Speech

Dynamics of the Recession and the Recovery LambuthUniversity Jackson,Tennessee April4,2002 By almost any yardstick, the U.S. willthenanalyzethespecialcharacteristicsof economy performed magnificently therecessiontogainsomeinsightintothelikely during the last half of the 1990s and characteristicsoftheexpansionnowgettingunder into early 2000. Paced by tremendous way.Iwillconcludewithadiscussionoftwo increases in the nation’s capital stock, which factorsthatIbelievewillbeparticularlyimpor- helped boost productivity growth to rates not tantforthegrowthofrealoutputovertheyears seen on a sustained basis since the 1950s and ahead. early 1960s, real GDP growth averaged a little Beforeproceeding,Iwanttoemphasizethat more than 4 percent from 1995 to 2000. More- theviewsIexpressherearemineanddonot over, inflation declined as output grew more necessarilyreflectofficialpositionsoftheFederal rapidly than it had for many years. ReserveSystem.Ithankmycolleaguesatthe Lastyear’srecessionwasinmanywaysone FederalReserveBankofSt.Louis,especially ofthemostunusualinbusiness-cyclehistory. DanThorntonandKevinKliesen,fortheircom- Outsideofmanufacturing,whichreachedits ments,butIretainfullresponsibilityforerrors. peakinJune2000,theslowdownwasmuchless pronouncedandtooklongertomaterialize.Hence, withsomeindustriescontinuingtogrowin2001 THE 1991-2001 ECONOMIC evenwhileotherswerepullingback,therewas EXPANSION thefeelingthattheeconomymightskirtanoffi- cialeconomicrecession.However,forecasters, Theeconomicexpansionof1991-2001was whohadpreviouslythoughtthatarecession recordsetting.Besidesitslongevity—exactly10 mightbeavoided,changedtheiroutlookimme- years—itwillberememberedforthreekeyfea- diatelyaftertheterribleeventsofSeptember11. tures.Thefirstwastheincreaseinthestructural— Suddenly,recessionwasacertainty.Forexample, ortrend—rateoflaborproductivitygrowth.The theOctoberBlueChipconsensusforecastsfor burstofproductivitygrowthwas,inlargemeas- thethirdandfourthquartersof2001wererevised ure,duetosignificantbusinessexpenditureson downto–0.4percentand–1.3percent,respec- fixedcapitalassets,particularlythoseinthe tively,fromthepre9/11forecastsof+1.3percent informationprocessingequipmentandsoftware and+1.6percent.ItwasnotuntillateNovember category. 2001,however,thattheBusinessCycleDating Theseconddistinctivefeatureofthe1991- CommitteeoftheNationalBureauofEconomic 2001expansionwasaspectacularappreciation Researchdeterminedthatthenation’srecord-long infinancialassetprices.TheFederalReserve’s businessexpansionhadendedinMarch2001. FlowofFundsdatashowthatthemarketvalue Toproperlyunderstandthedynamicsofthe ofcorporateequitiesheldbyU.S.residents lastrecession,weneedfirsttoidentifythekey increasedfrom$3.5trillionattheendof1990to characteristicsoftherecord-longbusinessexpan- $20.3trillionbytheendofthefirstquarterof sionthatprecededit.ThatiswhereI’llbegin.I 2000.Thisincrease,roughlya21percentannual 1 ECONOMICFLUCTUATIONS rateofgain,wasphenomenalbyhistoricalstan- Inviewofitsmildness,somehaveasked dardswhenbenchmarkedagainstthesizeofthe whetherwehadarecessionatall.TheBusiness economy.Duringmuchofthepost-WorldWarII CycleDatingCommitteehasindicatedthatitis period,themarketvalueofcorporateequitiesas notinclinedtorescinditscall.Theeventwillbe apercentofnominalGDPrangedfromjustunder knownbywhatevernametheNationalBureau 40percenttoalmost100percent.Butfromlate choosestocallit.I’vecalleditthe“Pluto 1990toearly2000,thisshareskyrocketedfroma Recession”—aftertheplanet,notthedog.My littleunder61percenttonearly210percent.Of monikerstemsfromthefactthatastronomers course,muchofthisboomwasdrivenbyexcesses argueoverwhetherPlutoisreallyaplanet.Some intechstocks,buteventhebroadandcompre- sayitisclosertobeingachunkoficethanasmall hensiveWilshire5000Indexsawextraordinary planet—ontheborderline,atbest.Anyborder- growth. lineobjectis,bydefinition,borderline.Rather thanengageinauselessdebateresultingfroma Thethirdkeydevelopmentwasthesteady fuzzydividingline,let’sjustcall2001theyear declineininflationtoaratethatapproximates ofthePlutoRecession. pricestability.Thoughonecouldprobablylist Thisrecession,likeallpreviouspost-World severalotherimportantdevelopments,Ibelieve WarIIrecessions,wasdominatedbyasubstantial thatthesearethemostimportant.Moreover,and swinginbusinessfixedinvestment.Afterlittle moreimportantlyforpresentpurposes,thethree growthduringthefourthquarterof2000andthe characteristicsofthelate1990sI’veemphasized firstquarterof2001,businessexpenditureson setthestagefortherecessionthatwejustwent capitalgoods—structuresandequipmentand through. software—fellsharplyoverthefinalthreequarters of2001.Thisinvestmentbust,though,cameon theheelsoftheinvestmentboomofthelatterhalf CHARACTERISTICS OF THE 2001 ofthe1990s:From1995to2000,investmentin RECESSION equipment,software,andstructuresgrewatan averageannualrateof10.6percent,muchhigher Onecanpointtoseveraldistinguishingchar- thanthe3.9percentratefrom1973to1995.Look- acteristicsofthe2001recession.Iamusingthe ingatthecompositionofthelate1990ssurgein pasttensebecauseIaminclinedtobelievethe spendingshowsthatfirmschosetodevotean recessionisover.Whileitispossiblethatrecent increasingshareoftheircapitalbudgetstopur- dataaredeceivingus,Ibelievethattherecession chasesofhigh-techcapital:From1995to2000, mostlikelyendedinDecember2001orJanuary realinvestmentininformationprocessingequip- 2002.ThefinalcallwillbewiththeBusiness mentandsoftwareroseatanannualrateof20.2 CycleDatingCommitteeoftheNationalBureau percent,whereasfrom1973to1995spendingon ofEconomicResearch.Iftherecessionendedin thesecapitalgoodsroseata13.2percentrate.By January,itwillhavelasted10months—justshort theendof2000,high-techinvestmentexpendi- ofthe11-monthaverageforpost-WorldWarII tureswereroughly37percentoftotalbusiness recessions.However,therecessionwasverymild. fixedinvestment,morethandoubletheroughly RealGDPdeclinedonlyamodest1.3percent 15percentshareseenin1973.Bycontrast,the annualrateduringthethirdquarter,andnoother shareofbusinessfixedinvestmentinstructures quarterexperiencednegativegrowth.Assuming declinedfromanall-timehighofroughly42per- that2002:Q1experiencedreasonablysolidgrowth, centinearly1982,tojustunder24percentby whichseemslikely,thefour-quartergrowthrate early2000. neverdroppedbelowzero.Incontrast,theaver- Theendproductofthisinvestmentboom agepeak-to-troughdeclineinrealGDPduring wasahugeincreaseinthegrowthofU.S.manu- post-WorldWarIIrecessionswasabout2percent. facturingcapacity.Thecapacityincreaseout- 2 DynamicsoftheRecessionandtheRecovery strippedoutputgrowthforseveralyears,leaving typicalrecessions,long-terminterestrates agapofexcesscapacity,especiallyinthearea declinedsignificantlyinadvanceofthecycle ofhigh-techequipmentsuchascomputersand peak.Inthetypicalrecession,long-termrates semiconductors.Forexample,from1995to2000, riseuntilthecyclepeak,giveortakeamonthor whilerealGDPgrewatanannualrateabitabove two.Thistime,however,thepeakinthe10-year 4percent,capacityinindustrialmachineryand Treasuryrateprecededthecyclepeakbyabout equipment(includingcomputersandofficeequip- 10months.Asignificantportionofthatdecline ment)grewatan11percentrate.Capacitygrowth inlong-terminterestrateswasattributabletothe washigheryetinthesemiconductorsector.The market’sconvictionthatinflationwasnotanissue, sizeandpersistenceofthisgapbetweenoutput anunderstandingbasedonamonetarypolicy growthandgrowthofmanufacturingcapacity thathasconsistentlypursuedtheobjectiveof wasunprecedentedforanexpansionphasedur- maintainingalowandstablerateofinflation.A ingthepost-WorldWarIIperiod. measureofinflationexpectationsisthespread Thesurgeininvestmentininformationand betweenthe10-yearconventionalandinflation- telecommunicationsinvestmentdidyieldasurge adjustedTreasurysecurities.Thatspreaddeclined inlaborproductivitygrowth,asfirmsreplaced byabout70basispointsduringtheyearpriorto outdatedequipmentwithnewequipmentembod- therecession’sonset.Aslong-terminterestrates iedwiththelatesttechnology.Theboostineco- camedownfollowingthespringof2000,resi- nomicefficiency,accordingly,gaverisetosizable dentialfixedinvestmentreceivedasignificant gainsinrealincome,earnings,andprofits.The boost.Theboostwasnotsufficienttocompletely lattertwodevelopments,ofcourse,helpedfuel offsetweaknessinothersectorsoftheeconomy, thetremendousriseinequityprices—particu- particularlythemanufactureofhigh-techcapital larlythoseoftechnologyfirms.Atsomepoint,it goodsandstructures,butwasimportantinlimit- appearsthatmarketparticipantsdecidedthatthe ingtheseverityofthedownturnintheaggregate paceofinvestmentinhigh-techcapitalgoods economy. hadoutstrippedthelong-termearningsprospects Inventoryinvestmentalmostalwaysplaysan ofmanyhigh-techfirms.Asexpectationswere importantroleineconomiccontractions.The broughtintoalignmentwithlong-termeconomic 2001recessionwasnoexception.Indeed,the realitiesandfirmsre-evaluatedtheirneedfor inventorycyclethistimewasaspronouncedas high-techequipment,equityprices—particularly anysinceWorldWarII.Theinventory-salesratio, thosereflectedintheNasdaqindex—descended measuredbytheratioofrealinventoriestoreal fromtheirstratosphericlevel. finalsales,isperhapsthebestmeasureofinven- Incontrasttotheplungeinbusinessfixed torybehavior.Thisratiotendstoturnupabout investmentduringtherecession,residentialfixed sixmonthsbeforethecyclepeak,asfirmsaccu- investmentgreweveryquarter,exceptforthe mulateunwantedgoodswhendemandgrowth fourthquarteroflastyear.Typically,housing slows.Then,theratiotypicallyincreasesmod- tendstoturndownaboutninemonthsbeforethe estlyforaboutthreemonthsintotherecession. peakoftheexpansion,andthencontinuesto Asfirmsliquidateexcessstocks,therecession contractforaboutsixmonthsintothedownturn. deepens.Asinventoriescomeintolinewith Inthe2001recession,however,realresidential sales,theratiobeginstoedgedownwardasthe fixedinvestmentbegantopickupbeforethecycle recessionendsandthenextexpansiongains peakandremainedstrong.Thisisaninteresting momentum. pointbecauseitshowsthattherecessionwas Inthe2001recession,however,theinventory- notlinkedtoinvestmentpersebutinsteadtoa salesratiorosethreemonthsbeforethecycle particularcomponentofinvestment. peakandthendeclined.Asthemanufacturing Ibelievethatonereasonthathousingfared sectorbegantoweakeninmid-2000,firmsseemed sowellduringtherecessionwasthat,unlike particularlyeagertoaggressivelyculltheirstock 3 ECONOMICFLUCTUATIONS ofinventories.Thisinventorydraw-downcon- monthlypatternofrealconsumerspendingwhen tinuedinearnestinto2001,culminatingina determiningcyclicalturningpoints. $119billiondropininventoryinvestmentinthe Thistimearound,however,realPCEkept fourthquarterof2001.Thisinventoryliquidation, increasingthroughoutmostof2001—albeitata relativetorealGDP,wasthelargestforanysingle modestlyslowerrateofgrowth—ratherthan quartersinceWorldWarII.Infact,theinventory decliningearlyintherecession,asisusuallythe liquidationoverthefourquartersoflastyearhas case.Evidently,consumerswerenotsufficiently notbeenseensincethe1948-49recession. persuadedtocutbackontheirexpendituresto Itisreallyquiteremarkablethattheinventory thedegreethatmanufacturerswere.Lastyear’s liquidationwassolargeconsideringthatthe taxcutslikelyhelpedbolsterhouseholdincomes recessionitselfwassomildcomparedwithone and,hence,spending.Inanyevent,inthefourth like1981-82.AsChairmanGreenspanhasnoted quarter,consumerspendingcameroaringback, onseveraloccasions,onepossibleexplanation surgingata6.1percentannualrate—apacenot forthebehavioroftheinventory-salesratiothis seenforthreeandahalfyears.Muchofthe timeisthatinnovationsininformationtechnology strengthwasconcentratedinconsumerdurables, andmanagementprocessesallowedfirmstoadjust whichroseattheastoundingannualrateof39.4 totheemergingslowdownquickerthaninprevi- percent.Inanaveragerecession,realconsumer ousrecessions. durablesexpendituresdeclineabout3.5percent. Thefinaldistinguishingcharacteristicofthe Butbetweenthefirstandlastquartersoflast 2001recessionwasthebehaviorofconsumer year,consumerdurablespurchasesroseby10.8 spending.Economistsandpolicymakerstendto percent.Akeypartofthestorywasnewvehicle payparticularlycloseattentiontoconsumer production,whichsurgedinresponsetothe spendingbecauseitisbyfarthelargestcomponent exceptionallyrichsalesincentivesofferedby ofaggregateoutput—encompassingroughly70 automotivemanufacturersintheaftermathof percentoftotalGDP.Whatisoftenignoredisthe September11.Theseeventswereobviously relativestabilityofalargechunkofconsumer uniquetothisrecession. spending:Roughly88percentoftotalconsumer AfactorthatIbelieveisimportantforunder- spendingisonservicesandnondurablegoods, standingthestrengthinconsumerspendingdur- whichtendnottofluctuateagreatdealquarterto ingthelastrecessionistheatypicalbehaviorof quarter.Theremaining12percentofconsumer short-terminterestrates.Typically,short-term expendituresisspendingondurablegoods, interestratesriseuntilthecyclepeakandthen which,becauseexpenditurepatternsoftenchange declinesubstantially,usuallyuntiltheneighbor- quicklywhenrealincomesandinterestrates hoodofthecycletrough.Thistimearound,short- change,isrelativelyvolatile.Durableconsump- terminterestratesbegantodeclineaboutfour tiongoodsarereallyaformofhouseholdinvest- monthspriortothecyclepeak.Thereasonwas ment,anddemanddependsonmanyofthesame thatpolicymakersrespondedmuchmorequickly basicdeterminantsasdoesbusinessdemandfor duringthisrecessionthanduringpreviousreces- capitalgoods.Aswithresidentialinvestment sions.TheFOMCbeganreducingitstargetfor duringthisrecession,thebehaviorofconsumer thefederalfundsratethreemonthsbeforethe durablespointstothespecialnatureofthedown- cyclepeak.Moreover,comparedwithprevious turninbusinessinvestment. recessions,theFOMC’sratecuttingwasvery Onaverage,realconsumerspending,other- aggressive.Theeffectivefundsratewasreduced wiseknownasrealpersonalconsumptionexpen- by475basispointsfromJanuarytoDecember. ditures,orPCE,peaksatthesametimeasthe Hence,itseemstomethattherecession’s officialNBERcyclepeak.Ofcourse,onereason comparativemildnessisdueinlargeparttobetter forthecoincidenttimingisthattheNBERCycle monetarypolicy.AsIhavejustmentioned,the DatingCommitteepayscloseattentiontothe FOMCrespondsquicklyandaggressivelytosigns 4 DynamicsoftheRecessionandtheRecovery thattheeconomywasweakening.Butjustas tialfixedinvestmentwasessentiallyflat;realPCE important,andperhapsmoreso,forsometime contributed+2.2percentagepoints;thegovern- nowtheFOMChaspursuedapolicyofreducing mentsectorcontributed+0.9percentagepoints; thelong-runinflationratetoalevelwherecon- andrealnetexportscontributed–0.2percentage cernsaboutinflationplayaminorroleineco- points. nomicdecisionmaking.Thislong-termpolicy Tosumup,hereiswheretheeconomystands hasnotonlysucceededinfosteringasignificantly headingoutoftherecession:consumptionisrel- improvedinflationoutlook,butalsohasenhanced ativelystrong;fixedinvestmentisrelativelyweak; theFed’scredibilityasaninflationfighter,thereby inventoriesarequitelean;housingwasstrong affordingtheFOMCconsiderableleewaytoact earlyintherecession,buttailedoffduringthe aggressivelytoreducethefederalfundsratedur- fourthquarterof2001.Moreover,thereislittle ingthisrecession.Finally,becausethemarket strengthinforeigndemandforU.S.goodsand understandsthisprocess,long-termratesbegan services. todeclinelongbeforetheFOMCactedtoreduce Whileadeclineininvestmentspendingtypi- thetargetfederalfundsrate.Longratesreflect callyisanimportantfactorinanexpansion‘s anticipationsoffutureshortrates;thedeclinein demise,itisalsousuallyanimportantfactor longratesisevidenceofmarketanticipationsof pullingtheeconomyoutofmostpostwarreces- whattheFOMCdid,atleastinbroadoutline. sions.Thepayofffrominvestmentopportunities Monetarypolicywasnottheonlyfactorwork- onproposedplantandequipmentexpenditures ingtooffsettheeconomicdownturn,asother thatappeardubiousorspeculativeshortlybefore economicforceswerealsoatwork.Akeyreason andduringtherecession,suddenlybecomemore fortheapparentstrengthofthisrecoveryisthe favorableduringtherecovery. spectacularpaceoflaborproductivitygrowth Onaverage,fourquartersafterthetroughof duringtherecession.Nonfarmproductivity businessactivity,realfixedinvestmentincreases increased2percentduringthe2001recession; byabout13percent.Interestingly,though,itisnot thisperformancewassurpassedonlybytheexcep- asurgeinbusinesscapitalspendingthatisthe tionallymildrecessionseenin1969-70,andthe catalyst,althoughgrowthisusuallyfairlyrobust milder-than-average1948-49recession.Bycon- (around9percent),butratherthekeydriver trast,productivitygrowthturnednegativeduring behindthesurgeinfixedinvestmentspending the1990-91recession,thoughitdidriseduring earlyinarecoveryisaspikeinresidentialfixed thesubsequentrecovery. investment:Onaverage,realresidentialfixed investmentspendingisnearly26percenthigher fourquartersafterthetrough.Anotherdriving forceduringmostexpansionsisconsumerpur- WHAT WILL THIS RECOVERY chasesofdurablegoods.Spendingonconsumer LOOK LIKE? durablegoodstypicallyincreasesbyabout16 Aswehaveseen,oneofthemoststriking percentduringthefirstfourquartersofarecovery. aspectsoftherecessionwasthedegreetowhich Thequestioniswhetherthesamepattern thecontractionwasconcentratedinthebusiness willholdduringthisrecovery.Ibelievethetypi- investmentgoodssector.Decomposingthecontri- calpatternisunlikelytorecurthistimeforseveral butionofrealGDPgrowth,measuredatanannual reasons.First,thestrengthofresidentialfixed rate,overthelastthreequartersof2001shows investmentspendingduringmostoftherecession thattheroughly0.2percentgrowthinrealGDP suggeststhereislittlepent-uphousingdemand wasapportionedinthefollowingmanner:real onthepartofhouseholds.Second,therecent businessfixedinvestmentcontributed–1.6per- riseinlong-terminterestrateswillinevitablyact centagepoints;realprivateinventoryinvestment todampentheburstinnewandexistinghome contributed–1.1percentagepoints;realresiden- salesthatwesawlastyear.Moreover,thehome 5 ECONOMICFLUCTUATIONS ownershipratecurrentlystandsatnearlyanall- WithPCEgrowthstillfairlyrobust,itisdiffi- timehighof68percent.Duringthelatterhalfof culttoseehowtheeconomycangetalargeboost the1990s,thehousingindustrybenefitedtremen- fromconsumerspending,especiallyif,assome douslyfromasharpriseinthehomeownership havesuggested,consumershavetrulybecome rate,whichhadstayedroughlyconstantat64 moreconservativeinthewakeof9/11.The percentfrom1985to1995.Wedon’treadilyknow inventory-salesratioisverylow,sotheeconomy whyhomeownershipratesbegantoaccelerate. shouldgetasignificantboostasfirmsrebuild Certainly,thesteadydecelerationininflation theirinventories.Allinall,however,Iexpect keptmortgageratesduringthelatterpartofthe thisrecoverytobesomewhatmilderthanthe 1990sconsiderablyloweronaveragethanthey averagerecovery;theaveragefollowingtheeight wereduringmuchofthe1970sand1980s.The post-WorldWarIIrecessionsexcludingtheshort strengthinhousingmayhavebeenrelatedinpart 1980recessionwasabout7.5percentrealGDP tothesurgeinequityvalues,whichafforded growthforthefirstfourquartersofrecovery. manyhouseholdsthewherewithaltobuyrather Goingforward,then,thefactorsIhaveout- thanrent.Inanyevent,itseemsunlikelythat linedabove,alongwiththefactthatthisreces- residentialinvestmentwillgetaboostfromthis sionwasextremelymild,suggesttheprospects factorgoingforward. foratypicalpost-recessionboomarenotterribly Thethirdfactor,theoutlookforbusinessfixed favorable.Thereis,however,acompetingcon- investment,ishardertogauge.Onepossibilityis sideration.Fiscalpolicyturnedmoreexpansion- thattherateofbusinessfixedinvestmentwillbe arylastyear,andmonetarypolicybecame,I somewhatattenuatedrelativetotheaveragepost- believe,highlyexpansionary.Moneygrowthwas warrecovery.AsInotedearlier,thetremendous highandshort-terminterestratesweredriven ratesofgrowthinbusinessexpendituresonequip- downtoalowlevel.Expansionarypolicymay mentandstructuresseenduringthelatterhalfof showupsomewhere,oralittlebitinlotsof the1990sledtobreathtakingincreasesinmanu- places.Theresultcouldbeupsidesurprisesin facturingcapacity—particularlyinthehigh-tech comingquarters. sector.Moreover,withthecostofequitycapital muchhighernowthanitwasinthelate1990s, therelativecostofcapitalmeansthatthebreak- evenpointonproposedcapitalinvestmentproj- SOME LONGER-RUN ects—theso-called“hurdlerate”—isappreciably CONSIDERATIONS highertodaythan,say,twoorthreeyearsago. Theshapeoftheeconomyincomingyears Itisimportanttoremember,however,that willdependcriticallyontherateofproductivity high-techcapitalgoodssuchascomputers, growth.Everyoneisnowawareofjusthowimpor- servers,software,andtelecommunications tantproductivitygrowthwastotheeconomy’s equipmenttendtodepreciatemuchfasterthan performancefrom1995to2001.Althoughthere othertypesofcapitalgoods.Asaresult,relatively ismuchwedonotunderstandaboutproductiv- fasterratesofgrossinvestmentwillbeneededto itygrowth,itappearsthatthestructural,orlong- keepthenetinvestmentrateconstant.Moreover, businessfixedinvestmentislikelytogetaboost run,growthrateofnonfarmlaborproductivityis fromthefactthattherealpriceofhigh-techgoods about2.5percent.Thisisasizableincreasefrom islikelytocontinuetodeclinesomewhat,sothat theroughly1.5percentgrowthexperiencedfrom thehurdlerateforhigh-techgoodsislikelyto 1973to1995.Growthofthelaborforceadds continuetodecline.Finally,continuingoppor- another1percenttoGDPgrowth;thus,areason- tunitiesforproductivitygainsfromtheapplica- ableworkingassumptionisthatpotentialoutput tionofnewtechnologymaysustainahighrate shouldgrowintheneighborhoodof3.5percent. ofinvestment. Ifproductivitygrowthremainsatthishigherlevel, 6 DynamicsoftheRecessionandtheRecovery theboosttotherealincomesoffuturegenerations tantcontributionmonetarypolicycanmaketoa willbelarge. highrateofeconomicgrowthistomaintaina Thesecondissueisthelong-terminflation lowandstablerateofinflation.Byvirtueofpast rate.Theeconomy’sperformanceinrecentyears— successontheinflationfront,in2001,monetary boththehighrateofgrowthinthe1990sandits policywasabletorespondvigorouslytoforestall resilienceinthefaceofrecessionandtheshock adeeprecessionandtolaythefoundationsfor ofSeptember11—isevidenceofthepayofffrom therecovery.Lastyear’spolicyactions,combined sustainedlowinflation.TheFederalReserveis withtheeconomy’snaturaldynamics,provide ultimatelyresponsibleforthetrendrateofinfla- theingredientsforasolidrecovery.Thestrength tion,andIseenoreasonwhypastsuccesson anddurationoftheexpansionjustnowbeginning, thisfrontcannotbeextendedindefinitely.Itis however,ultimatelydependonpolicymakers certainlytruethatmaintaininglowinflationis remainingfocusedonkeepingtheinflationrate inherentlyeasierthanbringinginflationdown. lowandstable.Astheeconomysettlesintoa Butsuccessinmaintaininglowinflationwillnot patternofsustainedgrowth,policywillalsoadjust comeautomatically—theFedmustnotfallasleep fromrecession-fightingmodetoeconomic-growth attheswitch. mode.Unlessforecastersarefaroffbaseintheir viewoftheeconomy’sprospects,intimeshort- terminterestrateswillrisetomaintainamonetary SUMMING UP policyconsistentwithlong-runpricestability. Thetimingofsuchrateincreasesisnotsomething AsamemberoftheFederalOpenMarket thatcanbeplannedindetail,butwilldepend Committee,Iamalwayssensitivetodevelop- onthearrivalofinformationontheeconomy’s mentsthatcouldthreatenthenation’stwomain progressandonpossibleriskstopricestability. macroeconomicgoals:pricestabilityandsus- Althoughnoonecanruleoutsurprises,the tainedeconomicgrowthwithfullemployment. economyisstableandpoisedforhighergrowth. Whilealltoooftenthesegoalsofgrowthandlow Thatiscertainlyapleasantenvironmentforpol- inflationareseenascompeting,intruththeyare icymakers,anditisnicetobeabletoendthese congruent.Theexperienceofthe1990sshould remarksonthatnote. puttorestthenotionthatpricestabilityisincom- patiblewithlowunemployment.Themostimpor- 7

William Poole (2002, April 3). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20020404_poole

@misc{wtfs_speech_20020404_poole,
  author = {William Poole},
  title = {Speech},
  year = {2002},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20020404_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}