For release: Jan. 11, 2002
Contact: Joe Elstner, (314) 444-8902; Charles B. Henderson, (314) 444-8311

Current Recession Has "Decidedly Atypical" Features, Says St. Louis Fed's Poole

Link to speech

ST. LOUIS -- The current recession has "some fairly standard features, and some that are decidedly atypical," according to William Poole, president of the Federal Reserve Bank of St. Louis.

Speaking to the AAIM Management Association, Poole said the September 11 terrorist attacks affected a slowing economy by "tipping it over rather decisively into a recession." Poole said it is not unusual for unusual events like the attacks to send a soft economy into recession, citing Iraq's 1990 invasion of Kuwait and the 1970 General Motors strike as examples.

"Another dimension of the 2001 recession, typical of past cyclical behavior, is that substantial inventory accumulation occurred as the economy's growth rate slowed in 2000," Poole said. "In the first quarter of 2001, firms had reduced production below the level of final sales, reducing inventories. In succeeding quarters, firms continued to liquidate inventories by ever-larger amounts. The inventory cycle is a standard feature of almost all recessions."

On the other hand, Poole said, in many ways this recession is not typical. "Housing investment, which historically has been a leading indicator of a cycle peak, has remained on a high plateau throughout 2001. Also, consumer expenditures on light vehicles have continued at near record levels, although with considerable support through lower financing and rebates. More generally, durable goods consumption, which usually declines in a recession, has held up pretty well."

Poole cited other "atypical" factors of the recession:

• Productivity growth has remained strong despite the slowdown in real growth.
• In contrast with typical cycles but in common with the 1990-91 recession, market rates of interest peaked in advance of the March 2001 cycle peak.
• The Federal Open Market Committee (FOMC) acted aggressively in advance of the cycle peak to reduce the intended federal funds rate. Poole noted that as news of the attacks arrived, the Federal Reserve became "totally focused" on maintaining a smoothly functioning payments system and preventing a liquidity crisis. "On the morning of September 11, even before the extent of the terrorist attacks was fully certain, Vice Chairman Roger Ferguson announced that 'the Federal Reserve System is opening and operating. The discount window is available to meet liquidity needs.' In several days about $100 billion of short-term liquidity was injected through discount window lending, open market repos, float and 'swap' agreements with four major foreign central banks."

Looking ahead, said Poole, the U.S. economy has powerful forces promoting growth and full employment. "Our 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."

These and other pluses, Poole said, remain in place. "For all these reasons, we have every reason to be optimistic about the course of the U.S. economy in the years ahead."

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