speeches · October 17, 2001

Speech

William Poole · President

The Role of Government in U.S. Capital Markets TheInstituteofGovernmentalAffairs UniversityofCalifornia–Davis Davis,California October18,2001 The overall role of government in U.S. criticaltotheorderlyfunctioningofthecapital capital markets is not prominent in markets,whichiswhythistopicfitsnicelyinto policydiscussions,norisitwellunder- theoveralltopicinthetitletomylecture.Indeed, stood by the general public. There are I’llemphasizejusthowimportanttheFedhas a number of important dimensions to this role beeninrespondingtotheeconomiceffectsof and significant changes over time. My purpose theterroristattacksonSeptember11. today is to outline these dimensions to provide I’veaddedapostscriptthatisoffthetopic, abetterunderstandingoftheroleofgovernment. butIknowofinterest—I’llreflectabitonthe Thecapitalmarketsarethemeansbywhich likelyimplicationsoftheterroristattacksonthe theeconomy’ssavingflowstothosewhousethe economy. saving.Businessfirmsneedaccesstosomeof Beforeproceeding,Iwanttoemphasizethat thissavingtofinanceproductiveinvestmentin theviewsIexpressherearemineanddonot physicalcapitalandtocoverlossesduringthe necessarilyreflectofficialpositionsoftheFederal start-upphaseofnewenterprises.Governments ReserveSystem.Ithankmycolleaguesatthe usesomeofthissavingtofinanceoutlaysinexcess FederalReserveBankofSt.Louisfortheircom- ofcurrentrevenues.Householdstapsomeofthis ments.RobertRasche,WilliamEmmons,andJoel savingtofinanceconsumptionoutlaysand,espe- Jameswereespeciallyhelpful.However,Iretain cially,housinginvestments.Inthefirstpartof fullresponsibilityforerrors. mylecture,I’lloutlinesomeofthebasicfactsas tohownonfinancialsectorsusefundsraisedinthe capitalmarketsandsomeofthenotablechanges NONFINANCIAL SECTORS USES overtime.I’llemphasizehowthegovernment’s OF FUNDS roleaffectstheoutcome. Thefinancialsystemdoesnot,however,trans- Almosteveryoneisawareofthefactthatin ferallfundsdirectlyfromsaverstoendusersof recentyearsthefederalgovernmenthaschanged funds.Alargefractionofsavingflowsthrough fromanetusertoanetsupplieroffunds—the financialintermediaries,suchasbanksandmutual federalbudgethasgonefromdeficittosurplus. funds.Thegovernment’sroleintheintermedia- Ofcourse,thatsituationisfluidtodaybecauseof tionprocessissubstantial.Thatwillbethesub- thechangedsituationinthewakeoftheterrorist jectofthenextsectionofmylecture. attacksofSeptember11.Itistooearlytomake Inthefinalsectionofmylecture,I’llreflect anyprojectionsastojusthowlargethechange ontheFederalReserve’sroleinthefinancialsys- inthefederalbudgetwillbeincomingyears. tem.TheFedreflectsanimportantgovernmental Perhapsthemostfamiliarfactaboutthefed- influence,butonemoreinvolvedintheoverall eralroleinthecapitalmarketisthatthefederal managementoftheeconomythandirectlyinthe budgetwentfromnearbalancein1970toadeficit capitalmarkets.Nevertheless,theFed’sroleis ofabout5percentofGDPinthemid-1980stoa 1 FINANCIALMARKETS surplusofabout2½percentlastyear.Because amounthadgrownto$328.2billion—abitless thatfactissofamiliar,I’llnotdwellonit. than4percentofGDP—ofwhich60percentwas Lesswell-knownistheuseofthecreditmar- issuedbystategovernmentunits.Inrecentyears, ketsbythestateandlocalgovernments.These stateandlocalgovernmentshavebeenamuch governmentshaveborrowedfundsonasmaller moreimportantsourceofdirectloanstononfinan- andsteadierscalethanthefederalgovernment cialborrowersthanhasthefederalgovernment. formanydecades.Theirnetnewborrowingeach Governmentsnotonlydirectlyabsorborpro- yearwasequivalenttoabout1percentofGDP videsavingtothecapitalmarketbutalsoinfluence throughthe1950s,1960s,and1970s.Stateand theuseandformofcapitalraisedbytheprivate localgovernmentborrowingspikedbrieflyabove sector.Ofparticularnoteisthegrowinguseof 2percentofGDPinthemid-1980s,beforefalling debtoverequitybycorporatebusiness.Fora backtoaboutzerobythemid-1990s.Themost corporation,debthastheadvantagethatinterest recentevidencesuggestsstateandlocalborrowing paymentsaredeductibleunderthecorporate issettoresumeitspreviouspaceequivalentto incometaxlaw,whereasdividendpaymentsare about1percentofGDPfortheimmediatefuture. not.Perhapsasaconsequenceofthisfeatureof Becauseofthisrelativelysteadypaceofbor- thetaxlaw,oratleastinpart,theequityportion rowing,thetotalamountofstateandlocalgovern- ofcapitalfornonfarm,nonfinancialbusinesses mentdebtoutstandinghasremainedbetween8 hasfallenfrom64percentin1970to50percent and18percentofGDPfortheentirepost-war today.Apossibledownsideaspectofthistrend period,withnoapparenttrendineitherdirection. isthatitmakescorporationsmorevulnerableto Forexample,stateandlocalgovernmentdebt bankruptcyshouldeconomicconditionsdeterio- wasequivalentto14.5percentofGDPin1970, ratesignificantly,andthatinturnmaymakethe 16.1percentin1985,andthenreturnedto13.0 overalleconomylessstable. percentby2000. Beyonditsdirectroleinraisingcapitalinthe Stateandlocalgovernmentsnotonlyraise fundsinthecapitalmarketsbutalsoareimportant market,thegovernmentregulatescompetitive lenders.Dataonlendingbystateandlocalgovern- conditionsinthesecuritiesmarkets.Sincethe mentstononfinancialborrowersarefragmentary, enactmentoffederalsecuritieslawsinthe1930s, andevidenceontheamountofsuchactivityis theemphasishasbeentoprovideinvestorswith limitedtorecentyears.Thisactivityisbestsum- information,andnotforthegovernmentitselfto marizedbypublicdebtissuedforprivatepur- makejudgmentsastoinvestmentmerit.This poses,asdefinedbytheBureauoftheCensus systemhasworkedwell,andmostinvestors sincefiscalyear1987-88.Thedatarefertodebt understandthatthegovernmentdoesnotsubsti- issuedbystateandlocalgovernmentsortheir tuteitsownjudgmentsforthoseofinvestors. agenciesforthepurposeoffundingprivatesector activities.Examplesofactivitiessupportedby suchlendingactivitiesincludeindustrialand FINANCIAL INTERMEDIATION commercialdevelopment;pollutioncontrol; Theflowofsavingfromtheoriginalsaver, housingandmortgageloans;privatehospital suchasahousehold,totheultimateuserofthe facilities;studentloans;andventuressuchas sportsstadiums,conventioncenters,andshop- saving,suchasacorporation,cantaketheform pingmalls.Forfiscalyear1987-88,theoutstand- ofhouseholdpurchasesofnewlyissuedcommon ingamountofsuchdebtwas$246.2billion,or stockorcorporatebonds.However,alargefraction approximately5percentofGDP,splitequally ofsavingflowsisintermediatedbyfinancial betweenstategovernmentsandlocalgovernments. firms.Theclassicexampleisthecommercial Byfiscalyear1996-97,thelatestperiodforwhich bank,whichcollectsfundsfromdepositorsand completedataareavailable,theoutstanding lendstobothbusinessesandhouseholds. 2 TheRoleofGovernmentinU.S.CapitalMarkets Financialintermediariesserveseveral throughtheNationalCreditUnionShareInsurance importantfunctions.Anobviousoneisthatthe Fund.TheFSLICwasabolishedin1989,and intermediaryspecializesintheanalysisofrisk responsibilityforinsuringdepositsofbanksand andadministrationofloans.Veryfewhouseholds thriftswasassignedtotheFDICthroughtwo havethelendingexpertisethatbanksdo.More- separatefunds,theBankInsuranceFundandthe over,bankscanattractfundsinsmallamounts ThriftInsuranceFund.Asoftheendof1999, fromindividualsandmakelargeloanstobusiness depositsinsuredbythetwoFDICfundsexceeded firms. $2.8trillion,about71percentofalldepositsat Thegovernmentroleinsupervising,regulat- insuredbanksand93percentofalldepositsat ing,andinsuringfinancialintermediariesismuch insuredthrifts.Inaddition,theNationalCredit moreextensivethanitsroleinthesecurities UnionAdministrationinsured$326billiondollars marketsinwhichstocksandbondsaretraded. increditunionshares. Thefederalroleregardingfinancialintermediaries ThestatutoryresponsibilityoftheFDIC rangesfromminimal,aswithfirmssuchasGE extendsonlytothefirst$100,000ofdeposits Capital,toextensive,aswithregulationofcom- heldbyaparticularindividualinallaccountsat mercialbanksandinsuranceofdeposits. adepositoryinstitution.However,asaconse- Ofallthefederalguaranteearrangements, quenceofthebailoutofContinental-IllinoisBank depositinsuranceisthemostfullydeveloped in1984,itbecameclearthatinpracticethegovern- andbestunderstood.IntheUnitedStates,deposit mentwasfollowingwhatthemarketusually insurancearrangementsbeganintheearly-19th callsa“too-big-to-fail”policy,butwhichismore century.Throughalongandpainfulevolution, properlycalleda“too-big-to-liquidate-quickly” includingcreationoffederaldepositinsurancein policy.Whatevertermisused,thepolicymeans the1930sandthecollapseoftheFederalSavings thatforlargebanksalldeposits,andnotjust andLoanInsuranceCorporationin1989,the insureddeposits,maybeguaranteed;clearly managementofthedepositinsurancesystemis though,shareholdersandmanagementsare nowfairlywellunderstood.Therearetwopillars vulnerabletoloss.Theextentofthisdefacto tothesystem.Oneisextensiveregulationand extensionofgovernmentinsuranceofdepository supervisionofinsureddepositoryinstitutionsby liabilitiesbeyondthestatutoryprovisionshas federalandstateagencies.Thesecondisthe neverbeenpreciselydefined.Intheeventof requirementthatinsuredinstitutionsmaintain problemsatanotherlargebank,themarketswill substantialcapital,whichprovidesacushion beuncertainoftheextenttowhichthegovernment againstlossesandanincentivefortheownersto willcoverlossesthatlarge,uninsureddepositors managetheirinstitutionscarefully. mightsuffer. Depositinsuranceservesanimportantfunc- Anotherclassoffinancialintermediariesis tioninimprovingthestabilityofthefinancial government-sponsoredenterprises,orGSEs. system.However,itcreatestheriskthatinsured Theseareinstrumentalitiesofthefederalgovern- depositoryinstitutionswillengageinunsafe mentandnotfullyprivate.Theyareestablished lendingpracticesthatmayleadtoloandefaults andcharteredbythefederalgovernmentto andbankfailures.Aninadequateinsurancesys- accomplishspecificpolicygoals.However,they temsoonerorlaterislikelytoleadtoexcessive mayhaveprivateshareholderswhoreceivedivi- taxpayerlosses. dendsandenjoymostoftherightsoffullyprivate Federalinsuranceprogramsthatcoverliabili- firms.ThemissionofthehousingGSEs—includ- tiesofprivatefinancialintermediariesdatefrom ingFannieMae(originallynamedtheFederal thecreationoftheFederalDepositInsurance NationalMortgageCorporation),andFreddieMac Corporation(FDIC)andtheFederalSavingsand (originallytheFederalHomeLoanMortgage LoanInsuranceCorporation(FSLIC)inthe1930s. Corporation)andtheFederalHomeLoanBank In1970,creditunionsharesbecameinsured System—istofacilitatetheflowofcredittomort- 3 FINANCIALMARKETS gageborrowers.InadditiontothehousingGSEs, valueofcovereddefinedbenefitpensionplans otherfinancialGSEsincludetheFarmCredit wasestimatedat$12.3billion. System,theFederalAgriculturalMortgageCorpor- Indiscussingfinancialintermediariesand ation(FarmerMac),theFinancingCorporation federalguaranteeprograms,Ihavementioned andtheRefinancingCorporation(bothsetupto dollaramountsinthetrillions.Thescaleofthe resolvefailedsavingsandloansintheearly1990s), programsiscomparabletothepubliclyheld andtheStudentLoanMarketingAssociation Treasurydebt—oftencalledthe“nationaldebt”— (SallieMae).Therearealsonon-financialGSEs whichwealsomeasureinthetrillions.These suchasthePostOfficeandtheTennesseeValley programshavesignificanteffectsonthecapital Authority. marketsandraisemanyfascinatinganddifficult AllofthefinanciallyorientedGSEstogether publicpolicyissues. controlledfinancialassetsof$2.125trillionat theendofthesecondquarterof2001,withthe lion’sshareaccountedforbythethreehousing THE FEDERAL RESERVE’S ROLE GSEs.AmajoractivityofthehousingGSEsisto Nofinancialsystemworkswell,asexperience purchasemortgageloansfromoriginatorslike aroundtheworldhasdemonstratedoftenand commercialandmortgagebanks,andthenpack- painfully,inthefaceofmonetaryinstability.In agethemintheformofmortgage-backedsecuri- theUnitedStates,theFederalReservehasthe ties,whichareguaranteedandsoldtoinvestors. essentialresponsibilityofmaintaininglowinfla- Thepoolofoutstandinggovernment-related tionandconfidencethatlowinflationwillcon- mortgagesecuritiesamountedto$2.636trillion tinueintotheindefinitefuture.Withoutthat attheendofthesecondquarterof2001.This confidence,thebondmarketwillhaveatough figureincludesmortgage-backedsecuritiesfrom timepricinglong-termbonds,becausethefuture GinnieMae,theVeteransAdministration,and purchasingpowerofmoneywillbeuncertain.In theFederalHousingAuthority,whicharenot GSEsbutinsteadareagenciesofthefederalgov- countriesexperiencinghighinflation,long-term ernmentcarryingthefullfaithandcreditofthe debtinstrumentsliterallydisappear.Fundscan government. onlybeborrowedshortterm,ifatall. Directgovernmentlendingtofinancialinter- TheimportanceoftheFederalReserve’srole mediaries,whichisquitesmalltoday,datesfrom inthepaymentssystembecamefullyevidenton thecreationofthediscountfacilityaspartofthe September11andthedaysimmediatelyfollow- FederalReserveAct,whichbecamelawin1913. ing.TheFedprovidedanenormousamountof IntheearlyyearsoftheFederalReserveSystem, extraliquiditytothefinancialsystem.Theaction suchloanswereanimportantsourceoffundsto wasnotamonetarypolicyactionintheconven- memberbanks.Inthepastdecade,exceptduring tionalsense,butaresponsetothephysicaldis- episodesoffinancialstress,suchasexperienced ruptionofthepaymentssystem. inthedaysfollowingtheSeptember11terrorist TounderstandwhattheFeddid,consider attacks,theoutstandingamountofsuchloans yoursituationifyourincomestopped,youwere hasbeenverysmall.Withtheexceptionofthe unabletoborrowfunds,andyouwereunableto seasonalborrowingfacility,thematuritiesof sellsecuritiesbecausethemarketswereclosed. suchloansareveryshort. Dependingonyouraccesstocash,youwouldbe Anothersignificantfederalguaranteeprogram forced,withinafewdays,todefaultonbillscom- arisesthroughgovernmentinsuranceofdefined ingdue.Bothnonfinancialandfinancialfirms benefitpensionplans,throughthePensionBenefit areinasimilarsituation,exceptthatfinancial GuaranteeCorporation.ThePBGCwascreated firmsespeciallyrelyheavilyondailyandeven bytheEmployeeRetirementIncomeSecurity hourlyreceiptstomeetobligationstomakepay- Actof1974.OnSeptember30,1998,thepresent mentsofvarioussorts. 4 TheRoleofGovernmentinU.S.CapitalMarkets Asaconsequenceoftheterroristattacks,the Becausemanychecksaretransportedbyair, securitiesmarketsclosed,andsofundscouldnot thegroundingofallaircraftmeantthatchecks beraisedthatway.Moreover,theattackcaused depositedwiththeFedforclearingcouldnotbe seriousdisruptiontotheoperationsofseveral deliveredtothebanksonwhichtheyweredrawn. financialfirmsthatplayaprominentroleinclear- Moreover,manybanksthatdonotordinarily ingpayments.Withoutcertainfundscomingin, usetheFed’scheck-processingservicesbrought firmsallovertheUnitedStates,andalloverthe theircheckstotheFedforafewdaysafter worldforthatmatter,wouldhavebeenforcedto September11.Forbothregularcustomersand defaultonobligations.Letmeemphasizethat thesenewcustomers,theFedgavecreditforthe thefundsduewereindeedowedtotherecipient balancesdepositedthatvastlyexceededthe firms;theproblemwasthatthephysicaldestruc- fundsbeingdeductedfromtheaccountsofother banks;thedifferenceiscalled“FederalReserve tionandunavoidabledelaysinbringingbackup float.”OnWednesday,September12,floatwas systemsandlocationstofulloperationalcapacity $22.9billion,upfrom$2.1billiontheprevious meantthatthefundssimplycouldnotbetrans- Wednesday. mitted.IntheabsenceofFedintervention,we Athirdmechanismtoinjectliquidityinto wouldhaveseenacascadeofdefaultsasfirms thebankingsystemwasFedpurchasesofsecuri- duefundsthatwerenotarrivingwouldbeunable tiesintheopenmarket.Fortunately,themarket tomeettheirobligations.Thisdefaultcascade mechanism,thoughseverelyimpaired,wasnot wouldhavespreadtheproblemthroughoutthe completelybroken.TheOpenMarketDeskatthe worldeconomicsystem. NewYorkFed,itselfoperatingfromacontingency TheFedprovidedextraliquiditytothemar- sitebecauseitsofficeneartheWorldTradeCenter ketsinavarietyofwaysaftertheterroristattacks. wasclosed,wasabletopurchasealargevolume Onemethodwasbymakingloansthroughthe ofsecuritiesthroughacombinationofoutright discountwindowtodepositoryinstitutions.Such purchasesandtemporarypurchasesunderrepur- loansusuallyrunafewhundredmilliondollars chaseagreements.Moreover,theFedarranged orso.OnWednesday,September12theout- currencyswapagreementswithseveralforeign standingvolumeofadjustmentcreditlentbythe centralbanks,whichenabledthemtoprovide Fedtodepositoryinstitutionsroseto$45.5bil- dollarstotheirfinancialinstitutions. lion,upfrom$99milliontheWednesdaybefore. Allthesemechanismstakentogetherexpanded Thoseloansallowedbankstomeettheirobliga- FederalReservecreditby$90billion,orabout tions,eventhoughexpectedreceiptshadnot 15percent,betweenWednesday,September5 arrived,andallowedbankstoextendcreditto andWednesday,September12.Asthefinancial theircustomerswhocouldthenmakepayments. systemrestorednormalpaymentsmechanisms, AlargeincreaseinFederalReservefloatwas andsecuritiesmarketsreopened,theextraliquid- anothermechanismexpandingliquidity.TheFed ityflowedbacktotheFederalReserve.Loansat typicallyclearsroughlyone-thirdofthechecks thediscountwindowwererepaid,floatdeclined generatedbythehouseholdsandbusinessesthat ascheckscleared,andOpenMarketDeskpur- writethem.Inthenormalcourseofbusiness,a chasesofsecuritiesunderrepurchaseagreement bankreceivingacheckmaytakeittotheFed, expired.Today,thesystemisfunctioningnormally. whichthenprocessesthecheckandsendsiton OneotheraspectofFedoperationsdeserves tothebankonwhichitwaswritten.Thedollar mentioninthiscontext.Ontheafternoonof amountofthecheckisaddedtotheclearing September11,andtoalesserextentduringthe accountofonebankanddeductedfromthe daysthatfollowed,somebanksexperienceda accountoftheotherbank.Theseclearingaccounts modestincreaseindemandforcurrency. aremaintainedonthebooksoftheFederal Frighteneddepositorswithdrewcashfromteller ReserveBanks. windowsandATMs.Ifthosesourcesofcashhad 5 FINANCIALMARKETS rundry,thewordwouldhavespreadrapidlythat POSTSCRIPT cashwasrunningout,andadditionalpeople Ichosemylecturetopiclongbefore wouldhavelinedupatATMstomaketheirwith- September11andhadinhandagreatdealof drawals.TheFedmadecleartodepositoryinsti- backgroundwork.ButIthinkitwouldbeamis- tutionsthatcashwasavailableandmaintained takeformetostopnowwithoutcommenting operationstoensurethatalldemandscouldbe brieflyonthelikelyeconomiceffectsoftheter- met.Amodestamountofextracashwasshipped roristattacks. tobanksrequestingit.Ipersonallyheardofno Thelong-runprospectsfortheU.S.economy ATMsrunningdry,andinamatterofafewdays remainbasicallyunaffected.Thedynamicnature theextrademandforcashdisappeared.Here oftheeconomyhasnotbeendamaged.The again,theFed’srolewastomaintainnormal prospectsforinnovation,andtheincentivesto functioningofthepaymentssystem,andbydoing sotheFedhelpedtomaintainpublicconfidence employnewtechnologies,havenotchanged. indifficultanduncertaincircumstances. Theshort-runoutlookisdominatedbyuncer- FederalReservepaymentssystemoperations tainty.Forecasters,requiredbytheirprofession areordinarilyconsideredarathermundanesub- toputdownnumbers,showamuchwiderrange ject.Thisexperienceshows,however,thatunder ofviewsthanusual.Iknowthateveryindividual conditionsofstressthesubjectisfarfrommun- forecasterhasevenlessconfidencethanusualin dane.Amoderneconomydependscriticallyon thenumberswrittendown.Thefactisthatwe reliablemethodstomakeandreceivepayment; havenocloseparallelinU.S.historytostudyfor whenthosemechanismsfail,theeconomyitself guidanceastothelikelycourseoftheeconomy cannotfunction.ThecrisisofSeptember11shows inthemonthsandquartersahead.Moreover,as thattheFederalReserveplaysanimportantrole theanthraxsituationsohorriblyillustrates,we inkeepingthemechanicsofthepaymentssystem mayhaveadditionalunpleasantsurprisesahead ingoodorder.Doingsobuildsconfidenceacross ofus. theeconomythatthisessentialaspectoflifewill Somebusinessanalystsseemtousetheword workinnormalfashion. “uncertainty”asaeuphemismfor“weakness,“ justasstockmarketanalystsseemtousetheword “volatility”asaeuphemismfor“decline.”What CONCLUDING COMMENT Imeanbyuncertaintyisthatlikelyoutcomesfor theaggregateeconomyoverthenextsixtotwelve Thecapitalmarketsplayacentralroleina monthsarespreadacrossarangefrommodestly marketeconomy.IntheUnitedStates,thesemar- poortomodestlygood.Withoutquestion,the ketshaveaheavygovernmentalpresence,butone terroristattackshavehurttheaggregateeconomy thathasevolvedtodifferingdegreesofgovern- overthenear-term.However,Idowanttoempha- mentinvolvementdependingonthemarketbeing sizethatwehaveveryconsiderablestrengthsin examined.Forthemostpart,governmentinvolve- oursituation.Weshouldnotbepessimistic.Iam mentintheprimarysecuritymarketsisrelatively limited.Thefederalandstateandlocalgovern- notsayingthatIhaveapersonalforecastofa mentsdoraisesignificantamountsoffundsin quickrebound,butatthesametimeneitherdoI thesemarkets,buttheregulatoryfunctioniscon- haveasinkingfeeling.Iamgenuinelyuncertain centratedintheareaofrequiringprovisionof abouttheeconomy’snear-termoutlook. accurateinformation. Whatarethestrengthsoftheeconomytoday? Financialintermediariesplayasignificantrole. Mostimportant,wehavearesilientpeoplewho Theyraisefundsfromavarietyofsourcesand arenotgoingtositbackandwatchthesituation makeloansofmanytypes.Thefederalinvolve- deteriorate.Weareapeoplewholookaheadand mentwithintermediariesrangesfromalight donotallowourselvestowallowinfear.Weare touchtoextensiveregulationandsupervision. alreadyactingtoaddresstheproblemsweface. 6 TheRoleofGovernmentinU.S.CapitalMarkets Ourhighlycompetitivemarketsareflexibleand September11;additionalmonetarypolicystim- responsivetochangingcircumstances.Wealready ulusisinplacenow,andmorefiscalstimulusis seetheairlinesadjustingrapidly,bycutting intheworks. routeswherenecessaryandadjustingfaresdown- Mostanalystsbelievethatlostbusinesson wardtoattractpassengers.Autocompanieshave September11andthedaysthatfollowedwas zero-interestratepromotions,andindeedauto sufficienttonudgetheeconomy’sgrowthratein salesinearlyOctoberhavebeenstrong.Market thethirdquarterbelowzero.Ifthefourthquarter aftermarketisrespondingandadjusting. isalsodown,thentheconventionalshorthand Therateofinflationislowandexpectedto definitionofarecession—twosuccessivequarters remainlow.Inmanypastperiodsofstress,rising withnegativeGDPgrowth—willbemet.Some inflationexpectationshavecomplicatedthesitu- talkasthoughthatoutcomeiscertain.Itisnot. ationtremendously.WhentheKoreanWarbroke Weshouldnotbesurprisedifthatistheoutcome, outinJune1950,therewereimmediatefearsofa butneithershouldwebesurprisedifthefourth surgeofinflationandofgoodsshortages.Many quartershowspositivegrowth. hoardedgoods,andpricesspikedupquickly, TheFederalReservewillbewatchingthe unsettlingthesituation. incomingdatacarefully,aswillthemarket.If TheU.S.bankingsystemisstrong,unlikethe necessary,moremonetarypolicyeasewillbeput situationinAugust1990whentheGulfWarbroke inplace.Asdataarrivesuggestingrevivalof out.Atthattime,theeconomydriftedintoreces- growth,we’llhavetowatchtobesurethatwe sion,andtherecoverythatbeganofficiallyin arenotobservingafalsedawn.We’llalsohaveto March1991wasanemic.Partoftheproblemthen becarefulnottooverstaypolicyease. wasthatabankingsystemwithaweakcapital Youmaynotfindtheeconomist’s“onthe positionwasunabletoexpandloanseventomany onehand,ontheotherhand”verysatisfying,but credit-worthyborrowers.Today,bankcapitalis itsurebeatsafirmcommitmenttoapolicycourse strongandbanksareabletolendtogoodrisks. oblivioustodevelopinginformation.Thatisthe Asubstantialamountofmonetaryandfiscal situationweface.WeintheFedarepaidtoexer- policystimuluswasalreadyinplacebefore ciseourbestjudgment.Thatiswhatwewilldo. 7

Cite this document

APA

William Poole (2001, October 17). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20011018_poole

BibTeX

@misc{wtfs_speech_20011018_poole,
  author = {William Poole},
  title = {Speech},
  year = {2001},
  month = {Oct},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20011018_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}