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

Thank you, Mr. Chairman. Probably the best indicator that economic activity in the region continues to improve gradually, yet business people remain very cautious, is the widespread increase in the demand for temporary workers. Like Mike Moskow, we have heard more about that recently, especially from advisory council members and from other contacts, than we had prior to this time. The temp agencies report that starting in March they experienced a significant pickup in both work orders and inquiries about temporary workers. Some reports of recalls of previously laid-off workers by trucking and shipping companies also suggest that this year will be better at least for that industry than last year, which wouldn’t be very hard at all because they really had a bad year last year.

I’ll relate one good news/bad news story about employment in the banking sector. One of the region’s largest banks announced plans to hire 2,000 people this year in the greater Cleveland metropolitan area alone. That sounds good to everyone except to the rest of us in the banking industry in the area who are all wondering where that bank is going to be able to get the people it claims to want. I’ll be watching my turnover numbers.

At our April board of directors meeting, a director reported that a large furniture retailer said that March had been the best month on record, after a dismal year last year and a dismal January and February. That’s similar to what Mike Moskow was hearing in his District. Our contact said that the improvement mainly reflected an increase in sales of office furniture to commercial customers. We followed up on that by contacting a number of office furniture manufacturers in the region, and most reported the same pattern. January and February sales were dismal, continuing the decline that had started in the fall of 2000; however, in March and early April they saw the first uptick in orders in almost a year and a half for some of them.

We also contacted appliance manufacturers who mostly produce for the residential market. First-quarter sales and earnings were up sharply, and sales forecasts for the year have now been raised. One firm reported that efforts were already under way to add full-time workers in order to cut back on overtime. A manufacturer of high-end tools, not necessarily high- technology equipment but the high-end tools that laborers worldwide use for all sorts of purposes, reported that throughout the second half of 2001, even before September 11, their year-to-year sales were off very sharply in North America. So what they characterized as a slight increase in year-over-year sales in the first quarter was encouraging. Nevertheless, all capital spending planned for this year will be in foreign countries—and that’s foreign production for foreign markets, not for re-import into the United States.

At a recent meeting of our Small Business Advisory Council, none of the participants had plans to invest to “increase capacity.” That was the way they characterized it. Most complained of being in industries with excess capacity—because their competitors are all over invested, I guess! Yet a majority plan to invest in equipment that will increase their own productivity and efficiency, allowing them to increase their own output with the same or even fewer production workers. What we were hearing in part was that some of them were saying they had surprised themselves at how much output they were able to produce. They simply didn’t know how productive the capital they had previously put in place was until the demand spurt hit them.

On the subject of compensation, all who spoke to the issue claimed that productivity increases continued to be greater than wage increases. Agriculture is one example of a sector that I don’t normally have in mind when thinking about major changes in productivity or technology. But the head of a large hog raising operation in northwest Ohio told us that because of the advanced technical skills now required in the ag sector—and he described some of the very sophisticated equipment that they use—all their recent hires have been college graduates. He now has a full-time recruiter visiting college campuses to get farm workers. And he recently has been giving wage increases of up to 10 percent in order to retain employees.

On the national economy, everything I’m seeing and hearing is consistent with a picture of an economy that is expanding, although with neither the boom conditions implied in the Commerce Department’s first-quarter preliminary number nor the slowdown shown in the Greenbook’s second-quarter projection. My belief that growth is somewhere between those two numbers leads me to the conclusion that the natural rate of interest is rising, even though I would not be able to pinpoint it with any degree of accuracy. And in my view a 1¾ percent overnight interbank rate is not consistent with a nonaccelerating rate of inflation. In a situation with competing paradigms, where one is the observed unemployment rate or some measure of the output gap versus some notion of the natural rate of unemployment and the other is the observed structure of nominal interest rates versus some notion of the natural rate of interest, I’m much more comfortable with the latter. It says that a positive productivity surprise does not reduce inflation potential. It’s quite the opposite because of the endogenous element of what happens to the stance of monetary policy.

As policymakers we must choose between those paradigms, at least implicitly, and I would like to do so explicitly. The measured unemployment rate versus the estimate of the natural rate says we’re still in a disinflationary environment. I don’t believe that. The observed nominal interest rates versus various estimates of the natural rate—or what some people like to call the real rate of interest—say that the current stance of policy is reinflationary. One has to choose. Listening to my directors and advisory council members, I have the impression that business people view the current stance of monetary policy as highly expansionary and fully expect that it will become less so in the months ahead. For them it’s only a question of when we start a series of actions to increase the overnight rate. For many it will be a relief once we finally get started, and it will reduce a source of current uncertainty. Thank you, Mr. Chairman.

Keyboard shortcuts

j previous speech k next speech