct. We'd taken a break at lunch -- go down under an old -- ancient oak tree there on the place, and have a barbecue. I had a beer at lunch. After lunch we take a break, go back to ranch headquarters. Then we took about an hour-long tour of ranch, with a ranch hand driving the vehicle, looking at game. We didn't go back into the field to hunt quail until about, oh, sometime after 3:00 p.m.

The five of us who were in that party were together all afternoon. Nobody was drinking, nobody was under the influence.

Q Now, what thought did you give, then, to how -- you must have known that this was -- whether it was a matter of state, or not, was news. What thought did you give that evening to how this news should be transmitted?

THE VICE PRESIDENT: Well, my first reaction, Brit, was not to think: I need to call the press. My first reaction is: My friend, Harry, has been shot and we've got to take care of him. That evening there were other considerations. We wanted to make sure his family was taken care of. His wife was on the ranch. She wasn't with us when it happened, but we got her hooked up with the ambulance on the way to the hospital with Harry. He has grown children; we wanted to make sure they were notified, so they didn't hear on television that their father had been shot. And that was important, too.

But we also didn't know what the outcome here was going to be. We didn't know for sure what kind of shape Harry was in. We had preliminary reports, but they wanted to do a CAT scan, for example, to see how -- whether or not there was any internal damage, whether or not any vital organ had been penetrated by any of the shot. We did not know until Sunday morning that we could be confident that everything was probably going to be okay.

Q When did the family -- when had the family been informed? About what time?

THE VICE PRESIDENT: Well, his wife -- his wife knew as he was leaving the ranch --

Q Right, what about his children?

THE VICE PRESIDENT: I didn't make the calls to his children, so I don't know exactly when those contacts were made. One of his daughters had made it to the hospital by the next day when I visited. But one of the things I'd learned over the years was first reports are often wrong and you need to really wait and nail it down. And there was enough variation in the reports we were getting from the hospital, and so forth -- a couple of people who had been guests at the ranch went up to the hospital that evening; one of them was a doctor, so he obviously had some professional capabilities in terms of being able to relay messages. But we really didn't know until Sunday morning that Harry was probably going to be okay, that it looked like there hadn't been any serious damage to any vital organ. And that's when we began the process of notifying the press.

Q Well, what -- you must have recognized, though, with all your experience in Washington, that this was going to be a big story.

THE VICE PRESIDENT: Well, true, it was unprecedented. I've been in the business for a long time and never seen a situation quite like this. We've had experiences where the President has been shot; we've never had a situation where the Vice President shot somebody.

Q Not since Aaron Burr.

THE VICE PRESIDENT: Not since Aaron Burr --

Q Different circumstances.

THE VICE PRESIDENT: Different circumstances.

Q Well, did it occur to you that sooner was -- I mean, the one thing that we've all kind of learned over the last several decades is that if something like this happens, as a rule sooner is better.

THE VICE PRESIDENT: Well, if it's accurate. If it's accurate. And this is a complicated story.

Q But there were some things you knew. I mean, you knew the man had been shot, you knew he was injured, you knew he was in the hospital, and you knew you'd shot him.

THE VICE PRESIDENT: Correct.

Q And you knew certainly by sometime that evening that the relevant members of his family had been called. I realize you didn't know the outcome, and you could argue that you don't know the outcome today, really, finally.

THE VICE PRESIDENT: As we saw, if we'd put out a report Saturday night on what we heard then -- one report came in that said, superficial injuries. If we'd gone with a statement at that point, we'd have been wrong. And it was also important, I thought, to get the story out as accurately as possible, and this is a complicated story that, frankly, most reporters would never have dealt with before, so --

Q Had you discussed this with colleagues in the White House, with the President, and so on?

THE VICE PRESIDENT: I did not. The White House was notified, but I did not discuss it directly, myself. I talked to Andy Card, I guess it was Sunday morning.

Q Not until Sunday morning? Was that the first conversation you'd had with anybody in the -- at the White House?

THE VICE PRESIDENT: Yes.

Q And did you discuss this with Karl Rove at any time, as has been reported?

THE VICE PRESIDENT: No, Karl talks to -- I don't recall talking to Karl. Karl did talk with Katherine Armstrong, who is a good mutual friend to both of us. Karl hunts at the Armstrong, as well --

Q Say that again?

THE VICE PRESIDENT: I said Karl has hunted at the Armstrong, as well, and we're both good friends of the Armstrongs and of Katherine Armstrong. And Katherine suggested, and I agreed, that she would go make the announcement, that is that she'd put the story out. And I thought that made good sense for several reasons. First of all, she was an eye-witness. She'd seen the whole thing. Secondly, she'd grown up on the ranch, she'd hunted there all of her life. Third, she was the immediate past head of the Texas Wildlife and Parks Department, the game control commission in the state of Texas, an acknowledged expert in all of this.

And she wanted to go to the Corpus Christi Caller-Times, which is the local newspaper, covers that area, to reporters she knew. And I thought that made good sense because you can get as accurate a story as possible from somebody who knew and understood hunting. And then it would immediately go up to the wires and be posted on the website, which is the way it went out. And I thought that was the right call.

Q What do you think now?

THE VICE PRESIDENT: Well, I still do. I still think that the accuracy was enormously important. I had no press person with me, I didn't have any press people with me. I was there on a private weekend with friends on a private ranch. In terms of who I would contact to have somebody who would understand what we're even talking about, the first person that we talked with at one point, when Katherine first called the desk to get hold of a reporter didn't know the difference between a bullet and a shotgun -- a rifle bullet and a shotgun. And there are a lot of basic important parts of the story that required some degree of understanding. And so we were confident that Katherine was the right one, especially because she was an eye-witness and she could speak authoritatively on it. She probably knew better than I did what had happened since I'd only seen one piece of it.

Q By the next morning, had you spoken again to Mr. Whittington?

THE VICE PRESIDENT: The next morning I talked to his wife. And then I went to the hospital in Corpus Christi and visited with him.

Q When was that?

THE VICE PRESIDENT: Oh, it was shortly after noon on Sunday.

Q Now, by that time had the word gone out to the newspaper?

THE VICE PRESIDENT: I believe it had. I can't remember what time Katherine actually talked to the reporter. She had trouble that morning actually finding a reporter. But they finally got connected with the reporter, and that's when the story then went out.

Q Now, it strikes me that you must have known that this was going to be a national story --

THE VICE PRESIDENT: Oh, sure.

Q -- and it does raise the question of whether you couldn't have headed off this beltway firestorm if you had put out the word to the national media, as well as to the local newspaper so that it could post it on its website. I mean, in retrospect, wouldn't that have been the wise course --

THE VICE PRESIDENT: Well, who is going to do that? Are they going to take my word for what happened? There is obviously --

Q Well, obviously, you could have put the statement out in the name of whoever you wanted. You could put it out in the name of Mrs. Armstrong, if you wanted to. Obviously, that's -- she's the one who made the statement.

THE VICE PRESIDENT: Exactly. That's what we did. We went with Mrs. Armstrong. We had -- she's the one who put out the statement. And she was the most credible one to do it because she was a witness. It wasn't me in terms of saying, here's what happened, it was --

Q Right, understood. Now, the suspicion grows in some quarters that you -- that this was an attempt to minimize it, by having it first appear in a little paper and appear like a little hunting incident down in a remote corner of Texas.

THE VICE PRESIDENT: There wasn't any way this was going to be minimized, Brit; but it was important that it be accurate. I do think what I've experienced over the years here in Washington is as the media outlets have proliferated, speed has become sort of a driving force, lots of time at the expense of accuracy. And I wanted to make sure we got it as accurate as possible, and I think Katherine was an excellent choice. I don't know who you could get better as the basic source for the story than the witness who saw the whole thing.

Q When did you first speak to -- if you spoke to Andy Card at, what, mid-day, you said, on Sunday?

THE VICE PRESIDENT: Sometime Sunday morning.

Q And what about -- when did you first -- when, if ever, have you discussed it with the President?

THE VICE PRESIDENT: I talked to him about it yesterday, or Monday -- first on Monday, and then on Tuesday, too.

Q There is reporting to the effect that some in the White House feel you kind of -- well, look at what Scott McClellan went through the last couple days. There's some sense -- and perhaps not unfairly so -- that you kind of hung him out to dry. How do you feel about that?

THE VICE PRESIDENT: Well, Scott does a great job and it's a tough job. It's especially a tough job under these conditions and circumstances. I had a bit of the feeling that the press corps was upset because, to some extent, it was about them -- they didn't like the idea that we called the Corpus Christi Caller-Times instead of The New York Times. But it strikes me that the Corpus Christi Caller-Times is just as valid a news outlet as The New York Times is, especially for covering a major story in south Texas.

Q Well, perhaps so, but isn't there an institution here present at the White House that has long-established itself as the vehicle through which White House news gets out, and that's the pool?

THE VICE PRESIDENT: I had no press person with me, no coverage with me, no White House reporters with me. I'm comfortable with the way we did it, obviously. You can disagree with that, and some of the White House press corps clearly do. But, no, I've got nothing but good things to say about Scott McClellan and Dan Bartlett. They've got a tough job to do and they do it well. They urged us to get the story out. The decision about how it got out, basically, was my responsibility.

Q That was your call.

THE VICE PRESIDENT: That was my call.

Q All the way.

THE VICE PRESIDENT: All the way. It was recommended to me -- Katherine Armstrong wanted to do it, as she said, and I concurred in that; I thought it made good sense.

Q Now, you're talking to me today -- this is, what, Wednesday?

THE VICE PRESIDENT: Wednesday.

Q What about just coming out yourself Monday/Tuesday -- how come?

THE VICE PRESIDENT: Well, part of it obviously has to do with the status of Harry Whittington. And it's a difficult subject to talk about, frankly, Brit. But most especially I've been very concerned about him and focused on him and feel more comfortable coming out today because of the fact that his circumstances have improved, he's gotten by what was a potential crisis yesterday, with respect to the developments concerning his heart. I think this decision we made, that this was the right way to do it.

Q Describe if you can your conversations with him, what you've said to him and the attitude he's shown toward you in the aftermath of this.

THE VICE PRESIDENT: He's been fantastic. He's a gentleman in every respect. He oftentimes expressed more concern about me than about himself. He's been in good spirits, unfailingly cheerful --

Q What did he say about that? You said, "expressed concern" about you -- what did he say?

THE VICE PRESIDENT: Well, when I first saw him in the hospital, for example, he said, look, he said, I don't want this to create problems for you. He literally was more concerned about me and the impact on me than he was on the fact that he'd been shot. He's a -- I guess I'd describe him as a true Texas gentleman, a very successful attorney, successful businessman in Austin; a gentleman in every respect of the word. And he's been superb.

Q For you, personally, how would you -- you said this was one of the worst days of your life. How so?

THE VICE PRESIDENT: What happened to my friend as a result of my actions, it's part of this sudden, you know, in less than a second, less time than it takes to tell, going from what is a very happy, pleasant day with great friends in a beautiful part of the country, doing something I love -- to, my gosh, I've shot my friend. I've never experienced anything quite like that before.

Q Will it affect your attitude toward this pastime you so love in the future?

THE VICE PRESIDENT: I can't say that. You know, we canceled the Sunday hunt. I said, look I'm not -- we were scheduled to go out again on Sunday and I said I'm not going to go on Sunday, I want to focus on Harry. I'll have to think about it.

Q Some organizations have said they hoped you would find a less violent pastime.

THE VICE PRESIDENT: Well, it's brought me great pleasure over the years. I love the people that I've hunted with and do hunt with; love the outdoors, it's part of my heritage, growing up in Wyoming. It's part of who I am. But as I say, the season is ending, I'm going to let some time pass over it and think about the future.

Q On another subject, court filings have indicated that Scooter Libby has suggested that his superiors -- unidentified -- authorized the release of some classified information. What do you know about that?

THE VICE PRESIDENT: It's nothing I can talk about, Brit. This is an issue that's been under investigation for a couple of years. I've cooperated fully, including being interviewed, as well, by a special prosecutor. All of it is now going to trial. Scooter is entitled to the presumption of innocence. He's a great guy. I've worked with him for a long time, have enormous regard for him. I may well be called as a witness at some point in the case and it's, therefore, inappropriate for me to comment on any facet of the case.

Q Let me ask you another question. Is it your view that a Vice President has the authority to declassify information?

THE VICE PRESIDENT: There is an executive order to that effect.

Q There is.

THE VICE PRESIDENT: Yes.

Q Have you done it?

THE VICE PRESIDENT: Well, I've certainly advocated declassification and participated in declassification decisions. The executive order --

Q You ever done it unilaterally?

THE VICE PRESIDENT: I don't want to get into that. There is an executive order that specifies who has classification authority, and obviously focuses first and foremost on the President, but also includes the Vice President.

Q There have been two leaks, one that pertained to possible facilities in Europe; and another that pertained to this NSA matter. There are officials who have had various characterizations of the degree of damage done by those. How would you characterize the damage done by those two reports?

THE VICE PRESIDENT: There clearly has been damage done.

Q Which has been the more harmful, in your view?

THE VICE PRESIDENT: I don't want to get into just sort of ranking them, then you get into why is one more damaging than the other. One of the problems we have as a government is our inability to keep secrets. And it costs us, in terms of our relationship with other governments, in terms of the willingness of other intelligence services to work with us, in terms of revealing sources and methods. And all of those elements enter into some of these leaks.

Q Mr. Vice President, thank you very much for doing this.

THE VICE PRESIDENT: Thank you, Brit.

END 2:28 P.M. EST, For Immediate Release, Office of the Vice President, February 15, 2006.

more at President Bush and White House or shooting accident and Vice President ot Harry Whittington and Katherine Armstrong or Dick Cheney and Texas Parks and Wildlife Department or hunting license and upland game birds or bird stamp or VIDEO and FOX NEWS or Brit Hume


Relared: Keywords Vice President Cheney, Wednesday, February 15, 2006 Update by the Office of the Vice President, Saturday, January 21, 2006 Vice President, Neil Cavuto, FOX News (VIDEO), Friday, January 13, 2006 Vice President to Travel to Egypt and Saudi Arabia, Friday, January 06, 2006 Vice President's Remarks on Iraq and the War on Terror (VIDEO), Thursday, November 17, 2005 Vice President's Remarks 11/16/05, Monday, October 31, 2005 Vice President appointed David S. Addington chief of staff, Saturday, October 29, 2005 Vice President's Statement on Libby Resignation, Friday, October 28, 2005 Resignation of Scooter Libby (VIDEO, Tuesday, October 04, 2005 Remarks by the Vice President to Second Marine Expeditionary Force, Monday, September 26, 2005 Statement on Vice President Cheney's Medical Procedure, Tuesday, September 06, 2005 President Meets with Cabinet (VIDEO), Thursday, August 11, 2005 President Meets with Defense and Foreign Policy Teams (VIDEO), Tuesday, July 26, 2005 Vice President at Dinner for Vito Fossella, Saturday, July 09, 2005 President, VP Signs Book of Condolence at British Embassy, Thursday, May 12, 2005 Vice President, A Nation Honors Nancy Reagan, Saturday, April 16, 2005 Vice President Dick Cheney and Mrs. Cheney Release 2004 Income Tax Return

Chairman Ben S. Bernanke, Semiannual Monetary Policy Report

Testimony of Chairman Ben S. Bernanke, Semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives, February 15, 2006

Mr. Chairman and members of the Committee, I am pleased to be here today to present the Federal Reserve's Monetary Policy Report to the Congress. I look forward to working closely with the members of this Committee on issues of monetary policy as well as on matters regarding the other responsibilities with which the Congress has charged the Federal Reserve System.

The U.S. economy performed impressively in 2005. Real gross domestic product (GDP) increased a bit more than 3 percent, building on the sustained expansion that gained traction in the middle of 2003. Payroll employment rose 2 million in 2005, and the unemployment rate fell below 5 percent. Productivity continued to advance briskly.

The economy achieved these gains despite some significant obstacles. Energy prices rose substantially yet again, in response to increasing global demand, hurricane-related disruptions to production, and concerns about the adequacy and reliability of supply. The Gulf Coast region suffered through severe hurricanes that inflicted a terrible loss of life; destroyed homes, personal property, businesses, and infrastructure on a massive scale; and displaced more than a million people. The storms also damaged facilities and disrupted production in many industries, with substantial effects on the energy and petrochemical sectors and on the region's ports. Full recovery in the affected areas is likely to be slow. The hurricanes left an imprint on aggregate economic activity as well, seen, in part, in the marked deceleration of real GDP in the fourth quarter. However, the most recent evidence--including indicators of production, the flow of new orders to businesses, weekly data on initial claims for unemployment insurance, and the payroll employment and retail sales figures for January--suggests that the economic expansion remains on track.

Inflation pressures increased in 2005. Steeply rising energy prices pushed up overall inflation, raised business costs, and squeezed household budgets. Nevertheless, the increase in prices for personal consumption expenditures excluding food and energy, at just below 2 percent, remained moderate, and longer-term inflation expectations appear to have been contained.

With the economy expanding at a solid pace, resource utilization rising, cost pressures increasing, and short-term interest rates still relatively low, the Federal Open Market Committee (FOMC) over the course of 2005 continued the process of removing monetary policy accommodation, raising the federal funds rate 2 percentage points in eight increments of 25 basis points each. At its meeting on January 31 of this year, the FOMC raised the federal funds rate another 1/4 percentage point, bringing its level to 4-1/2 percent.

At that meeting¸ monetary policymakers also discussed the economic outlook for the next two years. The central tendency of the forecasts of members of the Board of Governors and the presidents of Federal Reserve Banks is for real GDP to increase about 3-1/2 percent in 2006 and 3 percent to 3-1/2 percent in 2007. The civilian unemployment rate is expected to finish both 2006 and 2007 at a level between 4-3/4 percent and 5 percent. Inflation, as measured by the price index for personal consumption expenditures excluding food and energy, is predicted to be about 2 percent this year and 1-3/4 percent to 2 percent next year. While considerable uncertainty surrounds any economic forecast extending nearly two years, I am comfortable with these projections.

In the announcement following the January 31 meeting, the Federal Reserve pointed to risks that could add to inflation pressures. Among those risks is the possibility that, to an extent greater than we now anticipate, higher energy prices may pass through into the prices of non-energy goods and services or have a persistent effect on inflation expectations. Another factor bearing on the inflation outlook is that the economy now appears to be operating at a relatively high level of resource utilization. Gauging the economy's sustainable potential is difficult, and the Federal Reserve will keep a close eye on all the relevant evidence and be flexible in making those judgments. Nevertheless, the risk exists that, with aggregate demand exhibiting considerable momentum, output could overshoot its sustainable path, leading ultimately--in the absence of countervailing monetary policy action--to further upward pressure on inflation. In these circumstances, the FOMC judged that some further firming of monetary policy may be necessary, an assessment with which I concur.

Not all of the risks to the economy concern inflation. For example, a number of indicators point to a slowing in the housing market. Some cooling of the housing market is to be expected and would not be inconsistent with continued solid growth of overall economic activity. However, given the substantial gains in house prices and the high levels of home construction activity over the past several years, prices and construction could decelerate more rapidly than currently seems likely. Slower growth in home equity, in turn, might lead households to boost their saving and trim their spending relative to current income by more than is now anticipated. The possibility of significant further increases in energy prices represents an additional risk to the economy; besides affecting inflation, such increases might also hurt consumer confidence and thereby reduce spending on non-energy goods and services.

Although the outlook contains significant uncertainties, it is clear that substantial progress has been made in removing monetary policy accommodation. As a consequence, in coming quarters the FOMC will have to make ongoing, provisional judgments about the risks to both inflation and growth, and monetary policy actions will be increasingly dependent on incoming data.

In assessing the prospects for the economy, some appreciation of recent circumstances is essential, so let me now review key developments of 2005 and discuss their implications for the outlook. The household sector was a mainstay of the economic expansion again last year, and household spending is likely to remain an important source of growth in aggregate demand in 2006. The growth in household spending last year was supported by rising employment and moderate increases in wages. Expenditures were buoyed as well by significant gains in household wealth that reflected further increases in home values and in broad equity prices. However, sharply rising bills for gasoline and heating reduced the amount of income available for spending on other consumer goods and services.

Residential investment also expanded considerably in 2005, supported by a strong real estate market. However, as I have already noted, some signs of slowing in the housing market have appeared in recent months: Home sales have softened, the inventory of unsold homes has risen, and indicators of homebuilder and homebuyer sentiment have turned down. Anecdotal information suggests that homes typically are on the market somewhat longer than they were a year or so ago, and the frequency of contract offers above asking prices reportedly has diminished. Financial market conditions seem to be consistent with some moderation in housing activity. Interest rates on thirty-year, fixed-rate mortgages, which were around 5-3/4 percent over much of 2005, rose noticeably in the final months of the year to their current level of around 6-1/4 percent. Rates on adjustable-rate mortgages have climbed more considerably. Still, despite the recent increases, mortgage rates remain relatively low. Low mortgage rates, together with expanding payrolls and incomes and the need to rebuild after the hurricanes, should continue to support the housing market. Thus, at this point, a leveling out or a modest softening of housing activity seems more likely than a sharp contraction, although significant uncertainty attends the outlook for home prices and construction. In any case, the Federal Reserve will continue to monitor this sector closely.

Overall, the financial health of households appears reasonably good. Largely reflecting the growth in home mortgages, total household debt continued to expand rapidly in 2005. But the value of household assets also continued to climb strongly, driven by gains in home prices and equity shares. To some extent, sizable increases in household wealth, as well as low interest rates, have contributed in recent years to the low level of personal saving. Saving last year was probably further depressed by the rise in households' energy bills. Over the next few years, saving relative to income is likely to rise somewhat from its recent low level.

In the business sector, profits continued to rise last year at a solid pace, boosted in part by continuing advances in productivity. Strong corporate balance sheets combined with expanding sales and favorable conditions in financial markets fostered a solid increase in spending on equipment and software last year. Investment in high-tech equipment rebounded, its increase spurred by further declines in the prices of high-tech goods. Expenditures for communications equipment, which had fallen off earlier this decade, showed particular strength for the year as a whole. In contrast, nonresidential construction activity remained soft.

Although the financial condition of the business sector is generally quite strong, several areas of structural weakness are evident, notably in the automobile and airline industries. Despite these problems, however, favorable conditions in the business sector as a whole should encourage continued expansion of capital investment.

For the most part, the financial situation of state and local governments has improved noticeably over the past couple of years. Rising personal and business incomes have buoyed tax revenues, affording some scope for increases in state and local government expenditures. At the federal level, the budget deficit narrowed appreciably in fiscal 2005. Outlays rose rapidly, but receipts climbed even more sharply as the economy expanded. However, defense expenditures, hurricane relief, and increasing entitlement costs seem likely to worsen the deficit in fiscal 2006.

Outside the United States, economic activity strengthened last year, and at present global growth seems to be on a good track. The economies of our North American neighbors, Canada and Mexico, appear to be expanding at a solid pace. Especially significant have been signs that Japan could be emerging from its protracted slump and its battle with deflation. In the euro area, expansion has been somewhat modest by global standards, but recent indicators suggest that growth could be strengthening there as well. Economies in emerging Asia generally continue to expand strongly. In particular, growth in China remained vigorous in 2005.

Expanding foreign economic activity helped drive a vigorous advance in U.S. exports in 2005, while the growth of real imports slowed. Nonetheless, the nominal U.S. trade deficit increased further last year, exacerbated in part by a jump in the value of imported petroleum products that almost wholly reflected the sharply rising price of crude oil.

Surging energy prices also were the dominant factor influencing U.S. inflation last year. For the second year in a row, overall consumer prices, as measured by the chain-type index for personal consumption expenditures, rose about 3 percent. Prices of consumer energy products jumped more than 20 percent, with large increases in prices of natural gas, gasoline, and fuel oil. Food prices, however, rose only modestly. And core consumer prices (that is, excluding food and energy) increased a moderate 1.9 percent.

The relatively benign performance of core inflation despite the steep increases in energy prices can be attributed to several factors. Over the past few decades, the U.S. economy has become significantly less energy intensive. Also, rapid advances in productivity as well as increases in nominal wages and salaries that, on balance, have been moderate have restrained unit labor costs in recent years.

Another key factor in keeping core inflation low has been confidence on the part of the public and investors in the prospects for price stability. Maintaining expectations of low and stable inflation is an essential element in the Federal Reserve's effort to promote price stability. And, thus far, the news has been good: Survey measures of longer-term inflation expectations have responded only a little to the larger fluctuations in energy prices that we have experienced, and for the most part, they were low and stable last year. Inflation compensation for the period five to ten years ahead, derived from spreads between nominal and inflation-indexed Treasury securities, has remained well anchored.

Restrained inflation expectations have also been an important reason that long-term interest rates have remained relatively low. At roughly 4-1/2 percent at year-end, yields on ten-year nominal Treasury issues increased only slightly on balance over 2005 even as short-term rates rose 2 percentage points. As previous reports and testimonies from the Federal Reserve indicated, a decomposition of long-term nominal yields into spot and forward rates suggests that it is primarily the far-forward components that account for the low level of long rates. The premiums that investors demand as compensation for the risk of unforeseen changes in real interest rates and inflation appear to have declined significantly over the past decade or so. Given the more stable macroeconomic climate in the United States and in the global economy since the mid-1980s, some decline in risk premiums is not surprising. In addition, though, investors seem to expect real interest rates to remain relatively low. Such a view is consistent with a hypothesis I offered last year--that, in recent years, an excess of desired global saving over the quantity of global investment opportunities that pay historically normal returns has forced down the real interest rate prevailing in global capital markets.

Inflation prospects are important, not just because price stability is in itself desirable and part of the Federal Reserve's mandate from the Congress, but also because price stability is essential for strong and stable growth of output and employment. Stable prices promote long-term economic growth by allowing households and firms to make economic decisions and undertake productive activities with fewer concerns about large or unanticipated changes in the price level and their attendant financial consequences. Experience shows that low and stable inflation and inflation expectations are also associated with greater short-term stability in output and employment, perhaps in part because they give the central bank greater latitude to counter transitory disturbances to the economy. Similarly, the attainment of the statutory goal of moderate long-term interest rates requires price stability, because only then are the inflation premiums that investors demand for holding long-term instruments kept to a minimum. In sum, achieving price stability is not only important in itself; it is also central to attaining the Federal Reserve's other mandated objectives of maximum sustainable employment and moderate long-term interest rates.

As always, however, translating the Federal Reserve's general economic objectives into operational decisions about the stance of monetary policy poses many challenges. Over the past few decades, policymakers have learned that no single economic or financial indicator, or even a small set of such indicators, can provide reliable guidance for the setting of monetary policy.

Rather, the Federal Reserve, together with all modern central banks, has found that the successful conduct of monetary policy requires painstaking examination of a broad range of economic and financial data, careful consideration of the implications of those data for the likely path of the economy and inflation, and prudent judgment regarding the effects of alternative courses of policy action on prospects for achieving our macroeconomic objectives. In that process, economic models can provide valuable guidance to policymakers, and over the years substantial progress has been made in developing formal models and forecasting techniques. But any model is by necessity a simplification of the real world, and sufficient data are seldom available to measure even the basic relationships with precision. Monetary policymakers must therefore strike a difficult balance--conducting rigorous analysis informed by sound economic theory and empirical methods while keeping an open mind about the many factors, including myriad global influences, at play in a dynamic modern economy like that of the United States. Amid significant uncertainty, we must formulate a view of the most likely course of the economy under a given policy approach while giving due weight to the potential risks and associated costs to the economy should those judgments turn out to be wrong.

During the nearly three years that I previously spent as a member of the Board of Governors and of the Federal Open Market Committee, the approach to policy that I have just outlined was standard operating procedure under the highly successful leadership of Chairman Greenspan. As I indicated to the Congress during my confirmation hearing, my intention is to maintain continuity with this and the other practices of the Federal Reserve in the Greenspan era. I believe that, with this approach, the Federal Reserve will continue to contribute to the sound performance of the U.S. economy in the years to come.

February 2006 Monetary policy report and 2006 Testimony

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