Regional President Speech

COLUMBUS ECONOMIC FORUM Columbus, Indiana April 5, 2000 ..................................................................... The Fed’s Role in Promoting a Healthy, Growing Economy Good afternoon. I’m delighted to be here. As indicated in the video we saw earlier, Columbus is clearly a vibrant and dynamic community. I’ve greatly enjoyed my visit, and I appreciate the opportunity to come here todiscuss the Federal Reserve and the importance of price stability to the economy. As I’m sure you are aware, Chicago’s economy, like yours here in Columbus, has grown up hand in hand with its architecture. At the Chicago Fed’s LaSalle Street home, we’re fortunate to be surrounded by some of the best examples of 19th century and modernist buildings, from Burnham to Mies van der Rohe. I hope all of you will have the oppor- tunity some day to come to Chicago, to experience the city’s architecture and to take a tour of the Federal Reserve Bank of Chicago. An important part of my job as head of the Chicago Fed is to increase public awareness of how the economy works. Unfortunately, most Americans don’t have a lot of knowledge of the Federal Reserve System. In fact, I have had to explain to people, on more than one occasion, that the Federal Reserve is not a national bird sanc- tuary. And it most definitely is not the congressional wine cellar. You, of course, know that the Fed is our nation’s central bank. And while Americans’ knowledge about the Federal Reserve is still incomplete, public awareness of the Fed’s role in the economy has increased in recent years. The Federal Reserve was founded in 1913 during one of the more turbulent times in U.S. history. It was a period quite different from today. The country’s towns and cities had been linked by the transcontinental rail- way just a few decades earlier. America was newly industrialized and bursting at the seams with energy and expectations. At the same time, the U.S. had experienced a series of boom and bust cycles for several decades. There were frequent economic downturns, and expansions were too short lived to repair the damage done to peoples’ lives. By the late 1800s and early 1900s, there were widespread social and economic problems like the emerging phenomenon of big city poverty and numerous spells of high unemployment. Michael Moskow Speeches 2000 275 What a difference a century makes. Today, we’re experiencing an expansion that has become the longest in our country’s history, and the national unemployment rate is near a three-decade low. Back in the late 1800s, the state of our economy was symbolized by bank runs and bread lines. Now our economy is symbolized by images of parking lots overflowing with luxury cars, and new housing developments that sell out before there is time to plant a for-sale sign out front. Today I will talk about our economic expansion, and just what that means for us as a nation. In particular, I’m going to discuss how maintaining price stability is key to the Fed’s mission of contributing to a higher standard of living for all Americans. To set the stage for our discussion, let me give you a brief overview of what exactly the Fed does. Our mis- sion is to foster a safe and sound financial system and a healthy, growing economy. As opposed to the ups and downs of the late 1800s, our goal is sustained growth. The Fed pursues its mission through three main areas of responsibility. First, we’re a service provider — we provide financial services such as check processing and electronic payments to depository institutions and the U.S. government. Second, we’re a bank regulator — we supervise and regulate banks and bank holding companies. Finally, but most important, we formulate nation- al monetary policy. The Chicago Fed is one of 12 regional Reserve Banks. We serve a five-state area consisting of most of Indiana, Illinois, Michigan, and Wisconsin, and all of Iowa. We have a head office in Chicago as well as check-process- ing centers in Indianapolis, Des Moines, Milwaukee and Peoria, and a branch in Detroit. Most people tend to think of monetary policy as a process that begins and ends in Washington, D.C. But, in fact, at its founding, the Fed was intended to be regional in orientation and it continues to be so today. Each ofthe 12 Fed Banks has a President who participates on the Federal Open Market Committee, the Fed’s main policymaking group. As part of the policymaking process, we need to stay in touch with people living and working in the regions to supplement statistical data with up-to-the-minute information. That’s why I’m here today. My ability to bring current information about the economy in action is one of the advantages of the Fed’s regional system. Furthermore, having FOMC participants located outside the Washington beltway helps to keep the Fed insu- lated from the short-term political pressures that could distort the policymaking process. In short, the Fed’s regional system allows it to get a better feel for the latest economic developments and helps it focus on poli- cy not politics. The city of Columbus is an excellent example of how local developments can provide clues regarding the direction of the overall economy. Columbus has twice the concentration of durable goods producers as the restofthe state, and four times that of the nation as a whole. This concentration has made Columbus a bell- weather for economic swings in the Midwest. Columbus and other Midwestern metro areas also provided an earlywarning of the consequences of workforce shortages. Columbus saw historically low rates of unemploy- ment earlier in this expansion than almost anywhere in the country. By tracking developments in cities like Columbus, the Fed is able to get a better sense of future economic developments. Given that background, let me turn to why the Fed is concerned with price stability — and to why price sta- bility is so important in ensuring a healthy economy. At first glance, inflation may not seem that sinister. After all, you might wonder, if both prices and wages are going up, why should it matter? But in fact, as the 1970s showed, high inflation, especially when it’s volatile, can easily derail economic growth. Inflation dis- 276 Michael Moskow Speeches 2000 rupts growth by making the entire economy less efficient. The pricing mechanism, which should serve as a point of communication between consumers and producers, breaks down. One way to imagine this is to think about a national rail system: when it works, and when it doesn’t. Generally, trains come and go at high speeds, efficiently and safely. But some systems are less efficient than others. Sometimes there are problems with the signals. We’ve all heard of cases where cars were surprised at railroad crossings by malfunctioning gates, or when trains were not announced by either the crossing bells or the signals. And I know I’ve been on a train more than once that was delayed because of a signalman’s error. When signals fail, trains start running late, people miss connections, and in the end, the entire system performs below its potential. In the free market, price signals serve much the same purpose. Generally, goods and services change hands at high speeds, effi- ciently, and smoothly, without direction by any government agency. Unless, of course, there is a problem with price signals. Then, producers and investors misallocate. Customers and workers make ill-informed deci- sions. And the entire economy performs below its potential. Inflation distorts prices and interest rates, jam- ming the signals which we all depend upon to make decisions — decisions on when, where and how much to buy, sell, save and invest. A healthy growing economy is the Fed’s goal. But the Fed can’t directly create growth. Growth can only be created by investment in human skills, physical capital and new technologies. The Fed can’t make those investments. All the Fed can do is facilitate that investment — by creating an economic environment of low and stable prices and an environment of clear signals. The signals have worked well in recent years. Over the course of the current expansion, the economy has run like a locomotive on a clear stretch of track, fueled by the hard work and ingenuity of the American people. The importance of keeping the economy on track, and growing for as long as possible, cannot be underesti- mated. Economic stability and the long expansions it fosters have an enormous impact on our nation. For example, look at the impact of the expansion on those living on the margin in America. Much of popular dis- cussion about the economy tends to focus on images and events related to the more affluent — SUVs and IPOs, high-fashion flip phones, and the web in the palm of your hand. There is less discussion about anoth- er key benefit of the current expansion — the increased opportunity for the previously unemployed and lower-income workers to improve their lives. Historically, these workers are not as well off as the rest of the population. But the current economic expan- sion has helped many make solid progress. Our low inflation environment has provided the foundation for a sustained period of remarkably low unemployment, which has been below 5 percent for almost three years. This extended period of low unemployment has pulled many people into the workforce for the first time, as companies reach deeper into the labor pool. Long, steady expansions greatly benefit America’s poorer workers in many ways. The last-hired workers are often the first-fired. That’s why short booms that quickly burn themselves out often do not provide enough time for new workers to get the experience and training they need to stay employed during harder times. Extendedperiods of economic growth, such as the one we’re currently experiencing, mean that we have many Americans entering the job force who have never before had such opportunities — opportunities to work, to receive training, to invest in their own businesses, homes and families, and to break the cycle of poverty. I know that the businesses of Columbus have excelled at responding to the demands of your flourishing economy — by investing heavily in worker training and encouraging people to move to Columbus. Michael Moskow Speeches 2000 277 We’ve discussed how the Federal Reserve fosters sustainable growth. We’ve discussed how our nation has benefited from those efforts. And perhaps, most importantly, we’ve discussed how price stability is key to those efforts. But how exactly, does the Fed achieve price stability? For example, how does the Fed know when growth is sustainable and when it’s not? Roughly speaking, our economy’s maximum sustainable growth rate is determined by adding trend growth in the U.S. labor force and trend growth in productivity. The labor force has been growing at about one per- cent per year — roughly equal to our population growth. Just a couple of years ago, most economists would have said that productivity was growing at about 11⁄ percent per year, giving us a potential growth rate in the 2 U.S. of about 21⁄ percent. Today, many economists have higher estimates for potential growth, because of the 2 higher productivity growth we’ve been experiencing. In fact, the average annual productivity growth over the past four years is one percentage point higher than it was during the previous quarter century — significant- ly increasing maximum sustainable growth during this period. A significant portion of the recent dramatic increase in productivity growth was due to the kind of innova- tive products and services provided by the technology industry. Technology is changing the way all of us do our jobs, the way businesses buy and sell from other businesses, and the way companies interact with their customers. We have vastly improved access to information that enables us to be more efficient and effective as we make business decisions. But the increase in efficiency we’ve seen since the mid-1990s was not due simply to the highly publicized Internet and hi-tech computer applications. We learned to run our businesses smarter through improved management practices. And the U.S. labor market as an institution is functioning more efficiently than it used to. In the past, the low rates of unemployment we’re currently experiencing would not have been considered sustainable year after year. We usually considered such low rates of unemployment as a sign of imbalances in the economy, as a sign that aggregate demand was outstripping aggregate supply. And the result was always thesame. Bottlenecks emerged and inflation increased. Eventually, due to the higher inflation, growth would stall and the unemployment rate would go up. We’re not sure how low an unemployment rate can be sus- tained in the U.S. economy today without inflation rising and growth being curtailed. But the old belief that a6percent or so unemployment rate was as low as we could go without problems arising is surely out of date. Increased productivity growth raises our potential growth, which represents the supply of goods and servic- es we produce domestically. There’s evidence, however, that demand has been outstripping even this higher supply, and the presence of this imbalance has been an important factor in recent monetary policy discus- sions and decisions. As you know, since June 1999, the Federal Open Market Committee has increased its target for the federal funds rate by 11⁄ percentage points, to 6 percent. In part, this was a reversal of monetary easing actions taken 4 in the fall of 1998, following the Russian crisis. At that time, U.S. economic growth was quite strong, but the easings were deemed appropriate because volatility in financial markets was impeding the normal supply of financial liquidity to credit-worthy borrowers. The FOMC addressed this by lowering the federal funds rate target by three-quarters of a percentage point, in three steps, to reduce the risk that the financial crisis would spread. Bythespring of 1999, however, domestic financial markets had recovered and prospects for economic growth abroad had improved. Moreover, economic growth in the U.S. was quite brisk and potential inflationary risks wereincreasing. From late June, 1999 through March, the FOMC raised the funds target five times. When the 278 Michael Moskow Speeches 2000 latest increase was announced on March 21, the FOMC indicated that the balance of risks is still weighted mainly toward inflationary pressures. And we remain concerned that increases in aggregate demand will con- tinue to exceed the growth in potential supply, which could foster inflationary imbalances that would under- mine the economic expansion. In terms of the economic outlook for the year 2000, the Chicago Fed expects real GDP growth to be moder- ating towards its trend growth rate over the course of the year. The unemployment rate should remain near its recent level and “core” inflation, though still relatively modest, most likely will be higher than last year. Given continued strong aggregate demand, the Federal Reserve will need to remain vigilant regarding actual and potential imbalances to ensure that the U.S. economy sustains its strong performance for years to come. I’d like to conclude my discussion today by returning to the subject of architecture. One of the most famous buildings that shares LaSalle Street with the Chicago Fed is the old Rookery building. Built by Daniel Burnham after the Great Chicago Fire, as part of his redesign of the city, the Rookery has always held a great significance for Chicagoans. When it was built, the Rookery was the tallest building in the world. Since then it has been home to the Chicago Public Library, a major Chicago bank, and even City Hall at one point. Architecturally, the Rookery has undergone many changes over the years. In fact, about every thirty years or so, a new architect is invited to alter the building to meet the needs of the time. Frank Lloyd Wright, for example, removed much of its original ornate ironwork and added marble staircases covered in intricate carv- ing and painted gold leaf. In redesigning the Rookery, Wright faced a challenging task to meet the needs of the time without sacrific- ing its core architectural integrity. Similarly, the Fed, in setting monetary policy, needs to keep the continu- ally evolving nature of the economy in mind without losing its focus on price stability — the essential foun- dation for a healthy economy. Both architects and policy makers need to maintain a focus on the fundamentals to ensure their decisions will stand the test of time. The Federal Reserve remains committed to maintaining its focus on price stability as the best way to foster sustained, healthy growth and a higher standard of living for everyone in our nation. Michael Moskow Speeches 2000 279

Michael Moskow (2000, April 4). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20000405_michael_moskow

@misc{wtfs_regional_speeche_20000405_michael_moskow,
  author = {Michael Moskow},
  title = {Regional President Speech},
  year = {2000},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20000405_michael_moskow},
  note = {Retrieved via When the Fed Speaks corpus}
}