William Poole

Despite Dark Events,
Prospects Remain Bright

Pearl Harbor. The war in Korea. The Cuban missile crisis. Kennedy's assassination. The U.S. economy has survived many shocks in recent history. It will withstand the terrible events of Sept. 11, also.

Of course, there will be setbacks, as we've already seen in the airline and hotel industries. But the economy as a whole need not--and I believe will not--suffer in the long run. Our economy is resilient. Resources--both capital and labor--will flow from industries where they aren't needed to those where they are, and the aggregate economy will grow once again.

We can't predict how long this will take. But history shows us that the economy always rebounds, often sooner than people feared at the time a crisis occurs. Years from now, only economists will care how many quarters passed before the recovery occurred this time.

In such times of crisis, America has an edge over many other countries. For starters, our culture and institutions reward entrepreneurial activity. Many of us are motivated by the intellectual and financial rewards of building companies and serving markets. We are much better off living in a society where people may be excessively exuberant sometimes--think back to the late 1990s--than in a society in which few take risks. Within weeks of the terrorist attacks, our entrepreneurs and innovators will be looking for opportunities to move the U.S. economy forward. The environment they've always counted on--the accommodating government policies, the decentralized markets, the flexible labor force--is intact today.

Another important advantage we have at this point is our low and stable rate of inflation. The Fed's long-standing focus on controlling inflation will pay off now more than ever. After the terrorist attacks, there was almost no evidence that behavior was being motivated by fear of inflation. Contrast that to previous times of crises--the outbreak of the Korean War, for example--when the fear of rising prices complicated the situation considerably. That we take price stability almost for granted is a great strength of our current condition.

Equally important has been our ability to keep the nation's payments system running during the crisis. A market economy requires that households and businesses be able to make and receive payments reliably. The Fed provided record amounts of liquidity--tens of billions of dollars--through various channels after the terrorists struck the nation's financial capital. Banks had plenty of cash. ATMs were stocked. Any fear that access to money would be cut off was dispelled.

None of this is to say that the recovery starts tomorrow. Before the attack, the economy had already slowed to a crawl. Corporate profits were off 20 percent. A million people had received layoff notices since the start of the year. Only strong spending by consumers--thanks to low interest rates--kept recession at bay.

Among the many ways we can help the economy is to remain optimistic. Studies prove that expectations--positive as well as negative--can be self-fulfilling and reinforcing.

I'm confident, given our prior experience, given our economy's characteristics and the characteristics of our people, that the U.S. economy will rebound. The natural state of our economy is growth and full employment. We'll get there.