speeches · August 25, 2002

Speech

William Poole · President

Taking Stock: The State of the Business Recovery MidwesternStatesAssociationofTaxAdministratorsConference HyattRegencyUnionStationHotel St.Louis,Missouri August26,2002 Thirty-fiveyearsago,in1967,economists Iwillthentakestockoftheshort-runsitua- metataconferencetodiscusstheques- tion—ourrecoveryfromthe2001recession.While tion, “Is the Business Cycle Obsolete?” weallwantamorerapidrecoverythanwehave (The conference proceedings were observedinrecentmonths,Ibelievethattheevi- published in a book with the same title. Martin dencesupportstheviewthatrecoveryisunderway Bronfenbrenner, ed., Wiley Interscience, 1969.) andismostlikelytocontinue.Finally,I’llwalk The answer to the question from those proceed- youthroughthreescenariosofwheretheeconomy ings was a tentative “maybe,” with some partici- mightgofromhereandpossibleimplicationsof pants believing that the cycle was obsolete and thesealternativesformonetarypolicy. otherswillingatmosttoarguethatseveredown- Beforeproceeding,Iwanttoemphasizethat turns were a thing of the past. Over the years theviewsIexpressherearemineanddonot since that discussion, history has proven that necessarilyreflectofficialpositionsoftheFederal the U.S. economy is not recession-proof: the ReserveSystem.Ithankmycolleaguesatthe U.S. economy experienced six recessions—in FederalReserveBankofSt.Louis,especially 1970,1973-75,1980,1981-82,1990-91,andmost BobRascheandKevinKliesen,fortheircom- recentlyin2001.Moreover,the1981-82recession ments,butIretainfullresponsibilityforerrors. was pretty severe, with the unemployment rate rising to just under 11 percent. Although the business cycle is clearly still a fact of economic LONG-TERM PROGNOSIS life,expansion,notrecession,isthenormalstate of our economy. Infocusingonthenear-termeconomicout- Inassessingthehealthofaneconomy,itis look,wetoooftenfailtoadequatelyconsider importanttodifferentiatebetweenshort-run thoseforcesthatultimatelydetermineourfuture fluctuationsandlong-runtrends.Arecessionis livingstandards.Sinceexpansionofoutputand likeacold,perhapsmild,perhapsmiserable,but employmentisthenormalstateoftheU.S.econ- itpassesinduetime.Themostimportantissue omy,thedeterminantsofhowrichorpoorfuture foranyeconomyisitslong-runhealth,notits generationswillbeshouldalwaysbeinthefore- inevitabletemporarysetbacks. frontofourthinking.Sustainedlowerinflation, Iwillfirsttakestockoftheunderlyingtrends andthelowerinflationexpectationsthatgowith inoureconomy.Myconclusionisthatthebasic thatachievement,andfasterproductivitygrowth healthofoureconomyinrecentyears,andmost havebecomesoacceptedaspermanentfeaturesof probablyforyearstocome,issubstantiallybetter theU.S.economythatweareindangeroftaking thanitusedtobe.Inflationislowandsteady themforgranted. andexpectedtoremainso.Productivitygrowth Ifthelast25yearshavetaughtusanything,it isup,andexpectedtoremainso.Thosearetwo isthatoureconomydoesmuchbetterwheninfla- keyfeaturesofoureconomicsituationoverthe tionislowandstableand,equallyimportant, longerrun. whenfirmsandhouseholdsexpectittoremain 1 ECONOMICOUTLOOK thatway.Clearly,thisdevelopmentdidnotoccur TheFed’scommitmenttopricestabilitywas byaccident.Thecurrentperiodoflowandstable cementedfurtherinthe1990s.Inflationgradually inflationoccurredbecausetheFederalReserve fell,andbythelate1990svariousmeasuresof successfullyimplementedastrategytoachieve expectedlong-terminflationsettledintheneigh- andmaintainthatoutcome.Thesuccessofthis borhoodof2to2½percent.Wehavemadealot policybolsteredtheFed’scredibilitywithWall ofprogressontheinflationfront.Thisclimateof StreetandMainStreet,therebybringinglong-run pricestabilityprovidesasubstantialbaseforthe inflationexpectationsdowntorelativelylow futuregrowthofoureconomyanditalsopermits levelsandreducingtheresponsivenessofthose theFederalReservetoreactmuchmorevigorously expectationstoshort-runfluctuationsinour toshort-rundevelopmentsthanwouldotherwise priceindexes. bethecase. Someofyoumayhavevividmemoriesof Inthelongrun,anation’sstandardofliving, whatoursituationwaslikewhenpricelevelinsta- oftenmeasuredasthegrowthofrealGDPper bilitywasthenorm.Inflationroseafter1965and capita,isafunctionofaveragelaborproductivity reachedalevelfrom1979to1981thataveraged growth.TotalGDPgrowthdependsonbothlabor nearly11¾percentayearasmeasuredbythe forceandproductivitygrowth.Laborforcegrowth consumerpriceindex.Giventhe1to3percent isafunctionofpopulationgrowthandimmigra- ratesofinflationthathadbeenthenormduring tionratesandisrelativelyconstantyearbyyear. muchofthe1950sandearly1960s,theinflation Uncertaintyoverourlong-runprospectsforGDP ofthe1970swasadisturbingdevelopment.The growthislargelyafunctionofuncertaintyover substantialerosioninthepurchasingpowerof productivitygrowth.I’llconcentrateonthesim- theU.S.dollarfrom1965to1981causedgreat plestproductivitymeasure—laborproductivity— pain,culminatinginthedeepestrecessionsince whichisoutputperhouroflaborinput. theGreatDepression.Sinceinflationcamedown, Between1973and1994,thegrowthoflabor we’veexperiencedonlytworecessions,bothmild. productivityaveraged1.4percentperyear.Since Notsurprisingly,theeffectsofrisinginflation 1995,laborproductivitygrowthhasbeenabout causedfirmsandhouseholdstoreassesstheirview 1percentagepointhigher.Asimplewaytosee ofpolicymakers’commitmenttopricestability. theimplicationofthisincreaseinlaborproduc- Inflationexpectationsrose,startinginabout tivitygrowthisthat,attheoldrate,outputper 1968.Doubtsaboutmonetarypolicygradually workerdoublesin50years,whereasatthenew increased,andbythelate1970stheFedhadfar higherrateoutputperworkerdoublesin29years. lesscredibilitythanitneededtoconductasuc- Clearly,thelong-runbenefitsofsmallincreases cessfulmonetarypolicy.Thedeeprecessionof inannualproductivitygrowtharesubstantial 1981-82waspartofthecostofthatlostcredibility. whencompoundedoverlongperiods.Giventhat By1980,theBlueChipSurveyofForecasters wehaveanagingpopulation,wehaveagreat showedexpectedannualaverageinflationover needforthishigherproductivitygrowthtopro- thefollowing10yearsintherangeof7to8per- videtheoutputrequiredtosupportboththework- cent.Tenyearslater,thepoliciesofFedChairmen ingpopulationandtheincreasinglylargeretired PaulVolckerandAlanGreenspanhadproduced population. asharpdropininflationexpectations:In1991, Economistswhohavelookedatthesources thePhiladelphiaFed’sLivingstonSurvey,the ofproductivityaccelerationpointmostlytothe BlueChipSurvey,andtheSurveyofProfessional tremendousincreasesinthestockofbusiness Forecastersallshowedthatforecastersexpected capitalequipmentandsoftwareduringthelast CPIinflationtoaverageabout4percentover severalyears.Butthekeyisnotjustmorecapital the10-yearforecastinghorizon.That4percent perworker.Newtechnologyrequireschanged expectedrateforthe1990swasclosetoactual businessprocessestobefullyeffective.Thinkof experienceinthe1980s. theubiquitousnatureofpoint-of-salescanners, 2 TakingStock:TheStateoftheBusinessRecovery whichhaverevolutionizedinventorymanage- hungupontheseprecisenumbers,becausethe ment,computer-assisteddesignsoftwareand currentlyavailablesecondquarterdatacomefrom computer-assistedmachinecuttingtools,cell theadvanceestimateofGDPanditscomponents. phones,copiers,theInternet,andapanoplyof Theseestimatesaresubjecttorevision.Butother othertechnologicalinnovations.Allofthesehave informationalsosupportsthebasicpictureofan changedthewaywedobusiness.Newtechnology economythatisgrowingonlyslowly,andthatis alsointeractswithgovernmentpoliciesand themainpoint. requiresthattheychangeovertime.Twoimpor- Clearly,atthisstageoftherecovery,astalling tantareasonthisfrontarereformsinregulatory outofgrowthofrealfinalsalesiscauseforcon- policyandreducedrestrictionsoninternational cern;inatypicalrecoveryperiod,theeconomy tradetotakeadvantageofefficienciesfromserv- isgrowingmuchfasteratthisstage.Partofthe inganddrawingonworldmarkets. explanationisthattherecessionwasunusually Recentdatarevisionsloweredtheestimateof mild,whichleadstotheexpectationthatthe theaveragegrowthrateoflaborproductivityover recoverywillalsobemoremildthanusual. thepastthreeyearsbyabout¼ofapercentage Anotherpartoftheexplanationisthatthisreces- point.Neverthelessproductivitygrowthremained sionwasconcentratedintheareaofbusinessfixed robustbyhistoricalstandardsduringthe2001 investment;householdspendingonhousingand economicrecession,givingcredibilitytothefore- consumerdurablesheldupfarbetterthanusual castthattheproductivityslowdownof1973-94 inarecessionperiod. isindeedtrulyover. Althoughbusinessfixedinvestmenttendsto behighlycyclical,thedropinbusinesscapital spendingin2001wasmuchlargerthanusual— probablybecausetheamountofinvestmentthat SHORT-TERM PROGNOSIS tookplacelateintheexpansionwasexcessive— Therehasbeenamarkeddownshiftinthe atleastwiththebenefitofhindsight—particularly growthofU.S.economicactivitysincelatelast incertainsectorssuchastelecom.Fortunately, year.Outputgrowthhasbeenmodest,and realinvestmentinequipmentandsoftware employmentgrowthalmostnil.Thesedevelop- increasedforthefirsttimeinnearlytwoyears mentsarequitenaturallyamatterofconcern. duringthesecondquarterofthisyear;however, Mostofthepressattentionisonthegrowth nonresidentialconstructionspendingremains ofrealGDP,butfocusingonfinalsalesyieldsa veryweak. betterunderstandingoftherecoveryprocess.GDP Thesecondquarterisnowhistory,andwe isthesumoffinalsalesandinventoryinvestment, areintothethirdquarter.Atthisstageperceptions buttheinventorycyclecandistorttheshort-run oftheeconomy’sstrengthgoingforwardare picture.Earlyinarecoveryperiod,realGDP formedbothbyforecastsandbyhighfrequency growthisquitetypicallyboostedbyaninventory datathatare,however,oftensubjecttolargerevi- build-up,orthecessationofaninventorycorrec- sions.Asthedataonincome,production,and tion,andthatwascertainlytrueofthecurrent expenditurescomein,theyaregaugedrelative recovery.Finalsalesprovidesacleanermeasure toourexpectationsandthentheforecastsget oftheunderlyingstrengthofaggregatedemand. revisedaccordingly.Thisprocessisevidentfrom Afterrisingatafairlyrobust4.2percent acomparisonoftheJulyandAugustBlueChip annualrateinthefourthquarterof2001,the ConsensusforecastforrealGDPgrowthoverthe growthofrealfinalsalesslowedtoa2.4percent secondhalfofthe2002.InJuly,theConsensus annualrateduringthefirstquarterof2002.Then, wasroughly3percentgrowthforthethirdquarter inthesecondquarter,thepaceoffinalsales and3¾percentforthefourthquarter.InAugust, groundtoahalt—andevencontractedabit— theseprojectionsweremarkeddowntoabout2½ fallingata0.1percentrate.Weshouldnotget and3percentgrowth,respectively. 3 ECONOMICOUTLOOK Thefinancialpressisfilledwithstoriesabout deflationexperiencethathasoccurredabsenta thepossibilitythattheeconomymightslipback significantandpersistentreductioninmonetary intorecession.Fromanhistoricalstandpoint, growthrates. thelikelihoodofadouble-dipisremotebecause Moreover,theU.S.inflationsituationtoday therehasonlybeenonesucheventinthepost- isdecidedlymixed,withdifferentsectorsexpe- WorldWarIIera.Theshort1980recessionwas riencingdifferentpricetrends.Althoughthe followedbyafour-quarterrecoveryandthenby pricesofmanymanufacturedgoodsarefalling, thedeep1981-82recession.However,themacro- pricesofmedicalcare,education,andmany economicclimatethatspawnedthatdouble-dip— otherservicesarerising.Asaformeruniversity highandrisinginflation,poorpublicpolicies, professor,I’veoftenjokedthatI’llbelievedeflation andamajoroilpriceshock—isnotablyabsent isuponuswhenleadinguniversitiesstartcutting thistimearound.Hence,barringanunpredictable tuition.Housingpricesarerisingtosuchanextent calamity,Ithinktheprobabilityofadouble-dip thatsomearetalkingofahousing“bubble.”In recessionatthepresenttimeislow.Mostbusiness Japan,realestatepricesdeclinedalongwithequity economistssharethisview,accordingtothe prices.Fortheseandotherreasons,Idonotsee recentEconomicPolicySurveyconductedbythe deflationasamajorrisktotheeconomicoutlook NationalAssociationforBusinessEconomics. fortheUnitedStatesatthepresenttime. Whatmakesadouble-diprecessionunlikely? I’vealreadytalkedaboutthefavorableinflation environment.Expectationsoflowandstable THREE ECONOMIC SCENARIOS inflationcanonlybedescribedas“entrenched,” Onepossiblescenarioforthepathofthe whichmakesitmucheasierthanwouldother- economyoverthenextfewyearsisthatrecovery wisebethecaseforbusinessestoplanforthe willproceedaboutasexpectedintheconsensus future.Thebankingsystemiswellcapitalized, forecast.ThatoutlookhasGDPgrowingatarate unlikethesituationafterthe1990-91recession, ofabout2½percentoverthesecondhalfofthis whichmeansthatcreditisreadilyavailableto year.Growthgraduallypicksupnextyearand credit-worthyfirms.Monetaryandfiscalpolicy settlesatroughly3½percenttowardtheendof arebothcontributingtorecovery.Althoughthe nextyear.Thatrateofgrowthcontinuesoverthe levelandvolatilityoftheequitymarkethas remainderoftheforecastinghorizonofthreeor reducedtherateofinitialpublicofferingstoa fouryears.Thatisalsotheaveragerateofgrowth lowlevel,whichmakesthefinancingofnew expectedoverthelongerrun. enterprisesmoredifficult,thefinancingsituation Thelong-rungrowthrateisdeterminedby facedbynewenterprisestodayistypicalofearly theeconomy’sfundamentalcapacitytoproduce. recoveryperiods. Laborforcedemographics,determinedbytheU.S. Someobservershaveexpressedtheworry birthrate,immigration,andretirementssuggest thattheUnitedStatesmayfacetheso-called thatthenumberofpeopleemployedwillgrow “Japanproblem.”Thatis,theexistinglowrateof byabout1percentperyear.Addtothatsource inflationmaygivewaytodeflation—apersistent ofgrowthanestimateof2½percentproductivity declineinthegeneralpricelevel,leadingtoper- growthyieldsGDPgrowthof3½percentperyear. sistentstagnationofeconomicactivity.Deflation Ofcourse,bothoftheseprojectionsaresubject canbeaseriousmacroeconomicproblem,asU.S. toerror,especiallytherateofproductivity experienceinthe1930sandJapaneseexperience growth. fromtheearly1990stothepresentdayillustrate. Thisbaselinescenarioiswidelyacceptedin However,unlikeoursituationinthe1930sand themarkets.However,asalways,someforecasters Japaninrecentyears,U.S.moneygrowthhas expectfasterandsomeslowergrowththanthe remainedrobustandevenincreasedduringthe baseline.Currentinterestratesalsoreflectthis recenteconomicslowdown.Iamunawareofany baselineexpectation.FromyieldsonTreasury 4 TakingStock:TheStateoftheBusinessRecovery securitiesofvaryingmaturity,wecancalculate for2002wouldbe3.4percent.Theconsensus themarket’sexpectationoffutureshort-term fellto2.7percentinSeptember,justbeforethe interestrates.Forexample,comparisonofthe 9/11attacks.TheOctoberconsensuswas1.5 rateona3-yearbondwiththatona4-yearbond percent,andtheJanuary2002consensusfor permitsustocalculateanimplicitexpected1- 2002growthwas1.0percent. yearinterestratethreeyearsinthefuture—the Incomingdataledforecasterstorevisetheir rateona1-yearbondtobeissuedthreeyearsfrom viewsaboutthisyear.TheBlueChipConsensus now.Whatthiscalculationshowsisthatthe forecastgraduallyrose,reaching2.8percentin marketexpectsthe1-yearbondratetorisesteadily May.Then,theflowofdatabecamelesspromis- fromitscurrentlevelofabout2percent.Twoyears ing;thecurrentBlueChipConsensusforecast, fromnowthemarketexpectsthe1-yearrateto releasedearlierthismonth,was2.3percent. be3.8percent;fouryearsfromnow,5.2percent; Asinformationarrives,interestratesreflect eightyearsfromnow,6.4percent. thechangingeconomicoutlook.Considerhow Icouldrefinetheseinterestrateestimates, theTreasury10-yearbondratehasmovedsince buttheyaregoodenoughforcurrentpurposes. theFedbegantoreduceitsfederalfundsratetar- Whattheyshowisthatthemarketexpectsatypi- getonJanuary3,2001.Justbeforethatfirstpolicy calrecoveryscenario,withratesrisingasGDP action,the10-yearratewasabout5.0percent. growthpicksupandasthemarginofunused Followingthepolicyaction,themarketbecame laborandcapitalresourcesdeclines.Overtime, moreconfidentthattheeconomywouldescape asbusinessemployscurrentlyexcessproduction recession,andthe10-yearraterose,toalmost 5.3percentattheendofJanuary.Oversubse- capacityandbeginstoincreasecapitalspending, quentmonths,the10-yearratefluctuatedgener- creditdemandswillrise.Inthenormalcourseof allyinarangefrom4¾percentto5¼percent. events,weexpectcorporateprofitstorise,which Buttherewereperiodsofstrongerdataandgreater willfinancesomebutnotalloftheincreased optimismaboutthefuture,asinMay2001when capitalspending.Forthatreason,businesseswill therateapproached5½percent.Theoutlook beraisingmorefundsinthecapitalmarkets, becameclearlymorepessimisticanduncertain whichispartoftheexplanationofwhyinterest withthe9/11tragedy,andthebondratefellto ratesareexpectedtorise. 4.3percentinearlyNovember.Butincoming Allofthesecharacteristicsofthebaseline datawerestrongerthanhadbeenexpected;the scenarioareperfectlystandardstuff.Butalso bondrateroseto5percentinDecemberandon perfectlystandardisthattheactualoutcomemay upto5¼percentbyMayofthisyear.Thecon- welldifferfromtoday’sbestguess.Thebaseline sensusforecastwasalsobeingrevisedupduring scenarioevolvesasdataarrive,changingexpec- thisperiod.SinceMay,incomingdatahavebeen tationsaboutthefuture. weakerthanexpected;the10-yearbondrateis Recentexperienceillustratesthisprocessvery nowdowntoabout4¼percent,andtheBlue nicely.ConsiderhowtheBlueChipConsensus ChipConsensusforecasthasbeenreviseddown forecastfor2002haschangedovertime.TheBlue forboththisyearandnext. ChipConsensusforecastreferstotheannual I’veoutlinedwhatthebaselineforecastlooks averageGDP;thus,thenumbersIamaboutto likeatthispoint,butclearlywehavetolookalso discussrefertotheannualaverageGDPfor2002 atthepossibilitythattheactualoutcomemaybe comparedwiththeannualaveragefor2001.The strongerorweakerthanthebaseline.Let’slook BlueChipmonthlyreleases,datedthe10thof attheimplicationsoftwoadditionalscenarios, everymonth,arebasedonasurveytakenatthe onestrongerandoneweakerthanthebaseline. beginningofthemonth.Thatmeansthatfore- Rememberthatthebaselineistheoneprevailing castersarebasingtheirprojectionsondataavail- today,buttomorrowitmaybedifferent.Fore- ablethroughthefirstdayortwoofthemonth.In castersrevisethebaselinealmostcontinuously January2001,theconsensuswasthatGDPgrowth asincominginformationarrives. 5 ECONOMICOUTLOOK Tokeepthisanalysisofalternativescenarios bringdownlonger-termrateswithoutFedaction frombecomingundulycomplicated,let’sassume becausethemarketwillexpectthattheFedwill thatthebaselineiscorrectastoalong-runrate retainitscurrentlowfederalfundsratetargetof ofGDPgrowthofabout3½percent,butwrong 1.75percentforalongerperiodthanexpectedin abouthowfastwegettothatlong-rungrowth thebaselinescenario. rate.Supposefirstthattheeconomyapproaches Keepinmindthatthisscenarioassumeseco- thelong-rungrowthratemorequicklythanis nomicgrowthbelowthebaseline.Interestrates projectedincurrentforecasts.Inthiscase,itis declinebecauseofthatassumedoutcome,and likelythatoverthenexttwoyearsorso,relative sodonotpreventit.Atthesametime,thedecline tothebaselineprojection,businessinvestment inratesdoesservetolimittheextentofeconomic demandwillbestronger,equitymarketswill weakness.Clearly,declininglongrateswilltend recovermorequickly,andunemploymentwill tosupporthousing,businessfixedinvestment, fallmorequickly.Asaconsequence,short-term andhouseholdspendingonconsumersdurables interestrateswillalsorisemorequicklythan suchascarsandfurniture.Intime,thenatural currentmarketexpectations,andlong-termrates forcesofgrowthwillreassertthemselvesandthe willrisesomewhataswell. economywillgrowatitstrendratedetermined TheFederalReserve,ofcourse,willhavea bylaborforceandproductivitygrowth.Wewill rolehere.TheFedwillwanttopursueapolicy bedisappointedthatwedidn’treachtrendgrowth tokeepinflationlowandstable.Thatpolicywill sooner,butthereisnoreasontoexpectthatthe requireahighertargetfederalfundsrate,the U.S.economywillfallintoapersistentstateof interestratetheFedinfluencesdirectlythrough stagnation. itsopenmarketoperations.Thisisthetypical Thisanalysissuggeststhatthereisasensein patternofahealthy,non-inflationaryrecovery. whichthemonetarypolicysituationtodayis Anotherpossiblescenarioisthattheeconomy asymmetric—thatsometimeinthefuturethere mightexperiencealongerperiodofsub-par isahigherlikelihoodofrisingthanoffalling growththaninthebaselineprojection.Inthis short-termrates.Thatseemstometobetrue,but lattercase,short-terminterestrateswillremain onlybecausetheFedbroughtshortratesdown lowforalongerperiodthaninthebaselinecase. soquicklyandsofarlastyearthattheshortend Asthemarketdigestsincomingnewsindicating oftheyieldcurvesettledconsiderablybelowthe thattheeconomyisgrowingmoreslowlythan longend.And,remember,theleveloflongrates expected,itwillloweritsexpectationsoffuture todayreflectsmarketexpectationsthattheecon- short-termrates,whichwillbringdownlonger- omywillrecoveralongabaselinewe’vealready termrates.AsanexamplethatIhopewewillnot discussed,arecoveryfueledbyanaccommoda- observe—becauseIcertainlywanttoseetheecon- tivemonetarypolicyandthenaturaldynamics omyrecoveringmoreratherthanlessquickly— ofthebusinesscycle. ifthepicturechangesenoughthatthemarket expectsthatthe1-yearratewillremainatabout Icertainlydonotwanttoleavetheimpres- 2percentforthenextfiveyears,thenthe5-year sionthatmypositionisthattherearenocircum- bondratewillfallfromitscurrentlevelofabout stancesunderwhichIwouldarguethattheFed 3.3percenttoabout2percent.Similarly,the10- shouldcutthetargetfederalfundsrate.The yearand30-yearbondrateswillfallfromtheir slow-growthscenariocouldbesoslow,orcould currentlevelsofabout4.3and5.1percent,respec- threatentobecomeanoutrightdeclineinemploy- tively,tolowerlevels. mentandoutput,thatitwouldmakesensefor Thesechangesinlonger-termratesinthe theFedtocutthefundsratefromitscurrent subpargrowthscenariodonotassumeany level.Or,theUnitedStatescouldsuffersome FederalReserveactiontochangethetargetfed- unforeseenoutsideshockofthesortallofusare eralfundsrate.Inthisscenario,themarketwill awareispossiblebuthatetospeculateabout. 6 TakingStock:TheStateoftheBusinessRecovery Givensuccessinachievinglowandsteady inretrospectitshouldhavewaited,theeconomy inflation,Fedpolicywillbedrivenbyevents willeither“growinto”thetargetsetbytheFOMC thatdeterminewhatinterestratepolicywillbe ortheFOMCwillbeabletoreversecoursewith- requiredtosupportgrowthinthecontextof outdoingsignificantdamage. maintainingpricestability.Wemayexperience Inshort,theeconomicrecoverydoesnot eventsthatshoutforapolicyresponse,theway dependontheFOMCtimingitspolicyadjust- 9/11did.Morelikely,we’llhaveanaccumulation mentsexactlyright.Thatisanunreasonable ofevidencethatwillrequirejudgmenttosortout, standardtoapplytojudgingtheFOMCandfortu- leavingampleroomfordifferencesofopinionas natelynotatallnecessary.AsIhaverepeatedly totheappropriatesizeandtimingofpolicy emphasized,oneofthegreatbenefitsofachieving responses. lowandstableinflationisthatthisenvironment makestheeconomylesssensitivetotheexact timingofmonetarypolicyadjustments,because CONCLUSION marketparticipantshaveentrenchedexpectations thattheFedwilldowhatisnecessarytomaintain Thatweareinourcurrentpolicypositionis thislow-inflationenvironmentforyearstocome. aluxurytheFedhasearnedbyinvestinginprice Ifirmlybelievethatthecurrentmacroeco- stability.Becauseinflationexpectationsareso nomicsituationismorestableinitsfundamentals firmlyheld,theeconomyisnotsuper-sensitive thanithasbeenoverthewholeofmyprofessional tothetimingofmonetarypolicyactions.Ifthe life,whichgoesbacktotheearly1960s.Neither Fedwaitswhenitmightbetterhaveacted,the Inoranyoneelsecanforecasttheshort-termout- economywillnotrunofftherailsbecausethe lookwithanygreatprecision,butIamconvinced FOMCwillintimeactandactvigorouslyenough thatthosewhobetagainstthelong-runhealthof tomakeupforlosttime.Conversely,iftheFed theU.S.economyaremakingabigmistake. raisesthetargetfederalfundsratetooearly,when 7

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APA

William Poole (2002, August 25). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20020826_poole

BibTeX

@misc{wtfs_speech_20020826_poole,
  author = {William Poole},
  title = {Speech},
  year = {2002},
  month = {Aug},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20020826_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}