For Release: Sept. 20, 2001
Contacts: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

Long-Run Economic Prospects "Bright, Unchanged in Fundamentals": St. Louis Fed's Poole

Link to speech

EVANSVILLE, Ind. -- Prospects for the U.S. economy, though changed in some detail, remain "bright and unchanged in fundamentals," according to William Poole, president of the Federal Reserve Bank of St. Louis.

Poole, speaking before the Risk Management Association in Evansville, noted that this year's economic slowdown has been atypical, an "unusual mixture of reasonably strong household demand and extremely weak business investment spending." Manufacturing, especially telecommunications and electronic equipment, has borne the brunt of the slowdown, Poole said. However, he pointed out, household spending has continued to grow moderately. "Demand for light motor vehicles and housing has been robust, with record or near record sales rates in both markets," he said, attributing those results largely to relatively low interest rates.

Poole said that one notable factor during the slowdown is continued low inflation and called it "the dog that didn't bark."

"Past cyclical downturns," he said, "have been characterized, almost as a signature, by an acceleration of inflation" before hitting a peak either due to a supply shock like higher energy prices or an overly expansive monetary policy that promoted demand at the expense of supply. "In 2001, I believe an increase in the rate of inflation was forestalled by the preemptive monetary policy tightening that began in mid-1999," Poole said.

Poole said it is unlikely that excess investment optimism, followed by a shift in that sentiment, accounts for all of the 2001 economic slowdown in the United States. "But it seems clear that the tech reversal has played a major role. What I think is notable is not that overall growth slowed but instead that a recession had apparently been avoided as of Labor Day."

Poole noted that the "tech tumble" had not spilled over to the rest of the economy to a significant degree, and pointed to three factors: the easing of monetary policy starting in January, falling interest rates that sustained housing activity and demand for consumer durable goods, and "most important of all, widespread optimism about the longer-run course of the economy that sustained spending on a wide range of goods. People saw, I believe correctly, that the tech troubles were likely to be temporary." He defined "temporary" as "quarters rather than years."

Concerning the September 11 attacks and their aftermath, Poole noted that no one knows how long the effects will last. "What we do know," he stressed, "is that markets will do a good job in reallocating resources. I am not saying the affected industries will not suffer great pain; I am saying that the economy as a whole need not, and I believe will not, suffer great pain. Resources both capital and labor will flow from some industries to others and the aggregate economy will grow. I do not want to minimize the size of the current shock; I do want to caution against maximizing it. We will get back on course before too long."

Poole said the U.S. economy's strengths include "a resilient people, efficient markets and low inflation. The Federal Reserve has made clear for many years its commitment to maintaining low inflation, and that commitment is widely believed in the financial markets."

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