Speech

Shocks and More Shocks ThirteenthAnnualHymanP.MinskyConferenceontheStateoftheU.S.andWorldEconomies SessiononMonetaryPolicyandtheU.S.andWorldEconomies TheLevyEconomicsInstituteofBardCollege HiltonNewYork NewYork,NewYork April15,2003 There is no way I can discuss the cur- economy’slackofjobcreation,andIhavedone rent economic situation without start- soinanumberofspeeches.However,ifwecan ing with the observation that the U.S. createalittledistance,perhapsbythinkingabout economy is dealing with shock after thelikelyassessmentofthisperiodseveralyears shock after shock: The 9/11 attacks; threats of hence,Isuspectthatwewillmarvelattheecon- additional terrorism on U.S. shores or against omy’sresilienceinthefaceofalltheseshocks. U.S.interestsabroad;corporategovernancescan- Howresilienthastheeconomybeen?The dals; bankruptcies of large firms; war in Iraq; recessionof2001wasmild,measuredbythetotal SARS; oil price spikes. I’ve left out the large declineinrealGDPandbythedurationofthe decline in the stock market, starting in early decline.GDProseby2.8percentoverthefour 2000, because that decline is probably more a quartersof2002.ForecastersanticipatethatGDP consequence of downward revisions of earnings growthwillremainpositivethisyearandnext, forecasts than a cause. Still, the rather sudden atagraduallyrisingrate. transition from an environment of unbridled Whyhastheeconomybeensoresilient?The optimism to one of caution and the associated FederalReserveBankofSt.Louisdevoteditsmain stock market decline has certainly not been a essayinitsAnnualReportfor2001toexactly positive influence on the economy. thisquestion.Theessay,writtenattheendof Thereareseveralwaystoreacttothislistof 2001andearly2002,focusedonthesourcesof shocks,butbeforeIdosoIwanttoemphasize theeconomy’sresiliencebecausethattopic thattheviewsIexpressherearemineanddonot seemedhighlyappropriateintheimmediate necessarilyreflectofficialpositionsoftheFederal aftermathof9/11. ReserveSystem.Ithankmycolleaguesatthe Ourconclusionwasthattheeconomysur- FederalReserveBankofSt.Louisfortheircom- vivedtheshockofterroristattackssowellbecause ments,butIretainfullresponsibilityforerrors. offourextremelyimportantfeaturesofthecurrent IfIwerebackintheclassroomteachinga U.S.economy.First,theUnitedStatesenjoys courseinmacroeconomics,Icouldaskmystu- vigorouslycompetitivemarkets,whichpromote dentstoanalyzetheeffectsontheeconomyof rapidandefficientadjustmenttonewcircum- eachoftheseshocks.Astudentwhotoldmethat stances.Second,thecountryhasarobustfinancial anyoftheseshockswouldraiseeconomicgrowth system;thebankingsystemiswellcapitalized, andexpandemploymentwouldnotbeagood andfewbankshavefailedinrecentyears.Third, candidateforan“A”grade,unlessheorshehad despitecurrentstrains,federalandstategovern- anextraordinarilycleveranalyticalstorytotell. mentsforthemostpartareinasoundfiscalposi- Aswelivethroughthisperioddaybyday, tion.True,manygovernmentsareexperiencing wecanexpressourdisappointmentoverthe significantbudgetdeficits,butfiscalpositions 1 MISCELLANEOUS arefundamentallysoundinthatthedeficitsare tations.Ofteninthepast,asIhavedocumented generallynothugerelativetoGDPandgovern- atsomelengthelsewhere,theFed’sresponseto mentsretainampletaxingpowertoraiseaddi- developingrecessionhasbeenlimitedbyconcern tionalrevenuesiftheysochoose.Fourth,the thatinflationandinflationexpectationswould nationenjoyslowinflationandmonetarystability. beboostedbyprematureeasingofmonetarypol- TheBank’sAnnualReportessayemphasized icy.1Overthelastfiveyears,inflationhasbeen thatthesefourelementsofeconomicstrengthhave wellcontained,andinflationexpectationsremark- notalwaysbeenstaplesoftheU.S.landscape. ablylow. I’llnotrepeattheessayhere,butanyonefamiliar Howdidthelowinflationenvironment withU.S.economichistorycanpointtoepisodes becomesoentrenched?Theansweristhatyears whereoneormoreofthefourelementswas ofdisciplinedmonetarypolicyhavecreateda compromised. convictionalmosteverywherethatinflationwill Whatimpressesmeaboutthecurrentsituation remainlowbecausetheFedwilldowhatisnec- ishowwelltheeconomyhashandledmultiple essarytoachievethatresult.Indeed,inthelast severeshocks.Icannotguaranteethatthemodest yearortwothetalkhasbeenofthepossibilityof economicgrowthrateoflastyearwillcontinue deflation,ratherthantheriskofFedoverreaction withoutinterruption,butIdothinkthatisthe creatinginflation.However,whenweexamine mostlikelyoutcome.TheconsensusoftheBlue surveyevidenceoninflationexpectations,and Chippanelofeconomicforecastersinitsmost evidencefromtheyieldspreadbetweenconven- recentrelease(April10,2003)isforrealGDP, tionalandindexedTreasurybonds,talkofdefla- measuredbytheannuallevelofGDPfortheyear, tionisjustthat—talk.Theevidencedoesnot togrowby2.4percentthisyearand3.5percent supporttheviewthatthetalkhasaffectedthe nextyear.Notoneofthepanelof53forecasters waypeoplebehave. expectsadeclineinrealGDPthisyearornext. Resistinginflationpressureshasattimesnot Manyobservershavepointedtotherole beenverypopular,butdoingsohasbeenan playedbytheFederalReserve’spolicyresponse investmentthatisnowpayingoffinspades.The astheeconomyweakenedoverthecourseof2001. shockshittingtheeconomyhavenotcreatedinfla- TheFederalOpenMarketCommittee(FOMC) tionfears,aspastshockshavesooftendone.The reducedratesaggressivelyoncetheeconomic Fedhasnothadtodealwiththepossibilitythat weaknessbecameapparent.Ihearsomepeople easingpolicymightcreateinflationfears.Inflation saythatmonetarypolicyisnotworking,butfind stability,therefore,hasbeenaninvestmentthat thatpositionhardtofathom.Wouldtheautocom- haspermittedavigorouspolicyresponsetothe panieshaveintroducedzero-interestfinancing spateofshockshittingtheeconomyinrecent incentivesifinterestrateshadremainedhigh? years.Norhaveinflationfearsaffectedtheway Wouldwehaveexperiencedacontinuinghousing marketparticipantshaverespondedtotheshocks. boomifrateshadremainedhigh?Wouldwehave Withoutinflationuncertainty,theeconomyhas seenthemortgage-refinancingboomthathas adjustedquicklyandefficiently. helpedtosupporthouseholds’discretionary I’veemphasizedtheimportanceoftheecon- expendituresifrateshadremainedhigh?The omy’sresilienceinthefaceofmultiplenegative answertoallthesequestionsis“mostcertainly shocks,butshouldalsoemphasizethatthereis not.” evidenceofanextremelyimportantpositive Whatisnotgenerallyappreciatedisthecentral shockinrecentyears—thesustainedgrowthof roleplayedbyanentrenchedenvironmentoflow laborproductivity.Thetrendtiltedupin1995; andstableinflation.Inflationhasremainedlow whatistrulyremarkableisthatproductivity and,atleastasimportant,sohaveinflationexpec- growthremainedhighastheeconomyslowedin 1“Inflation,RecessionandFedPolicy,”MidwestEconomicEducationConference,St.Louis,Missouri,April11,2002. 2 ShocksandMoreShocks 2000,fellintorecessionin2001andthenrecov- thattheintendedfedfundsrateshouldbesetat eredslowlyduring2002.Measuredoverfour thelevelthatprovidesthebestchanceoffostering quartersoftheyear,productivityinthenonfarm healthyeconomicgrowthandsustainedlowinfla- businesssectorroseby2.1percentin2000,1.9 tion,takingintoaccounteverythingweknow. percentin2001,and4.1percentin2002.Given IfIknewforsurethatavailableinformation thepaceofoutputgrowth,thisproductivityper- wouldjustifyadifferentintendedfedfundsrate formancemeantthatemploymentgrowthwas atthenextFOMCmeeting,thenIwouldarguefor significantlynegativeduringtherecessionand movingtothatraterightaway.Betweenmeetings, roughlyflatlastyear.Stagnantemployment wereceiveaflowofnewinformation,consisting growthisanimportantproblem,butIthinkthat offormalstatisticalreleases,anecdotalreports thesustainedhighproductivitygrowthbodes fromcontactsacrossthecountry,newanalytical wellforemploymentandoutputgrowthoverthe insightsgeneratedbyresearchstaffandeventsof longrun.Productivitydata,ratherthanjustagut allsortswithpossibleimplicationsforthecourse feeling,justifyanoptimisticlong-termoutlook. oftheeconomy.Importantinformationisinher- Asforcomingquarters,Ihavenowayoffore- entlyunpredictable.Totheextentinformationis castingwhatadditionalnegativeshocksmight predictable,Ihavealreadyfactoredintomythink- beheadedourway,orhowrapidlytheeffects ingexperts’bestguessesaboutwhatwillhappen. ofrecentadverseshockswillwearoff.Idonot Deviationsfrombestguesses,obviously,are believethattheFedcandoanythingdirectlyto unforecastable. dealwithovercapacityinthetelecomindustry Itisthisnewinformationthatdriveschanges orreductionsintravelduetosecurityandSARS intheFOMC’ssettingoftheintendedfederalfunds concerns.Peopledelayingspendingsotheycan rate.Forthisreason,andnotbecauseIambeing followthewaronTVwillnotstartshopping coy,Icannotpredictwhatwillbetheappropriate becauseofanythingtheFedcando.WhatIdo policysettingatthenextFOMCmeeting. believeisthattheFederalReservewillrespond Lookingahead,intime,financialstability tochangingcircumstancesasrequiredtomain- andtheinherentgrowthpotentialoftheU.S. tainlowinflationandafinancialenvironment economywillcometodominatethesituation. consistentwithmaximumsustainablegrowthin Arrivinginformationwilltakeamorefavorable employmentandoutput. turn.Fedpolicywillrespondasthenewinforma- Ioftengetquestions,usuallywithawrysmile, tionmakesthecase.Thatmorefavorableeconomic askingmeabouttheprobabledirectionofFed conditionswillcomeismyoptimisticmessage, policy.Ihaveastockanswer,anditisnotacoy thoughIhavenoideaastowhenmorerapid answer.Monetarypolicyisdrivenbynewinfor- growthwillappear. mation.MypositionateachFOMCmeetingis 3

William Poole (2003, April 14). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20030415_poole

@misc{wtfs_speech_20030415_poole,
  author = {William Poole},
  title = {Speech},
  year = {2003},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20030415_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}