Regional President Speech

Community Leaders Boise, Idaho For delivery September 7, 1995 12:30 PM MDT A Perspective on the Twelfth District and U.S. Economies I. Good afternoon. It's a pleasure to be here. A. Recently, the U.S. economy and monetary policy have changed course. 1. Economic activity slowed substantially this year, after three years of rapid growth. 2. And in early July, the Fed cut its key policy tool_the federal funds rate_by one-quarter percentage point, a. reversing the pattern of interest rate increases it had undertaken in 1994 and early 1995. B. Today I'd like to give you my perspective on these developments and their consequences for both the Twelfth District and the nation. 1. I believe these developments are interrelated_ 2. __indeed, I see them as part of a consistent monetary policy regime designed to aim at price stability. II. Let me start with Idaho. A. Not so long ago, Idaho was vying with Utah for the country’s Number One ranking in payroll employment growth. 1. But the recent slowdown here has been quite pronounced, a. and Idaho now ranks 24th. 2. While jobs in the electronics sector continue to expand here, weakness is felt in many other sectors, a. with outright declines in key areas like construction and manufacturing in recent months. B. This kind of dropoff goes beyond what we might expect if Idaho were simply tracking the nation's performance. 1. One likely explanation is that the state's economy is making an adjustment from the unsustainably high growth rates in recent years. a. These high growth rates were fueled in part by migration into Idaho. b. Now, the unemployment statistics suggest the net in-migration is tapering off. c. That is, despite slower employment growth, the state's labor market remains relatively tight. 2. Another explanation relates to the state economy's traditional resource base. a. For example, data on manufacturers statewide as well as in the Boise area show recent employment declines in the lumber and wood products sector. Digitized for FRASCE. R Some of the other fast-growing states in the West have performed quite a bit http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis better. 1. In fact, Utah, Nevada, and Arizona rank first, second, and third in employment growth, 2. while Oregon ranks a strong sixth, and Washington comes in at twelfth. D. Hawaii, Alaska, and California aren't faring as well, however. 1. Hawaii's job market has been in a slump for almost three years, 2. and job growth in Alaska's natural resource sector also has been weak. E. When we turn to California, though, it looks like we're getting a moderate recovery. 1. Some of the weak sectors are balanced by several fast-growing ones_ a. _such as high tech, business services, entertainment, and tourism. 2. As a result, the recovery in California actually has picked up momentum this year, a. and the consensus forecast is for further improvement in 1996. F. A stronger California has implications for other western states. 1. On the plus side, it should mean more demand for goods and services produced in the other states. a. Our research in this area indicates that, in the past, California was a "driver" of the west, b. though more so for the bordering states than for more distant ones like Idaho. 2. On the other hand, a relatively stronger California economy means that Californians are less likely to move to other states. a. This is significant since the recent net migration from California helped satisfy the demand for workers in several western states. III. Now let me turn to the national economic picture. First I'll give you a little background on the Fed's thinking about the economy over the last year and a half, and then I'll give you my views on the outlook. A. The Fed became concerned about rising inflationary pressures last year. 1. In 1992, 1993, and 1994, the economy grew rapidly, a. averaging between 3 and 4 percent growth rates_ b. _well above the 2 to 3 percent long-run potential rate. 2. This long stretch of rapid growth ultimately pushed goods and labor markets to operate beyond their long-run capacities. a. For example, signs of strain showed up in manufacturing capacity utilization rates. b. And the unemployment rate fell to just under 5% percent, Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis (1) which appeared to be somewhat below the rate that can be sustained without rising inflation. 3. So, based on these indicators, the overall picture suggested that we had overshot capacity. B. As a result, inflation would have been on the rise in the future_ 1. _unless the economy had slowed down. 2. That's why we raised short-term interest rates from February 1994 to February 1995 . C. Since the beginning of this year, the pace of economic activity has cooled, and the timing of the slowdown has followed the normal lags between a policy action and economic activity. 1. The first quarter numbers showed substantially slower growth_ a. _from a 5 percent pace at the end of 1994 to 2® percent. 2. In the second quarter, the numbers showed an even greater slowdown_ a. _to a meager 1.1 percent. D. As a result of this slowing in the economy, inflationary pressures receded a bit. 1. In fact, they receded enough that we felt a modest reduction in short-term interest rates was warranted. 2. That's what led to our H percentage point cut in the funds rate in July. IV. Looking ahead, I'm optimistic that we'll have a fairly quick return to the kind of moderate, sustainable growth that the economy needs. A. For one thing, the second quarter GDP figures weren't as weak as they appeared on the surface. 1. Most of the weakness occurred in inventory investment, as firms made progress in working off excess stocks. 2. But it now appears that inventories are in better balance with sales, a. so a good deal of this depressing factor appears to be behind us. 3. In addition, the demand of households and firms for goods and services held up quite well in the second quarter, a. growing at a modest and sustainable 2XA percent rate. B. It looks as if demand probably will continue to hold up, although there are some pluses and minuses. 1. On the minus side, a. government spending will continue to contract moderately. b. While there's good reason to believe that less government spending and lower federal budget deficits will be good for the economy in the long run, c. in the short run, this contraction dampens demand. Digitized for FRASER 2. But on the plus side, http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis a. prospects for growth among most of our major trading partners appear reasonably good, so that foreign purchases of our exports should bolster growth in this country. b. In addition, I expect to see continuing strength in business investment. (1) For example, spending on computers is likely to continue the remarkable upward trend it has followed for the last several years. c. Finally, various financial factors_such as the strength in the stock market and recent declines in long-term interest rates_should help boost the economy. (1) In fact, I expect the lower long-term rates to contribute to a reasonably good performance next year for the housing sector. V. Now, so far, A. I've described 1. the Fed's concerns, 2. its course of action, 3. and the effects on the economy. B. What I'd like to do in closing is to tie this together,* 1. I'd like to show you how these actions and outcomes are consistent with a set of goals and procedures the Fed has adhered to for quite some time now. C. The goal, of course, is to deliver stable prices. 1. There's a good reason we focus on price stability: a. it's the main way monetary policy can promote the maximum sustainable advance in the country's economic output and the people's standard of living. 2. This isn't just a theoretical matter. 3. For one thing, we're not the only central bank with that focus. a. In the 1980s, a number of countries_both developed and developing__shifted their emphasis to reducing inflation. (1) Let me just rattle off a short list: (2) There's Australia, Canada, New Zealand, Sweden, the United Kingdom, France, and Argentina. b. Of course, Germany and Japan have had this emphasis for a lot longer. D. For another, here in the U.S., we learned about the need for price stability from hard experience: 1. In the 1970s, when inflation rose to double digits, a. we had economic and financial instability, b. and ultimately a big, double-dip recession in the early 1980s. E. Since that episode some 15 years ago, the Fed has basically been following the Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis same policy regime: 1. While being responsive to cyclical ups downs in the economy, we're also seeking to lower inflation gradually. 2. And the emphasis is on gradual change, a. because we want monetary policy to have the smallest possible adverse effect on economic activity during the transition. F. Both the interest rate increases from 1994 to early this year_as well as the recent cut in rates_were in keeping with this policy regime. 1. As I said, we raised rates when it became apparent a. that the economy had overshot capacity b. and that inflation would be on the rise unless the economy slowed. 2. Well, it did slow, and therefore inflationary pressures receded enough to warrant a modest reduction in rates. G. Now, pursuing this policy isn't a straightforward, mechanical proposition. 1. It calls for frequent reassessments and readjustments, as economic conditions develop. 2. But there is a constant in this policy regime that you can count on. 3. And that's the policy goal_ a. _providing the maximum sustainable economic growth through fostering price stability. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Robert T. Parry (1995, September 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19950907_robert_t_parry

@misc{wtfs_regional_speeche_19950907_robert_t_parry,
  author = {Robert T. Parry},
  title = {Regional President Speech},
  year = {1995},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19950907_robert_t_parry},
  note = {Retrieved via When the Fed Speaks corpus}
}