When he was a forecaster in the private sector, Board Governor
Laurence Meyer's firm was recognized as one of the most accurate
in the country, winning prestigious prizes from Business Week and the panel of Blue Chip Economists. So he would seem a natural fit for the Federal Open Market Committee,
the policymaking arm of the Federal Reserve System, and he indeed
sees his current position as a sort of culmination to his career.
"I must say at the outset that I believe I have been preparing for
this opportunity my whole life," Meyer said in his nomination hearing
before the Senate Banking Committee.
Meyer's responsibilities at the Board have required him to travel
across the country and, among other things, to visit with community
leaders about lending and development efforts. Those trips often
take him to urban neighborhoods, but during a recent trip to Minneapolis,
Meyer left the city and visited two northern Minnesota Indian reservations,
and he shares his reflections of that trip in the following interview.
Meyer also discusses his decision to start a private forecasting
firm, professional life at the Board and current changes within
the banking industry, among other issues.
REGION: To begin, just a couple of questions about your
career before you came to the Fed. Why did you decide to branch
out from academia in 1982 and start your own business?
MEYER: First, I should clarify that I did not leave academics
to start my forecasting firm. Washington University gave me the
latitude to begin and run the firm while retaining my faculty affiliation
and responsibilitiesthat was a challenge in itself, to be
sure. As a matter of fact, I am currently on leave from Washington
University while serving on the Board of Governors.
Why did I start the forecasting firm? An interesting question.
My love of large-scale macro models began while in graduate school
at MIT. I was a research assistant for Professors Franco Modigliani
and Albert Ando during their work building a large-scale macro model
that ultimately became the model used at the Board of Governors.
While I was serving as chairman of the Economics Department at
Washington University I wondered about what new challenges I wanted
in my career and decided that I would like to put into practical
use my knowledge of macroeconomics by starting a firm specializing
in model-based forecasting and policy analysis. I saw this as a
natural extension of my academic work as well as an opportunity
to provide a market test of the usefulness of my approach to macroeconomics.
I enticed two of my former studentsJoel Prakken and Chris
Varvaresto return to St. Louis and begin the firm, and the
firm's success was very much a joint product of our efforts. I had
to sell my interest in the firm as a condition for joining the Board
of Governors. But I take great pride in the continued success of
the firm under the leadership of my former partners.
REGION: Was it a difficult decision to make?
MEYER: Easiest one I ever made.
REGION: Were your modeling techniques new?
MEYER: They built on the tradition of the work that had
come out of MIT and the University of Pennsylvania and that were
already embodied in the work that was carried on by the Board of
Governors. It wasn't a dramatic change in vision, but we thought
we were able to develop a model that we felt was the best one being
usedcertainly in the private sector for forecasting and policy
By the way, building a business was a very exciting prospectthat
entrepreneurial challenge was a new one for me and I relished that
aspect of it. That was very exciting. I think it becomes more exciting
when you come so close to not making it. At the beginning it was
so closewhether we were going to be able to pull it off. But
when you're successful after that it's so much more meaningful,
because it was difficult.
REGION: In your statement before the Senate Banking Committee
at your nomination hearing, you said that your career had been,
in many ways, a preparation for the opportunity to serve on the
Board of Governors. Has there been anything that you've been unprepared
MEYER: There are three surprises for me. First, despite
all the warnings from former governors, it is still a surprise to
be confronted with such a wide range of responsibilities at the
Board. Most people believe that we attend eight FOMC meetings a
year and spend the remainder of our time thinking about the economic
outlook and monetary policy. The truth is we have responsibilities
in bank supervision and regulation, consumer protection, fair lending,
and community reinvestment, participate actively in various international
fora, and have important management oversight responsibilities for
the operations at both the Board of Governors and the 12 regional
Federal Reserve banks. We're like the board of directors of a large
Second, I have been surprised by the amount of attention by the
media, especially related to anything I say about the economic outlook
or monetary policy. There is a virtual feeding frenzy that goes
on, and the primary difficulty is the variety of interpretations
that are given to what you say, especially by the different wire
services. So, you try to be disciplined and communicate as effectively
as you can, and then you give a speech and get 10 varying interpretations
of what you said, often with a lot of liberties taken in the interpretation.
But you learn to live with that.
There's nothing malicious about it: They're trying to do their
job, and I'm trying to do my job. But I would say that one of my
least favorable moments in this job is coming back from a speech
and having to see the various wire service reports overdramatizing
and overinterpreting what I had to say, and then waiting so see
what shows up in the newspapers the next day.
Beyond that, the third surprise is that I frankly did not expect
that the workload would be as heavy as I have found it. My inbox
is like a perpetual motion machine; I have more material to read
than has been the case since graduate school, and devote especially
long hours to my speeches on the outlook and monetary policy, in
an effort to keep them appropriately balanced (I know they may not
always seem that way) and to try to avoid misinterpretation (which
I do not always manage to do).
REGION: Any particular case of media misinterpretation that
MEYER: There are many. One was the first time that I had
a significant impact on the market, I think it was in January 1997.
First of all, I gave a speech and a newspaper said something like
this: Gov. Meyer gave a speech in Charlotte that was taken as very
bearish by the markets, and the stock and bond markets took a significant
dip right away; but Meyer proved he was no Greenspanmarkets
recovered by the end of the day and ended higher. [Laughs.]
A reporter came on a trip with me subsequently just to observe
the reaction to the speech and write a story about the way it was
covered. As part of that story he quoted my wife after the Charlotte
trip as having said, "Well, you finally did it, you tanked the market."
Of course, my wife claimed that she never used the word "tanked,"
that it's not in her vocabulary. So I called up the reporter and
told him he had committed one of the gravest sins of a reporterhe
had misquoted somebody. He said that I had given him that quote,
and I told him: "You're supposed to check your sources."
In all seriousness, I try to be as effective in communicating
as I can be, as balanced as I can be, while still getting the message
across that I'm trying to conveywhich is difficult. I'm known
to be quite explicit, and have been told that I'm "recklessly clear."
But I want to be explicit, particularly about how I have evaluated
a situation in the pasthow I interpret what went on, why it
went on and what was appropriate or not about monetary policy. Looking
forward I try to be a little fuzzier and don't tend to talk in very
precise terms, but I do talk about the nature of the challenges
pretty explicitly. Because I'm as explicit as I am, I give the media
good material, as it were, and obviously I occasionally pay the
But I believe in transparency and that we have an obligation to
explain to the public how we assess the economic outlook and the
risks, and how we rationalize policy. Of course, I don't speak for
the FOMC and I don't speak for the BoardI can only give my
views. And we're all very careful about stressing that we are presenting
our personal views when we give speeches or talks, and not the views
of the entire Board or FOMC. If I ever read in a story that Gov.
Meyer has hinted about the direction of the FOMC, I immediately
call the reporter and stress that I was only giving my view and
not those of my colleagues. If you want to know what the FOMC thinks,
you've got to ask everybody on the Committee.
REGION: It sounds like it's easier to say nothing.
MEYER: It's easier to say nothing or to say things that
are reasonably obscure. Of course, if you think that the goal is
increased transparency, you can't handle it that way. But balance
is very important, judgment is very important. Some of these things
one learns from experience, but there's a great value in going over
this with the staff; they've been through this a number of times
over the years, and I do take their advice very seriously.
REGION: In a recent speech entitled, "Come
with Me to the FOMC," you describe, in great detail, the workaday
procedure of an FOMC meeting. [Reprinted in The Region,
June 1998.] You clearly have great respect for the FOMC and the
manner in which information is gathered and the meetings are conducted;
having said that, is there anything you would change?
MEYER: Let me begin by emphasizing the effectiveness of
the process. It is important to retain the encouragement that now
exists for all views to be expressed and respected.
Still, it is worthwhile to critically assess the effectiveness
of even those institutions that appear to be working so well, as
I would say is clearly the case for FOMC meetings. Given how well
the process works, I also am reluctant to view any of my suggestions
as of very high priority. But since you asked ... First, I would
prefer somewhat greater opportunity for discussion, for back and
forth among members to clarify arguments and draw out viewpoints.
I recognize the challenge of making this work in a group of 19 people.
And, sequential presentations, with each member having an opportunity
to participate in both outlook and policy go-rounds, ought to remain
the core of the FOMC meetings. Still, I believe that the process
and decisions would benefit from some give and take. There's not
really a discussion to draw out positions, and generally questions
to members of the FOMC in response to their statements are limited.
Second, I would prefer more discussion of broader strategy issues
related to monetary policy, as opposed to focusing at each meeting
almost exclusively on whether or not to change the funds rate at
that meeting or sometime soon. We sometimes have these broader discussions
in February and July (at our two-day FOMC meetings), but not at
most other meetings, and I think a little bit more discussion of
these strategic issues would be valuable.
REGION: In November 1996 you cautioned about allowing banks
to engage in nontraditional businesses like securities underwriting,
and you warned about the risks to the deposit insurance fund. Are
the recent mergers in banking, or the calls for Congress to liberalize
banking rules, cause for concern in this regard?
MEYER: My concern was not with banking organizations engaging
in nontraditional financial activities, but rather with such activities
being conducted in the bank itself or in an operating subsidiary
of a bank. I believe that the new activities should be limited to
affiliates of the holding company. There are several reasons why
this restriction is prudent. First, because there is an implicit
subsidy related to the federal safety net, banks can fund their
activities more cheaply than nonbanks. I do not believe this funding
advantage should be extended to the new activities.
Second, restricting the new activities to affiliates of the holding
company better insulates the depository institution from the risks
associated with the new activities. The holding company structure
is a device for protecting the deposit insurance fund from risks
associated with expanded activities within banking organizations.
Third, if banks had the option of locating all activities in operating
subsidiaries, they quite likely would do so to take advantage of
the cheaper funding that this would allow. The result could be a
decline in the use of the holding company form of organization.
This would in effect significantly erode the ability of the Federal
Reserve to remain engaged in regulation and supervision of large,
complex banking organizations. The Federal Reserve today is the
primary federal regulator of only 5 of the largest 25 banks. The
Federal Reserve, however, is the exclusive regulator of bank holding
This authority is a critical component of the Federal Reserve's
ability to keep its fingers on the pulse of the banking system,
to understand changing patterns in risk profiles and risk management
across the wide range of banking organizations, and to remain in
a position to manage systemic risk and respond to financial crises.
Some will view this argument as a "turf" issue. But who should be
involved in what activitiesand specifically to what extent
the Federal Reserve should be involved in bank supervisionis
an important and substantive public policy issue. Congress has always
looked to the Federal Reserve to monitor and control systemic risk,
guard against financial instability and manage financial crises.
REGION: What is your opinion of the Minneapolis
Fed proposal regarding deposit insurance, calling for depositors at
too-big-to-fail banks to take on some risk on deposits exceeding $100,000,
and for a market-based assessment of risk in the pricing of deposit insurance?
MEYER: I view the Minneapolis Fed deposit insurance reform
proposal as one idea for increasing market discipline on banking
organizations. This is especially important with respect to large,
complex and internationally active banks, where both the risks and
difficulty in supervision may be greater. Deposit insurance allows
depositors to be less focused on assessment of the risk of their
banks, because they know that if the bank fails, their deposits
are guaranteed, at least up to $100,000, and, in practice, often
well beyond. The Minneapolis Fed proposal would limit payouts to
uninsured depositors in systemic risk situations to the maximum
of either 80 percent of the nominal value of their deposits or the
market value of their deposits.
I am also interested in finding ways to improve market discipline.
My preferred approach would be to require large internationally
active banks to issue a minimum amount of uninsured subordinated
debt to the public. Holders of such debt would have a strong incentive
to require the bank to manage its risk prudently. Like the Minneapolis
Fed proposal, I would like to see the current risk-based insurance
premiums better reflect the risk differences between banks. That
does not happen today, in part, because current law limits the growth
of deposit insurance reserves, and as a result banks actually pay
deposit insurance premia.
It is, however, important to keep in mind that movements toward
increased market discipline often result in increases in systemic
risk. So, in comparing proposals for increased market risk, I would
focus on the following trade-off. For a given improvement in market
discipline, which proposal results in the smaller increase in systemic
risk? Based on this criterion, the subordinated debt approach may
be preferable. Subordinated debt holders cannot run, whereas depositors
facing uncertain losses might. Troubled banks with required levels
of subordinated debt would face higher funding costs, and, importantly,
the rise in the rate on such debt in response to higher risk would
provide information to the market, the banks and the supervisors.
REGION: Big bank mergers, of course, have been in the news
lately, and have raised questions for consumers, for the industry
itself and for regulators. Are more mergers inevitable?
MEYER: We are in the middle of a wave of consolidations
that is likely to continue for some time. There have been over 7,000
bank mergers since 1980, reducing the number of banking organizations
cumulatively by 40 percentto about 7,200 from about 12,300.
In recent years, many banks have been responding to the removal
of barriers to interstate banking that restricted entry and divided
markets. The adjustment to the freedom to diversify geographically
will continue to encourage bank mergers for some time. Attempts
to increase efficiency, in part by exploiting potential economies
of scale, may also be a factor promoting consolidation. I might
also note that product diversificationas in combinations of
banks, securities and insuranceis also a motivating factor
in some mergers. But each merger is somewhat unique and several
motivations in addition to those I have just mentioned may also
play a role.
REGION: For many years now, there has been a concern within
the banking industry of dominance by big banks and, by extension,
a disadvantage for smaller institutions. Yet, small banks continue
to do well and every year more bankssmall onesare chartered.
MEYER: That's very true, and we often hear from smaller
banks that they're licking their chops whenever another merger is
announced, that there will be more business for them. The fact is,
if two banks combine in a community it immediately ends up losing
some of that combined business and often has trouble growing in
the community afterward. I think it's really important that what
we emphasize in antitrust is not national concentration, but local
competition. Despite the number of mergers, there are some indices
that show that local market concentration hasn't changed very much
from 1980 until the present time. So, the mergers that we've had
so far have not severely undermined competitiveness from the standpoint
of local market competition.
REGION: What will the banking industry look like in 10
MEYER: I appreciate well the difficulty of forecasting,
especially over a period as long as a decade. But for the reasons
I mentioned above, it seems reasonable to expect a continued high
level of merger activity for the foreseeable future. Studies based
on historical experience, and based on continued implementation
of the antitrust laws, suggest that in a decade there will likely
be about 3,000 to 4,000 banking organizations, down from about 7,000
today. Although the top 10 or so banking organizations will almost
certainly account for a larger share of U.S. banking assets than
they do today, the overall size distribution of banks will remain
about the same. That is, there will likely be a few very large organizations
and an increasing number of firms as we move down the size scale.
Importantly, a large number of small banks are likely to remain.
REGION: How will bank supervision fit into the picture?
MEYER: Mergers and especially mega mergers are increasing
the challenge for bank supervisors in several respects. Geographic
diversity requires more coordination for the Federal Reserve across
districts and with state supervisors in different states. Increased
product diversity, especially if financial modernization legislation
passes, increases the need for coordination across banking, securities
and insurance supervisors. Moreover, in a world of more sophisticated
and complex financial products, supervisors will have to continue
to develop and use examiners with special skills and expertise in
such areas as capital markets, risk management, internal modeling
and information technology. Increased globalization requires increased
coordination with supervisors in other countries. Another challenge,
again potentially under financial modernization legislation, would
be to learn to blend functional and umbrella supervision.
Finally, supervisors are adjusting and must continue to adjust
examination practice to the changing banking environment. One adaptation
is the move toward more "risk-focused exams." Exams increasingly
focus on assessment of the risk management process, internal controls
and corporate governance, rather than the evaluation of individual
transactions. This is important because the quality of the assets
in more complex institutions can change quickly, making static snapshots
of their portfolios of limited usefulness. Supervisors will also
have to make maximum effective use of information technology to
collect and process information in order to monitor on a more timely
basis the impact of market developments on banking organizations'
REGION: In your work at the Board, you have been involved
with community development; as you travel around the country, what
are some of the issues that are commonly discussed?
MEYER: First, there is much discussion of the successes
in affordable housing and small business lending programs. This
success reflects the encouragement of CRA for depository institutions
to focus on the needs of the low- and moderate-income communities
and people. That encouragement combined with the creativity of both
banking and local non-profit community organizations has resulted
in private/public partnerships that lever a modest public sector
commitment of funds with substantial private sector participation.
These partnerships have facilitated housing and economic development
in neighborhoods and communities all over the country.
However, there is also much talk of the challenges that lie ahead,
challenges in part related to the rapid pace of change in banking.
There is concern about an erosion of public subsidy funds. Leverage
is good, but it helps to have something to lever! There is concern
that mergers and deregulation may undermine some of the recent community
reinvestment successes, either because of loss of local control,
because of greater difficulty in working with larger banking organizations,
or because new activities that banks might be allowed to engage
in might divert energy and resources away from community reinvestment.
In order to effectively address these challenges, it is essential
that financial institutions and local community organizations continue
to work together. The community groups must recognize that opportunities
exist for the development of new products and services for their
communities. The larger institutions will need to rely, more than
ever, on the community groups' knowledge of local markets. By working
together, and mustering that creativity which has served the communities
so well in the past, banks and nonprofit groups will continue to
be effective agents of change in our neighborhoods.
I should also say that often when I make such visits I spend some
time at the beginning explaining what the Federal Reserve is doing
in that context. So I have to explain what the Federal Reserve's
interests are. Most people associate the Federal Reserve with monetary
policy, but Congress also gave us a wide range of responsibilities,
and one of them is to encourage banks to serve the needs of their
communities, with specific reference to low- and moderate-income
REGION: What was your impression of your trip to northern
Minnesota, including visits to the Mille Lacs and Fond du Lac reservations?
MEYER: My recent area of specialization at the Board has
been consumer and community affairs because I chair the oversight
committee for this area. When I travel to Reserve banks, I usually
try to visit with community nonprofit organizations, bankers and
local government officials to learn about the success of banksand
private/public sector partnerships in which they participatein
facilitating affordable housing, small business lending and general
economic development in low- and moderate-income communities.
Because the Ninth District has a large number of Indian reservations,
we decided to use this opportunity to acquaint me with the special
challenges of banks lending and providing financial services on
Indian reservations. The two reservations I visited each had casinos
and both had taken advantage of the revenues from the casinos to
invest in community development projects. In one case, I visited
a quite extraordinary elementary schoolboth high-tech and
attuned to the cultural values of the tribeas well as a health
clinic that incorporated traditional healers with all the modern
facilities. It was very interesting to see this blending of technology
and long-standing cultural tradition. On the other reservation I
visited a very impressive community college. In both cases I met
with the Indian leadership and bankers, and had a good opportunity
to explore ways to facilitate more effective relationships between
banks and the reservations.
Most of the time, on these trips, I'm looking at urban areas,
and this is one of the first times that I've seen these challenges
in more rural communities.
REGION: Did you come away with any new insights?
MEYER: I think I understand better the need for a two-way
education process. Bankers have to be better educated about tribal
law and about how the tribal court systems work. Also, tribes need
to be better educated about what banks need to make loanson
Indian reservations or anyplace else. There have to be, sometimes,
adaptations that take place; we have to sit around the table and
build those relationships so they work more effectively. As we all
know, bankers do not like uncertainty, so what we need to do is
find ways to reduce what they view are the special uncertainties
having to do with misunderstanding and the variation from tribe
to tribe of the legal systems.
REGION: Researchers at the Minneapolis Fed have looked
at questions regarding the nation's ability to increase its standard
of living, and why some countries are more economically successful
than others. In brief (and at the risk of oversimplifying), our
1996 Annual Report argues that openness to technological progress is the key to economic
growth. What is your take on this issue?
MEYER: The discussion in the 1996 Annual Report follows a theme developed, among others, by my colleague at Washington
University, Douglass North, on the effect of institutions on economic
performance and living standards. Institutions involve rules of
the game and incentives that affect the amount of output that a
society can produce from its fundamental endowments in the form
of labor and natural resources.
I often began my introductory economics class by explaining the
concept of an aggregate production function. The output of a country
depends on the amount and quality of inputslabor, capital
and natural resources. But it is important to appreciate that the
quantity of output that can be produced with a given volume of inputs
is affected by the institutions and policies of a country, including
property rights, regulatory systems and tax structure. That is,
institutions and policy affect the position of the aggregate production
function. Moreover, the inputs into productionthe amount and
quality of physical and human capital investedare themselves
influenced by policy and institutions. Deregulation and reduction
in trade barriers, particular policies cited in the Minneapolis
Fed discussion, are excellent examples of changes that potentially
increase competition and allow the economy to achieve a more efficient
allocation of resources and higher living standards.
REGION: You have been recognized as one of the most accurate
economic forecasters. What's your secret? Have you brought any particular
tools or methods with you to the Board?
MEYER: I have said many times that my recipe for forecasting
was quite simple: mix one part science, one part art and one part
luck. The science is the model, that incorporates both a vision
of how the economy works and empirical regularities that form the
basis for forecasting future developments. The art is the judgment
that is always required in constructing a forecast. And good luckwell
that speaks for itself!
When I put my forecast together in the private sector, it was
a team effort, with my partners and our staff at my forecasting
firm. This was a full-time job for several people. I do not put
a forecast together in the same way at the Board. I judgmentally
adjust the forecasts produced by the staff at the Board and from
many of the private sector forecasters I worked with before joining
the Board. This is part of the transition from being a specialist
(forecaster) to being a generalist who makes decisions with the
support of specialists.
REGION: In the past, it seems we were able to rely on the
unemployment rate as a predictor of inflation; recently, though,
a plunging unemployment rate has apparently had little effect on
inflation. Is the unemployment rate still a reliable predictor?
How low can NAIRU go [nonaccelerating inflation rate of unemployment]?
MEYER: I too have been surprised by the combination of
declining inflation and unemployment during my first two years on
the Board. I have focused a lot of energy on trying to understand
the source of the exceptional performance and the implications for
There are really two problems with the unemployment rate as a
measure of demand pressure in the economy. First, the amount of
demand pressure depends on the unemployment rate relative to some
threshold rate, NAIRU, which is not directly observable and can
vary over time. I, like most other students of wage-price dynamics,
believe that NAIRU has declined from its level in the late 1980s
and early 1990s. Nevertheless, careful attempts to update the estimate
of NAIRU based on recent data still leave most students of the Phillips
curve with estimates of NAIRU near 5.5 percent.
Second, the unemployment rate is not the only measure of demand
pressure and specifically measures demand pressure in the labor
market. Other measures worth looking at include product market-related
indicators, including the capacity utilization rate. Usually the
unemployment rate and the capacity utilization rate move together
(inversely of course). But in the current expansion, these two measures
of utilization rates have diverged. Specifically, capacity utilization
rates are below the level that is usually associated with rising
inflation. Based on historical performance, the capacity utilization
rate in manufacturing would ordinarily be between 4 and 5 points
higher than it is today, to be consistent with current unemployment
rates, and at a rate well above that associated with stable inflation.
How low can the unemployment rate go? That depends, of course,
in part on how low NAIRU is. It depends also on how large and persistent
favorable supply shocks continue to be, since I view such shocks
as being instrumental in restraining inflation that otherwise would
have resulted from the very tight labor markets. I have noted many
times that I believe the unemployment rate is significantly below
a level that is sustainable in the long run without rising inflation.
The trick is to make a smooth transition back to more balance in
labor markets as the favorable supply shocks abate or reverse.
REGION: In recent years there has been much discussion
about the rate of productivity. Have we seen a permanent shift in
the rate of productivity growth? If so, what bearing does this have
on our understanding of inflation?
MEYER: There remains considerable debate about whether
and to what extent there has been an increase in trend productivity
growth. Productivity growth has been robust in recent quarters,
but much of this strength can be explained as a normal cyclical
rebound. Productivity is, after all, one of the most aggressively
procyclical variables in the economy. Even so, I have raised my
estimate of trend productivity growth since I joined the Board.
This is partly due to technical revisions in the measurement of
price indices used to compute productivity and partly due to my
reading of the productivity data. It is also supported by evidence
of capital deepening, a rise in the amount of capital available
to each worker because of the investment boom in this expansion.
An increase in trend productivity contributes to keeping inflation
low, at least for a while, for several reasons. First, it raises
aggregate supply and makes it more difficult for demand to overtake
supply. Second, if unanticipated, it initially does not raise nominal
wages, but lowers the cost per unit of output, for a given wage
rate. Some of that cost reduction goes to profits, but competitive
forces transmit some of the cost savings to prices.
The key question is to what degree the recent increase in productivity
growth reflects a normal cyclical acceleration and to what extent
it might signal an improvement in the trend rate of productivity
growth. The simple answer is that it likely reflects some of both;
but it is important to parse out the overall increase between these,
and perhaps even other, transitory influences. While I have revised
upward my estimate of trend productivity growth in response to the
recent data, I, nevertheless, continue to believe temporary favorable
supply shocks have been a more important factor explaining recent
inflation experience than a permanent increase in the productivity
REGION: When you describe the U.S. economy, you've been
known to use such descriptions as "temporary bliss" and "permanent
bliss." Could you please describe those terms? Which state of bliss,
if either, describes our current situation? [Interview was given
in May 1998.]
MEYER: Temporary bliss and permanent bliss are two "stories"
that might explain the recent exceptional performance of low unemployment,
rapid growth and declining inflation. Temporary bliss refers to
the role of temporary factors in producing this exceptional outcome.
Falling oil and import prices, exceptionally sharp declines in computer
prices, especially benign food prices, and unusual restraint in
health care costs have collectively restrained inflation over the
last year and a half and some of these factors have been in play
for the last two and a half years. I refer to this explanation as
"temporary bliss" to emphasize that the exceptional performance
in this case reflects temporary factors. The implication is that
the current state is not sustainable and monetary policy must be
concerned with making the transition back to a still good, but more
Permanent bliss is an alternative story that explains recent exceptional
performance as a reflection of permanent structural changes, which
have allowed the economy to operate at a lower unemployment rate
without inflationary consequences and allow the economy to grow
faster on average. A decline in NAIRU and an increase in trend productivity
growth would fall into this explanation. In this story, the exceptional
performance is sustainable and monetary policy has to be careful
not to interfere with the economy achieving its new and lower sustainable
unemployment rate and new and higher sustainable output growth.
The two "stories" highlight potentially different explanations
of recent performance and highlight how the different explanations
have different implications for monetary policy.
The complicated truth is almost certainly a mixture of the two
"stories," in which case the weights of the two explanations has
an important implication for monetary policy.
REGION: Thank you, Mr. Meyer.