Notable Quotes From Federal Reserve Board Members

See Also: Fed Scorecard; Using the Fed Scorecard

Below: Vice Chairman Roger Ferguson; Governor Laurence Meyer; Governor Edward Gramlich; New York Fed President William McDonough; Governor Alfred Broaddus, Jr.

Chairman Alan Greenspan

Feb. 13, 2001
Topic: Monetary Policy Report (Humphrey-Hawkins testimony)
Where: Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate
http://www.federalreserve.gov/boarddocs/hh/2001/February/Testimony.htm

"The exceptional weakness so evident in a number of economic indicators toward the end of last year (perhaps in part the consequence of adverse weather) apparently did not continue in January. But with signs of softness still patently in evidence at the time of its January meeting, the FOMC retained its sense that the risks are weighted toward conditions that may generate economic weakness in the foreseeable future."

"Crucial to the assessment of the outlook and the understanding of recent policy actions is the role of technological change and productivity in shaping near-term cyclical forces as well as long-term sustainable growth."

"The prospects for sustaining strong advances in productivity in the years ahead remain favorable. As one would expect, productivity growth has slowed along with the economy. But what is notable is that, during the second half of 2000, output per hour advanced at a pace sufficiently impressive to provide strong support for the view that the rate of growth of structural productivity remains well above its pace of a decade ago."

"Although a reduced availability of Treasury securities will require adjustments in the particular form of our open market operations, there is no reason to believe that we will be unable to implement policy as required."

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Jan. 25, 2001
Topic: Outlook on the Federal Budget
Where: Before the Budget Committee, U.S. Senate
http://www.federalreserve.gov/boarddocs/testimony/2001/20010125/default.htm

"The key factor driving the cumulative upward revisions in the budget picture in recent years has been the extraordinary pickup in the growth of labor productivity experienced in this country since the mid-1990s."

"Between the early 1970s and 1995, output per hour in the nonfarm business sector rose about 1-1/2 percent per year, on average. Since 1995, however, productivity growth has accelerated markedly, about doubling the earlier pace, even after taking account of the impetus from cyclical forces. Though hardly definitive, the apparent sustained strength in measured productivity in the face of a pronounced slowing in the growth of aggregate demand during the second half of last year was an important test of the extent of the improvement in structural productivity. These most recent indications have added to the accumulating evidence that the apparent increases in the growth of output per hour are more than transitory."

"I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise."

"The time has come, in my judgement, to consider a budgetary strategy that is consistent with a preemptive smoothing of the glide path to zero federal debt or, more realistically, to the level of federal debt that is an effective irreducible minimum. Certainly, we should make sure that social security surpluses are large enough to meet our long-term needs and seriously consider explicit mechanisms that will help ensure that outcome. Special care must be taken not to conclude that wraps on fiscal discipline are no longer necessary. At the same time, we must avoid a situation in which we come upon the level of irreducible debt so abruptly that the only alternative to the accumulation of private assets would be a sharp reduction in taxes and/or an increase in expenditures, because these actions might occur at a time when sizable economic stimulus would be inappropriate. In other words, budget policy should strive to limit potential disruptions by making the on-budget surplus economically inconsequential when the debt is effectively paid off."

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Dec. 5, 2000
Topic: Structural changes in the economy and financial markets
Where: America's Community Bankers conference: Business Strategies for Bottom Line Results, New York
http://www.federalreserve.gov/BoardDocs/Speeches/2000/20001205.htm

"In periods of transition from unsustainable to more modest rates of growth, an economy is obviously at increased risk of untoward events that would be readily absorbed in a period of boom. The sharp rise in energy prices, if sustained, is worrisome in this regard."

"The most significant effect to date from higher energy prices appears to be on profit margins, where corporate businesses, constrained by competitive market forces, have not been able to raise prices to fully offset energy cost increases."

"With equity prices weakening in response to reduced earnings from higher costs and a more moderate pace of sales, the 'wealth effect' that spurred consumer spending is being significantly attenuated. Moreover, high and rising equity prices had facilitated a good deal of financing for newer companies, both in the equity and bond markets. Widened spreads in the high-yield markets reflect, in part, a reduced potential for new equity issuance to support debt servicing. Higher costs of capital for these companies likely is exerting some restraint on overall business capital spending."

"Nonetheless, in the face of the energy price spike and the erosion of optimism in financial markets, consumer confidence, or sentiment, appears to be holding up reasonably well to date, though there have been some mixed signals of late."

"Still, in an economy that already has lost some momentum, one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending."

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Oct. 19, 2000
Topic: Challenges for monetary policymakers
Where: Cato Institute conference: Monetary Policy in the New Economy, Washington
http://www.federalreserve.gov/boarddocs/speeches/2000/200010192.htm

"Some who question the economic implications of the spread of innovation and the step-up in productivity growth hypothesize that the gains are largely confined to the so-called new economy, with little effect on efficiency in the old economy. But this notion fails to capture the dynamics of the marketplace. To be sure, a significant segment of our economy's growth reflects output of high-tech equipment. Moreover, the long-term prospective profit growth of those firms engaged in the computer and telecommunications industries has been revised up during the past five years by more than double the amount for the so-called old-economy industries. But in a meaningful sense, there is, with few exceptions, little of a truly old economy left. Virtually every part of our economic structure is, to a greater or lesser extent, affected by the newer innovations."

"The reemergence of oil prices as an important macroeconomic consideration is a reminder that there is less of a stark division between old and new economies than is often loosely suggested. Even the oil industry, a presumed old-economy stalwart, is a surprisingly major player in the new. As a consequence, policymakers will need to consider how changes in technologies and world markets may have altered the response of our economies to oil-price shocks and, thus, how best to respond to them."

"Even though the intensity of oil consumption is markedly below where it was thirty years ago, it still has the potential to alter the forces governing economic growth in the United States. To date, the spillover from the surge in oil prices has been modest. Any effect on inflation expectations, at least as inferred from the behavior of long-term Treasury Inflation-Indexed Securities, has been virtually nil. Moreover, despite some slowing that likely has been related in part to the bite from the so-called 'oil tax' on household incomes, the growth of consumer spending has remained firm. But policymakers will need to be on the alert for oil-driven, indeed energy-driven, risks to our expansion."

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Aug. 25, 2000
Topic: Global Economic Integration: Opportunities and Challenges
Where: Kansas City Fed annual symposium, Jackson Hole, Wyo.
http://www.federalreserve.gov/BoardDocs/Speeches/2000/20000825.htm

"The most recent wave of technology has engendered a pronounced rise in American rates of return on high-tech investments, which has led to a stepped-up pace of capital deepening and increased productivity growth. Indeed, it is still difficult to find credible evidence in the United States that the rate of structural productivity growth has stopped increasing. That is, even after stripping out the significant impact on productivity acceleration of the recent shape of the business cycle, the second derivative of output per hour still appears to be positive."

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July 20, 2000
Topic: Report on monetary policy (Humphrey-Hawkins testimony )
Where: Senate Banking Committee, House Banking Committee
http://www.federalreserve.gov/boarddocs/hh/2000/July/Testimony.htm

"[T]he past year's rise in the price of oil has amounted to an annual $75 billion levy by foreign producers on domestic consumers of imported oil, the equivalent of a tax of roughly 1% of disposable income. This burden is another likely source of the slowed growth in real consumption outlays in recent months, though one that may prove to be largely transitory."

"The more modest pace of increase in domestic final spending in recent months suggests that aggregate demand may be moving closer into line with the rate of advance in the economy's potential, given our continued impressive productivity growth. Should these trends toward supply and demand balance persist, the ongoing need for ever-rising imports and for a further draining of our limited labor resources should ease or perhaps even end. Should this favorable outcome prevail, the immediate threat to our prosperity from growing imbalances in our economy would abate.

"But as I indicated earlier, it is much too soon to conclude that these concerns are behind us. We cannot yet be sure that the slower expansion of domestic final demand, at a pace more in line with potential supply, will persist. Even if the growth rates of demand and potential supply move into better balance, there is still uncertainty about whether the current level of labor resource utilization can be maintained without generating increased cost and price pressures."

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July 11, 2000
Topic: Structural change in the new economy
Where: National Governors' Association, 92nd Annual Meeting, State College, Pa.
http://www.federalreserve.gov/boarddocs/speeches/2000/20000711.htm

"There are no indications in the marketplace that the process of re-engineering business operations is slowing, although it has been difficult analytically to disentangle the part of the rise in output per hour that is permanent and that which is the consequence of transitory business cycle forces."

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June 13, 2000
Topic: Business data analysis
Where: New York Association for Business Economics, New York
http://www.federalreserve.gov/boarddocs/speeches/2000/20000613.htm

"In summary then, most of the gains in the level and the growth rate of productivity in the United States since 1995 appear to have been structural, largely driven by irreversible advances in technology and its application--irreversible in the sense that knowledge once gained is almost never lost."

"To be sure, some of the increase in output per hour may well reflect cyclical rather than structural changes."

"But cutting through the inevitable cyclical fluctuation of measured output per hour, the evidence of a decided improvement in the growth rate of structural productivity from the macro data has continued to strengthen. And, an examination of the micro level evidence is even more compelling."

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April 14, 2000
Topic: Technology and financial services
Where: Journal of Financial Services Research and American Enterprise Institute Conference, in Honor of Anna Schwartz, Washington
http://www.federalreserve.gov/BoardDocs/Speeches/2000/20000414.htm

"There is implicit in this exercise the admission that, in certain episodes, problems at commercial banks and other financial institutions, when their risk-management systems prove inadequate, will be handled by central banks. At the same time, society on the whole should require that we set this bar very high. Hundred-year floods come only once every hundred years. Financial institutions should expect to look to the central bank only in extremely rare situations."

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April 5, 2000
Topic: Technological innovation and the economy
Where: White House Conference on the New Economy, Washington
http://www.federalreserve.gov/BoardDocs/Speeches/2000/20000405.htm

"The risks of investing in equities come primarily from uncertainty about future earnings and about the rates at which those future earnings should be discounted, and much less from changes in overnight interest rates, the principal tool of the central bank. Consequently, even if we were to foster somewhat larger movements in short-term rates to address changes in stock prices, I doubt that investors' perceptions of equity risks would be much affected and thus that equity prices would be meaningfully influenced. In short, monetary policy should focus on the broader economy and on pending inflationary or deflationary imbalances. Should changes in asset prices foster economic imbalances, as they appear to have done in recent years, it is the latter we need address, not asset prices."

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March 6, 2000
Topic: The revolution in information technology
Where: Boston College Conference on the New Economy, Boston
http://www.federalreserve.gov/boarddocs/speeches/2000/20000306.htm

"Until market forces, assisted by a vigilant Federal Reserve, effect the necessary alignment of the growth of aggregate demand with the growth of potential aggregate supply, the full benefits of innovative productivity acceleration are at risk of being undermined by financial and economic instability."

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Feb. 17, 2000
Topic: Humphrey-Hawkins testimony
Where: Senate Banking Committee, House Banking Committee
http://www.federalreserve.gov/boarddocs/hh/2000/february/testimony.htm

"The problem is that the pickup in productivity tends to create even greater increases in aggregate demand than in potential aggregate supply. This occurs principally because a rise in structural productivity growth has its counterpart in higher expectations for long-term corporate earnings. This, in turn, not only spurs business investment but also increases stock prices and the market value of assets held by households, creating additional purchasing power for which no additional goods or services have yet been produced."

"But these safety valves that have been supplying goods and services to meet the recent increments to purchasing power largely generated by capital gains cannot be expected to absorb an excess of demand over supply indefinitely. First, growing net imports and a widening current account deficit require ever larger portfolio and direct foreign investments in the United States, an outcome that cannot continue without limit."

"Imbalances in the labor markets perhaps may have even more serious implications for inflation pressures. While the pool of officially unemployed and those otherwise willing to work may continue to shrink, as it has persistently over the past seven years, there is an effective limit to new hiring, unless immigration is uncapped. At some point in the continuous reduction in the number of available workers willing to take jobs, short of the repeal of the law of supply and demand, wage increases must rise above even impressive gains in productivity. This would intensify inflationary pressures or squeeze profit margins, with either outcome capable of bringing our growing prosperity to an end."

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Jan. 13, 2000
Topic: Technology and the economy
Where: Economic Club of New York, New York
http://www.federalreserve.gov/boarddocs/speeches/2000/200001132.htm

"Productivity-driven supply growth has, by raising long-term profit expectations, engendered a huge gain in equity prices. Through the so-called 'wealth effect,' these gains have tended to foster increases in aggregate demand beyond the increases in supply. It is this imbalance between growth of supply and growth of demand that contains the potential seeds of rising inflationary and financial pressures that could undermine the current expansion."

"What will stop the wealth-induced excess of demand over productivity-expanded supply is largely developments in financial markets. That process is already well advanced."

"A diminution of the wealth effect, I should add, does not mean that prices of assets cannot keep rising, only that they rise no more than income."

"Regrettably, we at the Federal Reserve do not have the luxury of awaiting a better set of insights into this process."

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Vice Chairman Roger Ferguson

Feb. 14, 2001
Topic: eCommerce
Where: Owen Graduate School of Management, Vanderbilt University
http://www.federalreserve.gov/boarddocs/speeches/2001/20010214/default.htm

"The technological developments that enable us to engage in electronic commerce today have created tremendous opportunities to improve the ways in which we do business. Even as some businesses fail, they are contributing to our store of knowledge about what will and will not work in e-commerce. But beyond just the success or failure of specific businesses, electronic commerce has challenged the thinking of entrepreneurs and of those who lead traditional businesses. The developments in e-commerce have reminded us that change, even rapid change, is part of the normal evolution that we expect from market economies. They have also shown, however, that no matter what delivery mechanism is used, successful businesses must still follow good business practices, pay attention to basic economic principles, and sell products and services that buyers want."

"I believe this to be true for business generally and certainly for payments. A market-oriented approach to payment system innovation promises to provide long-lasting benefits to the consumers and businesses that use the U.S. payment system. We need to approach payment system innovations with an open mind and a willingness to learn. This is particularly true in the world of electronic commerce, where payments are being adapted to new technologies, products, and methods of doing business. These innovations are important in themselves. But they are also important because successful innovations to support electronic commerce may, over the long term, have a broad influence on the payment systems we use throughout our economy."

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Jan. 12, 2001
Topic: Domestic Macroeconomic Developments
Where: Bay Area Council 2001 Outlook Conference, Oakland, CA
http://www.federalreserve.gov/boarddocs/speeches/2001/20010112/default.htm

"The employment and income generated by business spending on capital goods boosts consumer outlays and sets off another round of investment spending. Through this process, an innovation on the supply side of the economy generates a comparable increase in aggregate demand."

"It is important to emphasize that higher productivity growth translates into higher real income growth for employees. This added income is seen most clearly in the higher wages paid to that growing number of workers whose cash compensation is tied to company performance either directly or through stock options. But real incomes should increase even for workers whose compensation is not directly linked to company performance, as profitable business opportunities bolster the demand for scarce labor."

"Given the efficiency and forward-looking nature of financial markets, even expected future technical innovations will have an immediate effect on equity valuations. Equity values, in turn, can influence consumer behavior. As you know, economists often speak of the 'wealth effect,' and econometric modeling indicates that consumers eventually tend to raise the level of their spending by 2 to 5 cents for every incremental dollar of wealth. As a consequence, equity valuations can have a noticeable effect on consumption and on macroeconomic performance."

"In recent weeks the Committee's outlook changed rapidly as a result of incoming data and anecdotal reports, demonstrating the importance of our constant and intense scrutiny of the economy. The Federal Reserve will continue to analyze the incoming information carefully and will act prudently and forcefully to provide the monetary and financial conditions that will foster price stability and promote sustainable growth in output"

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May 9, 2000
Topic: Conversation with leaders of the New Economy
Where: Haas School of Business, New Economy Forum, Portola Valley, Calif.

"After increasing 1.6% per year from 1990 to 1995, output per hour in the nonfarm business sector -- a conventional measure of productivity -- has increased at an annual pace of about 2.6% since 1995. Cyclical forces -- such as the inability of businesses to add to their payrolls as rapidly as they would have liked in response to the rise in demand -- have probably played some role in these efficiency gains. But I suspect that longer-term, structural changes, reflecting the boom in capital spending and the revolution in information technology, probably have been more important."

"But technological waves ebb and flow, and it is natural to ask whether we can count on such rapid productivity growth in the future. On this score, I am cautiously optimistic. But, as an economist, I need to see hard evidence of actual ongoing productivity gains or cost reductions in the economic statistics to truly believe that the world is continuing to change in a fundamental way."

"Some particularly enthusiastic observers of the 'new' economy argue that inflationary pressures are no longer a risk. I firmly believe that we should recognize that, even in a high-productivity economy, stresses and imbalances might emerge. In the present context, the most obvious indication of an imbalance is the current account deficit, which is both large and growing. This means that we are financing investment with savings from overseas. The other indicator of an imbalance between demand and supply growth is the gradual decline in the unemployment rate over the last few years. It may be that this imbalance has served only to bring the unemployment rate to a new and lower sustainable rate, but it is also true that the wedge between demand and supply growth cannot continue indefinitely because, once pressures on limited resources rise sufficiently, inflation will start to pick up."

"What should be done when such uncertainties seem particularly acute? When we suspect that our understanding of the macroeconomic environment has deteriorated, as evidenced by strings of surprises difficult to reconcile with our earlier beliefs, I think that the appropriate response is to rely less upon the future predicted by the increasingly unreliable old models and more upon inferences from the more recent past. That means we should weight incoming data more heavily than data from decades past in trying to make judgments about the new economy and, of course, act appropriately when trends become clear."

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Feb. 17, 2000
Topic: The New Economy: Unanswered Questions for 2000
Where: Downtown Economics Club, New York
http://www.federalreserve.gov/boarddocs/speeches/2000/20000217.htm

"Given the economic importance of equity prices, it is reasonable for policymakers to monitor developments in this market even if we do not 'target' specific values. We have seen in other economies that the bursting of bubbles in financial markets can create unsettled conditions that affect real economic activity. Therefore, the maintenance of sound equity market conditions is of concern to policymakers, though how that can be accomplished is often far from clear."

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Governor Laurence Meyer

Oct. 19, 2000
Topic: The Economic Outlook and the Challenges Facing Monetary Policy
Where: Washington University, St. Louis
http://www.federalreserve.gov/BoardDocs/Speeches/2000/20001019.htm

"Even if productivity growth stabilizes at its current rate, we are, in my view, facing a transition. This, of course, presumes that my story about the short-run effects of an acceleration in productivity is on the mark. Initially, we faced a choice between temporarily lower unemployment and lower inflation, and experienced a combination of above-trend growth, a declining unemployment rate, and falling core inflation. The choices may now become less favorable -- specifically some combination of slower growth and perhaps higher inflation. Of course, because of the acceleration in productivity, such a slowdown may still leave the growth rate of real GDP well above the average that prevailed over the two or more decades preceding the acceleration."

"The full effect of the recent rise in oil prices may still be feeding through to the prices of a broader range of goods and services, contributing to a near-term risk of higher inflation -- even more so, of course, if oil prices move higher."

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June 6, 2000
Topic: The New Economy Meets Supply and Demand
Where: Boston Economics Club, Boston
http://www.federalreserve.gov/boarddocs/speeches/2000/20000606.htm

"So, is there a new economy? As I said, it depends. For my part, I accept the proposition that there has been a significant improvement in underlying productivity growth in the United States, that it is very closely tied to improvements in information and communications technology, and that it is likely to spread around the world. But I resist the new economy label because it seems to encourage a disrespect for the old rules that could seriously undermine our success in taking advantage of the new opportunities."

"First, a productivity shock affects aggregate demand as well as potential supply and may initially have an even larger effect on demand than on supply."

"Do we have excess aggregate demand? In my judgment, we have excess demand conditions in the labor market. The central tendency for my estimate of the [non-accelerating inflation rate of unemployment] is in the range of 5% to 5.25%, compared to the 4.1% current unemployment rate."

"The major question in this respect is whether slowing the economy to trend alone will get the job done or whether we need a period of below-trend growth to unwind an imbalance between the levels of aggregate demand and supply."

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April 12, 2000
Topic: The Economic Outlook and the Challenges Facing Monetary Policy
Where: Toronto Association for Business and Economics, Toronto
http://www.federalreserve.gov/boarddocs/speeches/2000/20000412.htm

"The key point is that, even though the rate of increase in nominal wages and core measures of inflation do not yet signal that inflation pressures are building, the balance of aggregate demand and sustainable supply today and the distinct possibility that labor and product markets will tighten further suggest an unacceptable risk of overheating and, therefore, higher inflation in the future."

"To the extent that incoming data only gradually alter perceptions of the appropriate policy stance, only gradual policy adjustments will be called for."

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March 3, 2000
Topic: Structural Change and Monetary Policy
Where: Joint Conference of the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research, San Francisco
http://www.federalreserve.gov/boarddocs/speeches/2000/20000303.htm

"What does this suggest about monetary policy strategy going forward? The current strategy can, I believe, be viewed as a two-step process. The first step is, preemptively, to slow growth to trend. If successful, this step would limit, though not necessarily remove, the threat of overheating, if output has already advanced beyond potential. The second step is to respond reactively to higher inflation, should the prevailing output gap prove to be inconsistent with stable inflation."

"A final component of the strategy, in my view, should be that policy should tighten further -- above and beyond what is presumed to be necessary to slow the economy to trend -- to the extent that efforts to stabilize the output gap fall short. For example, let us assume that growth ultimately moves to trend but, in the interim, the continued above-trend growth increases the output gap still further. In response, policy should tighten incrementally, encouraging below trend-growth and hence unwinding the further increase in the output gap."

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Feb. 23, 2000
Topic: How Does a Surplus Affect the Formulation and Conduct of Monetary Policy?
Where: National Association for Business Economics, 16th Annual Policy Conference, Washington
http://www.federalreserve.gov/boarddocs/speeches/2000/20000223.htm

"Some have been concerned that the Federal Reserve and the Treasury might be working at cross purposes today to the extent that reductions in the Treasury debt supply have led to declines in longer-term Treasury rates at a time when monetary policy is aiming to slow the pace of economic activity to a more sustainable rate. To date, the main impact of Treasury operations and debt management prospects has been on longer-term Treasury rates, with only a small spillover effect on the financial variables that affect private spending decisions -- short- and longer-term private interest rates, equity prices, and exchange rates. To the extent that Treasury debt management operations affect the private interest rates or other financial conditions that matter for private spending decisions, the [Federal Open Market Committee] can always adjust its policy settings as appropriate to achieve its objectives."

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Jan. 20, 2000
Topic: Sustainability and Monetary Policy
Where: Before the National Economists Club and the Society of Government Economists, Washington
http://www.federalreserve.gov/boarddocs/speeches/2000/20000120.htm

"I believe that the prevailing macro configuration is best described by some combination of figures 1.B, 1.C, or 1.D. That is, even after we incorporate the estimated decline in the [non-accelerating inflation rate of unemployment] and the higher rate of growth of potential (as reflected in figure 1.C), output is above potential and output growth exceeds that of potential (as depicted in figures 1.B and 1.D). If output were above potential, we still would not know whether the outcome would be a soft (1.B) or a hard (1.D) landing. To complete the picture, we also have to rely on the temporary disinflationary effects of favorable relative-price shocks and the increase in the productivity trend that have allowed the economy to operate, for a while, beyond potential without suffering inflationary consequences."

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Governor Edward Gramlich

Feb. 20, 2001
Topic: Productivity Growth
Where: Before the International Bond Congress, London
http://www.federalreserve.gov/boarddocs/speeches/2001/20010220/default.htm

"Of all the economic statistics that analysts pore over, productivity growth is surely the most important in the long run. Productivity alone determines the long-run path of income per capita, or living standards. All kinds of projections feed off this long-run growth path -- budget surplus projections, tax revenue projections, and entitlement trust fund projections. Because productivity growth is an important component of earnings growth, stock market valuations depend on the outlook for productivity. In today's open economy, internationally mobile capital searches the world for high returns, making productivity growth a factor in international currency valuations. Because productivity growth is also an important component of unit labor costs, it plays a major role in controlling inflation, at least in the short and medium run. Were national leaders able to pick one economic statistic to be favorable, they would surely pick growth in productivity."

"In the long run, the implications of increases in productivity growth rates are fairly obvious. Per capita living standards will grow at a higher rate, and all variables that depend on income will be influenced accordingly. Long-run budgets will move toward a greater surplus, as projected revenues grow relative to expenditures. The actuarial balance of social security trust funds will be improved, as projected payroll tax revenue based on wage income grows relative to retirement benefit costs. Forecast retirement costs will grow, too, because social security benefits are often wage-indexed until the time of retirement, but not as much as forecast trust fund revenues."

"Determining the implications of increases in productivity growth for inflation in the short- and medium-run is more complicated. Productivity gains are typically thought to reduce inflationary pressures by expanding aggregate supply relative to aggregate demand. But such need not be the case, if the productivity gains sufficiently expand equity values and spending on consumption and investment. Equity values are likely to rise in anticipation of later income gains, so the wealth-income ratio will rise. If the impact of wealth on spending is large enough, productivity increases can actually expand aggregate demand more than supply in the short run, though presumably not in the longer run once the rise in income causes the wealth-income ratio to readjust."

"Increases in productivity growth can also influence inflationary pressures on the cost side. Typically, wages are believed to lag productivity changes, so rises in productivity are reflected in near-term declines in unit labor costs, reducing inflationary pressures from the cost side. But in a competitive labor market, workers should eventually get paid for what they produce, so wages should eventually catch up and eliminate the short-term effect on unit labor costs."

"In most growth models, changes in long-run productivity growth will also raise real interest rates, limiting investment demand but also simultaneously raising domestic currency values. This effect, too, will improve the actuarial forecasts for social security trust funds that have at least some initial assets."

"The United States productivity growth spurt, realized to a much lesser extent around the world, can be attributed largely to a combination of an investment boom and a technological revolution. The investment boom generates productivity gains through capital-deepening, and the technological revolution seems to raise MFP growth. The two forces may also be complementary, in that the technological revolution could raise investment profitability while the investment boom could speed a restructuring of industry."

"The changes in productivity unleash all kinds of long- and short-run forces. In the long- run the effects are surely positive, leading to greater growth in per capita living standards and a lessening of the long-run entitlement spending problem. In the short-run, aggregate supply will rise, aggregate demand could rise, unit labor costs should fall, at least temporarily, and there could be further influences on investment, the capital stock, exchange rates, and real interest rates. Sorting through all of these influences is a daunting task indeed. But there is a policy strategy that nicely adapts to this welter of conflicting influences. Forward-looking, flexible inflation targeting can forecast future pressures in either an inflationary or recessionary direction, and it is at least a feasible way for the central bank to respond to this multiple-variable complexity."

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April 20, 2000
Topic: Investment and Saving
Where: University of Oregon, Eugene
http://www.federalreserve.gov/boarddocs/speeches/2000/20000420.htm

"But even in view of these considerations, cycles in aggregate demand and capital investment have often occurred in the past and are certainly possible in the future. The investment accelerator may have been weakened, but it has by no means been abolished. This leads to policy considerations and specifically to challenges facing monetary policy."

"In either case, the big challenge facing the central bank is policy lags. If it takes time before monetary policy affects the economy, either a Taylor rule central bank or an inflation-targeting central bank will have to act sufficiently early, perhaps preemptively, to neutralize the cyclical shocks."

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New York Fed President McDonough

June 13, 2000
Topic: A View of the U.S. and Regional Economies
Where: Peter M. Tully Endowed Lecture on Financial Services and Economic Development, College of St. Rose, Albany
http://www.ny.frb.org/pihome/news/speeches/2000/mcdon000613.html

"In a word, probably the most notable feature of the U.S. economy's remarkable performance over this past decade has been the rebound in the growth rate of productivity. Whereas productivity growth had languished at about 1.5% a year for most of the 1970s and 1980s, it rose steadily over the 1990s, reaching a striking 3.5% in 1999 and the first quarter of this year. It has been the impressive growth in productivity that has been the fundamental factor behind the sharp improvement in the output/inflation mix we have been observing these past several years."

"While it might be tempting in this environment to sit back and declare victory, nothing would be more foolish. There is no question that the U.S. economy, especially in relation to the world economy, is beginning to exhibit signs of imbalance and strain."

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March 30, 2000
Topic: A Perspective on the U.S. and World Economy
Where: Japan Center for Economic Research, Tokyo
http://www.ny.frb.org/pihome/news/speeches/2000/mcdon000330.html

"Thus, probably the most notable feature of the remarkable expansion in the U.S. economy over this past decade has been a rebound in the growth rate of productivity. Whereas the productivity growth rate had languished at the 1.5% level throughout most of the 1970s and 1980s, it rose steadily over the decade of the 1990s, reaching an astonishing 5.7% annual growth rate in the second half of 1999. The question that remains unanswered -- and troublesome -- is whether this significant improvement in productivity growth, which has made the U.S. economy one of the most competitive in the world today, is temporary or permanent."

"As a central banker, however, I cannot help but register concerns about some recent developments. As the expansion has progressed, signs of imbalance or strain have begun to appear in the U.S. economy, especially in relation to the world economy."

"We can not yet resolve the 'new economy' debate. Nevertheless, I am persuaded that the longer productivity improvement continues, the harder it becomes to view this improvement merely as a cyclical phenomenon. Certainly, it seems to me that the accompanying low levels of inflation, together with relatively high rates of resource utilization, suggest that something more than normal cyclical forces is at work."

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Governor Alfred Broaddus, Jr.

Jan. 19, 2001
Topic: Economic Prospects for 2001
Where: Risk Management Association, The Omni Hotel, Richmond, Virginia
http://www.rich.frb.org/media/speeches/show.cfm?SpeechID=24

"Even after we reduced interest rates on January 3, the FOMC indicated that the risk in the outlook was still weighted more heavily toward slower growth than toward higher inflation, and I agree with that assessment. But core inflation has been rising very gradually for the last 12 months or so. Please don't misunderstand me. I am not ringing any immediate inflation alarm; inflation is well contained for now. But it is worth remembering, as 2001 progresses, that the Fed's principal contribution to the long 1990s expansion has been precisely our success in bringing both actual inflation and expected future inflation to very low rates, and firmly establishing the credibility of our longer-term anti-inflationary strategy. Indeed, this enhanced credibility is what allowed us to act decisively a few days ago without stimulating fears of future inflation."

"In navigating through whatever turbulence we may encounter near-term, we need to stay on our longer-term course aimed at price stability and credibility for low inflation. Our commitment to this course and these objectives has provided a firm foundation for the outstanding performance of the U.S. economy over the last half decade. We need to continue it."

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