Most economists have about as much confidence in economic forecasts as they do in forecasts about their local weather. Since Jan. 3, 2001, the Federal Open Market Committee (FOMC) has cut the intended funds rate 11 times. During the January 2002 FOMC meeting, the committee voted to keep the intended funds rate the same. Although I cannot predict what our economic future will look like, I can offer my own perspective on where we are right now and how we got here.
At the end of 2000, the consensus among policy-makers was that our economy would slow down during the first part of 2001. We expected the slowdown would be a brief "V" shape—as plotted on a graph—that would not end a decade of economic expansion. As the year progressed, the slowdown did materialize, and it lasted longer than we anticipated. That "V" became a "U"; yet, as of late August 2001, forecasters continued to project near-term recovery without a recession.
All bets were off starting Sept. 11. That day's tragedies were unprecedented, and forecasters had no historical basis from which they could base their projections about our economic future.
Failure to predict the economy's turning point, or even realize for several months that a peak has occurred, is typical. Clearly, our economy was not performing well before the attacks. Many considerations were important factors. As the growth rate slowed in 2000, businesses sharply reduced their investments, and inventories grew substantially. In 2001, businesses cut investment further and liquidated inventories. On the flip side, new car and home sales flourished. Therefore, it is impossible to know whether we would have had an official recession had the attacks never happened.
What does the future look like? I can't offer a specific forecast. My personal conviction is that our current economy contains powerful forces that will promote growth and full employment. We have strong, resilient people, efficient markets and low inflation. Most economists agree that if our central bank does not achieve price stability, no one else can. I define price stability as an environment in which the inflation rate, when properly measured and averaged over several years, is zero. Achieving price stability—as I define it—will yield a highly stable economy. I believe we cannot be so aggressive in our efforts to stabilize the economy that we run the risk of compromising the goal of price stability.
The long-run goals of the Fed are clear. When it is necessary, we are ready to cut or raise the intended funds rate. Likewise, when the available information does not indicate that a change is warranted, the Fed is prepared to wait patiently until the appropriate action becomes clear.