Transcripts of the monetary policymaking body of the Federal Reserve from 2002–2008.

Thank you, Mr. Chairman. There’s little in the recent data regarding economic activity in New England that suggests much in the way of forward momentum. Recent employment data, especially the benchmark revisions in the early spring, indicate much steeper employment losses than previously thought. These losses were more significant in size in 2001 to be sure, but in the period from the supposed end of the recession at year-end 2001 to the present, regional job losses have been relatively severe in New England compared with elsewhere. Indeed, while the region is roughly 5 percent of the nation’s population and economic activity, its job losses over the past year have equaled about 10 percent of the total for the country as a whole. Massachusetts has been hardest hit among the New England states and has lost more jobs in percentage terms from pre-recession peaks than any other state. To those New Englanders who gauge conditions by comparing them to the worst recession in memory, the 1990-91 recession—and the number of those is not trivial—there is some reassuring news. Relatively speaking, things are not as bad as they were then. This time the pain is more evenly shared, albeit with New England clearly on the low side in terms of jobs.

Other, more forward-looking indicators on the regional economy have a brighter tone. Like the nation, consumer confidence in the region improved in April, and business confidence rose a bit as well, largely because of improved expectations about the future. An index of leading indicators for Massachusetts remained in negative territory, however, pushing off thoughts of positive growth for the state until later in the fall.

In our last telephone conference call, I shared with members of the Committee a great deal of anecdotal information that we had gathered over the intermeeting period. As you’ll recall, those anecdotes reflected little near-term optimism about the outlook and not much in the way of plans for new capital spending, particularly domestically. Contacts since the last phone call have echoed many of the same themes. In talking with a senior official at CVS, which is a pharmacy chain with a fairly broad nationwide presence, I heard comments similar to those that President Poole heard from his Wal-Mart contacts. My source said that CVS sees no sign of a postwar pickup in spending and a continuation of the trend toward buying smaller rather than bigger sizes of items—despite what we might read about the popularity of economy sizes. He also noted that fewer customers are buying multiple refills of their prescriptions; people are purchasing only the exact amount they need or sometimes not even a full month’s prescription. So, there is clearly a trend toward less spending. Most of our contacts don’t see a significant rebound in activity this year. They are all hoping that 2004 will be better.

On the national front, labor markets remain quite slack, labor force participation is down, unemployment is up, and industrial production and business investment remain subpar despite some signs of life in the telecom world. About the only good news since our last meeting came from equity markets, buoyed by the end of the war, better-than-expected corporate profits, falling oil prices, and rising consumer confidence. These bright spots seem fragile, however. Contacts at Thompson First Call expect corporate profit growth to slow substantially in the second quarter, as energy company earnings reflect lower oil prices and as the beneficial effect of currency translation diminishes. It is questionable whether markets will continue to surprise on the upside and whether confidence will buoy spending, given the impact of real economic data, job losses, and the inevitable reduction in the sense of postwar relief.

Most people I’ve talked to over the last several weeks have had one question in common. They ask, How is it that standard forecasts for economic growth over the next year or so all have a sizable rebound in the last half of this year? People ask this based on their own perspectives and what they see in their industries. They wonder what will happen to turn things around. Well, one answer is fiscal policy in the form of increased defense spending and tax reduction, if any of the plans now being debated in Washington are in fact enacted into law. But when I say that, the reply usually is, What about state and local spending? Taken together, state and local government spending accounts for about 12 percent of real GDP—almost as much as business investment and nearly twice as much as federal government spending. Given state deficits of about $100 billion or so in the aggregate for fiscal 2004, it seems clear that either spending will decline or local taxes will increase by amounts that eat significantly into disposable income. Either way there would be some offset, however sizable, to federal stimulus.

Another answer to the question of what will foster a pickup in the economy is that monetary policy is accommodative and that the markets expect it to stay so. But is it really? With declining inflation rates, real interest rates are no more accommodative than they were before our last 50 basis point move in November, at least according to the Bluebook analysis. “Is the Fed really doing enough?” these questioners ask.

The final answer to the question lies in the fact that three years have passed, technology has become obsolete, productivity remains strong, and businesses will soon be forced to invest more. That’s the same logic used in last May’s Greenbook which forecast GDP growth, led by optimism about both consumption and investment, by the end of the year to be about 2½ percentage points higher than it in fact was. Clearly we were wrong then. Perhaps the passage of time has raised the likelihood of our being right this time. That is, an additional year of spending deferral may have made a second-half of 2003 spurt of growth more likely.

But it’s hard to find many business people—except in the biotech arena, which has mostly small firms, or in direct defense contracting—who think that the kind of growth projected in the Greenbook is a good bet, especially by the end of this year. They may simply be myopic. Nonetheless, I remain skeptical about the strength of the Greenbook forecast for the rest of 2003, even recognizing that it has been tempered a bit. I wonder as well about the projection of a nearly 5 percent pace of GDP growth by year-end 2004. This forecast seems to have more than its share of risks on the downside. But even if it is realized, we will have had nearly four years of below-potential growth and an output gap even into 2005. Unemployment rises through most of the forecast period, falling only in the last quarter of 2004. And inflation trends downward to below at least my definition of price stability, given the uncertainties of measurement. While I’m concerned about the potential for deflation, for many of the reasons President Guynn mentioned I don’t think that all aspects of deflation and deflationary psychology are as likely as the Greenbook suggests.

That said, the degree of expected price decline and its implications for slack resource use are not ideal nor in my view consistent with our dual mandate. As I noted before, with falling inflation, monetary policy has become less accommodative. It may be time now—and if not now, soon—to adjust policy so that it provides continuing support during this long, gradual recovery period. In my view, there’s little risk, and there could be considerable gains in doing that; and I think there is a way to explain it neutrally.

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