speeches · November 19, 2001
Speech
William Poole · President
Market Responses to Economic Stress
LittleRockDowntownRotaryClub
DoubleTreeHotel
LittleRock,Arkansas
November20,2001
On September 10, the U.S. economy sufficienttogeneratenegativeeconomicgrowth
was limping along but with the forthethirdquarter,nowmeasuredat0.4percent
promise of faster growth before too (annualrate).Clearly,theairlineandhotelindus-
long.Thenextmorning,thecountry tries,andrelatedservices,havebeengreatly
suffered grievous and vicious terrorist attacks. affected.Atpresent,consensusforecastsarefor
As a result of these attacks, and the subsequent significantnegativegrowthinthecurrentquar-
anthrax attacks, our economy has suffered a sig- ter.TheNationalBureauofEconomicResearch
nificantshockandseriousshort-rundisruptions. maydesignatethecurrentperiodasarecession,
Today, I want to share with you my conviction thefirstsince1990-91.
that our long-run economic prospects, though Nooneknowshowlongtheseeffectswill
changed in detail, remain bright and unchanged persist.Presently,forecasterslookforwardtoa
in fundamentals. resumptionofgrowthinthefirsthalfofnextyear.
Therearemanystrengthsinoursituation, Nevertheless,uncertaintyaboutthepossibility
andweoughtnottobepessimistic.I’llconcen- offutureterroristattacksincreasesthedownside
tratemyremarksononeofthesestrengths—the risktosuchforecasts.Eventssuchasnewdis-
rapidresponseofU.S.marketstochangedcir- coveriesofanthraxcontamination,lackofquick
cumstances.Oureconomyisresilient,both
progressinidentifyingtheperpetrator(s)ofthe
becauseourpeopleareresilientandbecausewe
anthraxletters,homemaildeliverybypostal
relysogreatlyondecentralizedmarkets.These
workerswearingrubbergloves,andtheapparent
marketswillassistusinreallocatingoureconomic
accidentalcrashofAmericanAirlinesflight587
resourcesinwaysthatwilldealeffectivelywith
onNovember11allincreasethegenerallevelof
thenewrealitiesweface.
anxiety.Whiletheshort-runimpactofsuchuncer-
Beforeproceeding,Iwanttoemphasizethat
taintyonconsumerandbusinessbehaviorisdif-
theviewsIexpressaremineanddonotneces-
ficulttoquantify,itcertainlyisnotpositive.On
sarilyreflectofficialFederalReservepositions.I
theotherhand,thereissomeprobability—which
thankmycolleaguesattheFederalReserveBank
Idonotknowhowtoestimate—thattheFBIwill
ofSt.Louis,especiallyBobRasche,forextensive
identifyandapprehendtheanthraxterroristsand
assistance.However,Iretainfullresponsibility
dispelmuchoftheanxietyoveranthrax.Our
forerrors.
uncertaintiesarenotallonthedownside.
Whatwedoknowisourmarketswilldoa
goodjobinreallocatingresources.Iamnotsaying
SHORT-RUN ECONOMIC IMPACT
thattheaffectedindustries,firmsandemployees
ThequantitativeimpactoftheSeptember willnotsuffergreatpain;Iamsayingthatthe
attacksisnowbecomingclear.Disruptionsto economyasawholeneednot,andIbelievewill
transportationandlogisticsthroughoutthecoun- not,suffergreatpain.Resources—bothcapital
tryandsharpreductionsinconsumerpurchases andlabor—willflowfromsomeindustriesto
intheimmediateaftermathoftheattackswere otheronesandtheaggregateeconomywillgrow.
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FINANCIALMARKETS
THE LONG-RUN OUTLOOK Therearemanyotheropportunitiesfornew
approachestothesolutionofoldproblemsorto
ItismyconvictionthattheU.S.economy
definesolutionsforemergingproblems.Thepro-
containsverypowerfulforcespromotinggrowth
visionofsecurityforourtransportationsystems,
andfullemployment.Oursocietyrewardsentre-
ourfoodchain,ourenergygenerationsystems,
preneursandinnovators.Wearemuchbetteroff
andourborderswillconsumesignificantlymore
livinginasocietywherepeoplemaybesome-
resourcesthanhavebeenrequiredinthepast.
timesexcessivelyexuberant—assomemayhave
Innovativeapproacheswillberequired.Forexam-
beeninthelate1990s—thanoneinwhichfew
ple,intheimmediateaftermathSeptember11,
arepreparedandabletotakerisks.Ourstrengths
severelogisticalbottlenecksdevelopedatboth
includearesilientpeople,efficientmarkets,and
CanadianandMexicanbordercrossingsasdetailed
lowinflation.IntheFederalReserve,wehave
inspectionsofthousandsoftruckswereimple-
madeclearformanyyearsourcommitmentto mented.SincethepassageofNAFTA,someindus-
maintaininglowinflation,andthatcommitment tries—forexampleautomobileproduction—have
iswidelybelievedinthefinancialmarkets. becomehighlyintegratedacrossthethreeNorth
Ourcultureandinstitutionsrewardentre- Americaneconomies.Thebottlenecksthat
preneurialactivity.Theyareintact,completely emergedforcedthetemporaryclosureofanumber
undiminishedbytheSeptembertragedies.People ofproductionfacilitiesbecausepartscouldnot
aremotivatedbytheintellectualandfinancial bedelivered“just-in-time.”Expertshavecon-
rewardsofbuildingcompanies,developingnew cludedthatitisnotlikelythatthoroughsecurity
productsandservices,andservingmarkets.They inspectionscanbecompletedefficientlyatcen-
willbelookingforopportunitiestomovetheU.S. tralizedsitessuchasbordercrossings.Ifso,then
economyforward. withoutsubstantialinnovation,someofthecost
Wearealreadyseeingsuchforcesatwork. savingsthathavebeenrealizedinrecentyears
Manufacturersofequipmentgenerallyusedto throughreducedinventorieswillbelost.
preventbacterialcontaminationoffoodhave WhileIhavenoexpertiseinthissubject,itis
appliedelectronbeamtechnologytodecontami- possibletoimagineapproachesthatmightreduce
natemailsentthroughvariousWashington,D.C., suchproductiondisruptions.Satellitetracking
postalfacilities.Atthispoint,neitherthecost technologyisnowincommonusebytrucking
northenecessityofapplyingthistechnology companies.Entrepreneurscanconceivablyextend
broadlyhasbeendetermined.Researchersatthe thistechnologytomonitorvehiclesthathave
MayoClinichaveannouncedthedevelopment beeninspectedandsealedatdispersedpoints-
ofanapparentlyreliableone-daytestforanthrax of-originsothatfulltruckloadscanbecleared
exposure.IfapprovedbytheFDA,thistestwill throughbordercrossingselectronically.
savevaluabledayseitherinstartingacourseof BeforeSeptember11,therewasmuchdiscus-
treatmentforinfectedindividualsorreassuring sionaboutexcesscapacityinthetelecommunica-
othersthattheirhealthisnotatrisk.Researchers tionsindustry.Asaresultoftheattacks,business
atSaintLouisUniversityhavebeenstudyingthe contingencyplannersarerethinkingthecosts
dispersionpatternsofdustandcatallergens. andbenefitsofconcentrationversusdispersalof
Untilrecently,theirresearchobjectivehasbeen productionsitesandcomputerfacilities.The
toalleviateallergysufferingandtopreventlead attacksdemonstratedthattheInternetsatisfied
poisoning.Nowtheyareexaminingwhethertheir theoriginaldesignspecificationsthatwerelaid
findingscanassistinunderstandinghowbiolog- downbytheDefenseDepartmentlongbeforethis
icalagentssuchasanthraxsporesaredispersed. technologywasadaptedtocivilianuse.
Theseareexamplesofhowexistingtechnology Communicationthroughe-mailwasmaintained
istransferredtoaddressnewlyemergingproblems formanyfirmsinNewYorkCityevenwhenthe
andtodevelopnewproductsandservicesinan wiredtelephonesystemfailed.Witharevision
entrepreneurialenvironment. intheassessmentofthelikelihoodoffuture
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MarketResponsestoEconomicStress
attacks,thecasemaybetippedinfavorofmore demandpermanentlyawayfromtheoutputof
decentralizedfacilities.Inthisevent,theremay oneindustryandtowardtheoutputofanother
beasubstantialincreaseindemandforfiber industry,theseprovisionsonlyaffectthetransi-
opticcommunicationscapacity. tionfromaninitialenvironmenttothenew
Improvedtechnologyforpassengerandbag- environment.Forexample,airlinescurrentlyare
gagescreeningatmajorairportsisalsoanarea experiencingcostlyadjustmenttoreducedpas-
wherethereisconsiderablepotentialforprofitable sengerloadsbecausesenioritylistsforpilotsare
innovation.Thistechnologyissueisseparate notalignedwithflightcertificationlistsforthe
fromtheissueofwhetherscreeningservices optimalmixofequipment.Adjustmentofcapacity
shouldbeproducedbyprivatesectorfirmssubject requirestherecertificationofmoreseniorpilots
tofederalsupervisionorproducedbyfederallaw onsmallerplanes.Oncetheretraininghasbeen
enforcementpersonnel.Airlinesnowrecommend accomplished,thesefirmswillbeabletooperate
thatpassengersarriveatmajorairportstwohours efficientlyatthelowerlevelofdemand.
inadvanceofdeparturetimetoallowforcheck- Firmsandjobsarecreatedanddestroyed
inandsecurityclearance,anincreaseofone continuouslyinoureconomysothatultimately
hourfromtherecommendedlead-timepriorto ourresourcesareutilizedinthemostproductive
September11.Thisadditionallead-timeisasub- activities.Thischaracteristichasbeennotedfre-
stantialincreaseinthecostofairlinetravelto quentlyoverthepastseveralyearsasanexplana-
consumersaboveandbeyondanyhigherticket tionofwhy“high-tech”haspenetratedproduction
pricesorusertaxestocovertheexpenseofthe processesheremorequicklyandmoreintensively
moreintensivesecurityscreening. thaninothercountries.Thus,Ibelievethatthe
Mypersonalexperience,matchingtheexpe- transitiontoaneconomythatconsumesahigher
rienceofmanyothersI’vetalkedto,isthatthe levelofsecuritycanbeaccomplishedwithlittle
timeinvolvedincheck-inandsecurityscreening ifanydisruptionofthelong-termproductivity
ishighlyvariable,increasingtravelerfrustration trendsthatarethesourceofourincreasingstan-
andamplifyingtheincreasedcostofairlinetravel. dardofliving.
Overthelongrun,suchincreasesincostcanbe Regulatoryconditionsarealsofavorablefora
expectedtoprovokesignificantsubstitutionof smoothadjustmentofoureconomyinlightofthe
othermodesoftravel,particularlyforshortand newthreatofterrorism.Amarketsystemworks
intermediatedistancetrips.Nevertheless,even mosteffectivelywhenpricescansignalwhere
aftersuchsubstitution,thetotaltimecostsof resourcescanbeusedmosteffectively.Inthe
travelwillbeincreased.Theadditionaltravel currentsituation,wearemuchbetterpositioned
time,aggregatedoveralltravelersoverthecourse thanwasthecaseinsomesignificanthistorical
ofayear,representsasignificantresourcelossto situations.WiththeoutbreakoftheKoreanWar,
oursociety.Innovationsinsecurityscreening pricecontrolsandrationingofcriticalmaterials
processesandimprovedtechniquesformanaging wereinstituted.Oneexampleoftheeffectsof
passengerflowthroughscreeningpointshave thosepoliciesisthatinvestmentinlargestructures
greatpotential. andtheproductionofautomobilesweredisrupted
Governmentpoliciesandthestructureofour byrationingofsteel.Creditcontrolswerealso
laborandcapitalmarketsenableentrepreneurs imposedonmortgageandconsumercredit.All
tobesuccessful.Thoseconditionsareinplace, oftheseregulationsinterferedwiththeabilityof
undepreciated.Relativetootherindustrialized themarketsystemtodirectresourcestotheir
economies,jobentitlementsintheUnitedStates mostproductiveuses.
arerelativelylow.Senioritypractices,jobsecurity In1974,atthetimeofthefirstoilshock,the
provisionsofnegotiatedlaborcontracts,plant remnantsoftheNixonwage-pricecontrolsstill
closurenotificationlaws,andthelikeprovide governedenergymarkets.Everyonewhohelda
someshort-termjobsecuritytoworkers.However, driver’slicenseatthattimewillrememberthe
inthefaceofamajorshockthatsignificantlyshifts longlinesatgasolinestationsinmanypartsof
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FINANCIALMARKETS
thecountry.Simultaneously,gasolinewasreadily thinkbacktotheKoreanWar,theCubanMissile
availableinotherareas.Thepricecontrolsystem Crisis,theKennedyassassination,the1974and
preventedthemarketsystemfromallocatingfuel 1979energyshocks,andotherevents.Iwillnot
toitsmostproductiveuses. trytorankthemagainstthecurrentsituation.But
Amarketsystemworksmosteffectivelywhen Iamconfidentgivenourpriorexperience,given
pricesignalsarenotconfusedbyinflationary oureconomy’scharacteristicsandthecharacter-
expectations.Thereisnoevidencethatbehavior isticsofourpeople,theeconomywillbefine.
sinceSeptember11hasbeenmotivatedbyfear Wewillgetbackoncoursebeforetoolong.
ofinflation.Wesawafewlinesatgasstationson
thatday,basedonunfoundedfearsofaphysical
shortageratherthanafearofsharplyhigherprices. CONCLUDING COMMENTS
Iemphasizethispointbecauseinprevious
I’veemphasizedtheimportanceofcompetitive
crises—again,theoutbreakoftheKoreanWaris
marketsinspeedingtheadjustmentoftheU.S.
aclearexample—fearofrisingpricesconsider-
economytonewcircumstances.Lowinflation,
ablycomplicatedthesituation.Thatwetakeprice
andsolidexpectationsofcontinuinglowinflation,
stabilityalmostforgrantedisagreatstrengthof
arealsoofgreatimportance.Weenjoyother
ourcurrentcondition.
strengthsthatleadmetobeoptimistic.Before
Equallyimportant,amarketeconomyrequires
theattacks,thefederalbudgethadasubstantial
thathouseholdsandfirmsbeabletomakeand
surplus,whichmeantthatthefederalgovernment
receivepaymentsreliably.Intheimmediateafter-
couldapplynecessaryresourcestomeetingour
mathofSeptember11,theFedprovidedahuge
militaryandhomelandsecurityneedswithouta
amountofliquiditythroughvariouschannels
prolongeddebateaboutwhetherwecouldafford
andmadecashreadilyavailablesobankscould theseoutlays.Moreover,thebankingsystemand
keeptheirATMsstocked.Intheseandotherways, insuranceindustrywerewellcapitalized.Large
theFederalReservehasworkedlong,hard,and insurancelosseshavenotshakenthefinancial
effectivelysinceSeptember11tokeepthepay- stabilityofinsurancefirms,norarebanksfinan-
mentssystemworking.Withindays,asfinancial ciallystressedastheywereatthetimeofGulf
marketsandthetransportationsystembeganto WarandDesertStormin1990-91.
functionagain,theincreaseddemandforliquidity Finally,byaccidentoftiming,wealreadyhad
subsidedandtheFedallowedtheshort-runliq- inplacesubstantialmonetaryandfiscalstimulus
uidityinjectionstomature. onSeptember11.Monetarypolicyhadeased,
I’veemphasizedthatnear-termadjustmentsare andfiscalpolicyhad,too.Furthereasingsteps
alreadyoccurringintheeventsofSeptember11. areinplace.Forallthesereasons,Iamnotonly
Theseadjustmentsneednothaveamajorpersist- optimisticaboutthelongrunbutbelievethatwe
ingaggregateeconomicimpact.Letmeuseasail- willseesignsofrenewedeconomicgrowthbefore
inganalogy,drawnfrommymanyyearsofsailing toolong.Ihavenowaytosetaprecisetimetable
smallboats.IknowtheracingmarkIhavetogo forrenewedgrowth,butagreewithprofessional
around,butsometimesgetpushedoffcourseby economicforecastersthatweneedtothinkin
anadversewindshiftorsquall.Thoseshort-run termsofmonthsratherthanyears.
eventsdonotpreventmefromreachingmyobjec- Mymessageisthatthecomingrevivalisnot
tive,althoughtheymaymakemypassageslower. anaccident.Itisaconsequenceofthefundamen-
ThenaturalstateoftheU.S.economyisgrowth talsoftheU.S.economy,whichareasstrongnow
andfullemployment.We’llgetthere. astheyhaveeverbeen.Letmere-emphasizethat
Idonotwanttominimizethesizeofthecur- thetimingisuncertainandthatwecouldhave
rentshock;Idowanttocautionagainstmaximiz- nastysurprisesaheadofus.Butwehavelotsgoing
ingit.Theeconomyhaspushedaheadfollowing forusandamplereasontobethankfulinthis
previousshocks.Inmypersonalexperience,I Thanksgivingweek.
4
Cite this document
APA
William Poole (2001, November 19). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20011120_poole
BibTeX
@misc{wtfs_speech_20011120_poole,
author = {William Poole},
title = {Speech},
year = {2001},
month = {Nov},
howpublished = {Speeches, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/speech_20011120_poole},
note = {Retrieved via When the Fed Speaks corpus}
}