Regional President Speech

Presentation to the San Diego Rotary Westin Horton Plaza, San Diego By Robert T. Parry, President and CEO of the Federal Reserve Bank of San Francisco For delivery August 21, 2003, 1:00 PM Pacific Daylight Time, 4:00 PM Eastern Prospects for the National and Local Economies: A Monetary Policymaker’s View I. Good afternoon. I’m very pleased to be here with you today. A. What I plan to do is focus on economic conditions here in San Diego and in the nation, B. and I’ll try to draw out some of the implications I see for monetary policy. II. I’ll start with the local picture. A. The San Diego economy has fared relatively well since the national recession began in early 2001. 1. In fact, private sector payrolls have actually increased slightly in San Diego over the past 2-1/2 years, a. while they’ve shrunk by over 3 million jobs in the rest of the country. 2. This reflects in part a. ongoing population growth b. and gains in industries (1) such as construction and retail trade. B. Of course, the area’s continued success depends in part on its attractiveness as a place to live and do business. 1. And, like other parts of California, this is imperiled to some degree a. by the state’s budget crisis, b. and by accompanying problems, such as rapidly escalating costs for Workers Comp. 1 2. Here’s just one example of “pastures looking greener” elsewhere. a. A longstanding local manufacturing concern—Buck Knives— announced plans to move to Idaho in 2005. b. The key reasons for the move, according to the firm, are (1) lower costs (2) and a more attractive business climate. 3. Of course, an improved business climate—and an improved budget situation—depend importantly on an improved economy, a. —both in the state and in the nation. III. So let me turn to the national picture. A. First, where do we stand now? 1. For one thing, we got the announcement last month that the recession has been over since November of 2001. Well, that’s the good news. 2. But you could hardly call this recovery “robust.” a. Indeed, I think you could say we’ve been “in a lull” for a quite a while now. 3. The bright spot has been consumer spending, especially when it comes to autos and housing, 4. But employment has been stagnant or worse— a. —in popular terms, this has been another “jobless recovery.” 5. What has been missing is solid, sustained growth in business investment. a. Weakness in business investment led us into the recession, b. and it’s going to take strength in business investment to lead us out of this lull and into a robust expansion. B. I must admit, we’ve been expecting to see a solid pickup in growth for quite a while. 2 1. The reason is that there are—and have been—some very positive fundamentals at work in the economy. 2. One is the stimulus in the pipeline both from fiscal policy and from monetary policy. a. On the fiscal side, (1) there’s some extra stimulus from the pickup in defense spending to support the action in Iraq. (2) In addition, Congress passed stimulus packages in 2001 and 2002. (3) And, of course, in May the President signed a significant tax package with some immediate effects on spending. (a) More than $13 billion in refund checks for 2002 child tax credits have been mailed, (b) and withholding schedules have been modified to reflect lower tax rates. b. In terms of monetary stimulus, the Fed cut short-term interest rates from six and a half percent to one and three-quarters percent in 2001. (1) And we brought the rate down to 1 percent with additional cuts in November 2002 and last June. (2) So short-term rates are now at their lowest levels in more than forty years. 3. Another important fundamental is the economy’s strong productivity performance. a. The surge in productivity that began with the economic boom in the mid-1990s has continued— (1) —even through the 2001 recession and the modest recovery since then. b. This suggests that the process of technological innovation that drives productivity in the long run is still alive and well. 3 c. And that bodes well for the future, because faster productivity growth creates business opportunities that stimulate economic growth. IV. Looking ahead, the most likely outcome appears to be that the economy will show reasonably strong growth for the rest of this year and then pick up some more steam in 2004. A. And the data for the second quarter do contain some positive signals that support the forecast. 1. Business investment in equipment and software—and especially the information processing equipment component—showed healthy gains, 2. and profit reports were favorable. B. The indicators about the current quarter also are encouraging. 1. In recent months, the beleaguered manufacturing sector has registered positive growth, 2. and the July numbers for autos and retail sales were actually stronger than expected, a. so consumers are still spending. V. But I should point out that these positive signals have not been sustained long enough to be conclusive, and there are still some downside risks to be aware of. A. For example, the forecast depends on continued strength in consumer spending. 1. But there are a couple of things that could cause consumers to pull back. a. One is the sharp rise in the last two months in longer-term interest rates—including mortgage rates. (1) Although mortgage rates are still low by historical standards, they’ve risen more than a full percentage point since June. (2) Those higher rates already have taken a lot of the wind out of the refinancing boom, (3) and later on they could slow growth in new-home 4 construction. b. Furthermore, so long as this remains a jobless recovery, (1) it could weigh heavily on consumers (2) and lead them to hold off on making purchases. B. In terms of business investment, we saw an uptick earlier in this recovery, only to watch it fade away in subsequent quarters. 1. We could see this uptick fade away, too. 2. In other words, the factors that were making firms cautious before could very well still be at play. VI. What does all of this imply for inflation? A. Because of the sluggish performance of the economy, we’ve built up a lot of slack in labor and product markets over the past 2-1/2 years— 1. —the unemployment rate has been hovering around six percent for the last four months, a. and there’s a lot of excess capacity in product markets. 2. This means that it’s going to take more than a few quarters of the kind of reasonably strong growth we’re forecasting for the rest of this year to work off that slack. a. In fact—it’s going to take more than a few quarters of quite strong growth to work it off. 3. And that means that core inflation—which already is low—may trend down even lower. B. Let me put some numbers on this scenario. 1. The measure of consumer inflation that the Fed relies on quite a lot came in at just about one and a half percent over the past year. a. That measure is the price index for personal consumption expenditures, excluding food and energy. 2. Now, this measure is by no means perfect. a. In fact, there’s fairly broad agreement that it probably overstates inflation by about half a percentage point. 3. So, given that bias, a. it’s likely that so-called “true” core inflation could be below one percent this year— b. —even with a pickup in growth. VII. Now let me draw out the implications of all this for monetary policy. A. As you know, our primary goal is price stability— 1. —that means, an environment in which people and businesses can make financial decisions without worrying about where prices are headed. B. Typically, we’re aiming at price stability 1. by working to bring the inflation rate down. C. But conditions today aren’t typical. 1. The inflation rate is very low. a. In fact, this is the first expansion in over forty years that began with a very low inflation rate. 2. So the response of monetary policy isn’t necessarily going to be typical, either. D. What’s typical when an expansion starts to take hold? 1. Most of the time, the inflation rate is higher than it is now. 2. So one of the main concerns is an upside surprise— a. —that is, the possibility that the economy will come roaring back, possibly pushing the inflation rate even higher. 3. Since it takes time for policy to have an impact, a. the Fed has often found it necessary to get an early start on holding the pace of expansion within sustainable limits. E. But in the current low-inflation environment, upside surprises are less of a concern than downside surprises that could push the inflation rate lower. 1. Why? a. Because, as I said, we’re likely to have a considerable amount of excess capacity for some time to come— b. —even with the generally anticipated pickup in growth. F. The Fed’s current stance is accommodative, reflecting the moderate strength of the expansion, the high level of excess capacity, and the low level of inflation. 1. Given that, I wouldn’t be surprised if it turned out to be appropriate to keep an accommodative stance for a considerable period. VIII. Now, you’re used to hearing central bankers like me cheer when we think inflation is trending lower. A. That made sense when inflation was viewed as clearly too high. B. But the Fed’s goal is price stability— C. And I want to assure of this—price stability will remain our goal, 1. whether the threat to the economy is inflation or deflation. # # #

Robert T. Parry (2003, August 20). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20030821_robert_t_parry

@misc{wtfs_regional_speeche_20030821_robert_t_parry,
  author = {Robert T. Parry},
  title = {Regional President Speech},
  year = {2003},
  month = {Aug},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_20030821_robert_t_parry},
  note = {Retrieved via When the Fed Speaks corpus}
}