U.S. economy is now in the longest expansion in its peacetime history

• Despite economic crises in Thailand, Indonesia, Malaysia, Korea, Japan, Russia, Brazil,...

• Real GDP and job growth is up

• Inflation is down

Real GDP growth stays strong

-6

-4

-2

0

2

4

6

8

88 89 90 91 92 93 94 95 96 97 98

Percent

98Q4: 6.1%

GDP growth rate 1988-98

Inflation rate stays low

0

1

2

3

4

5

6

88 89 90 91 92 93 94 95 96 97 98

Inflation rate (GDP)(4 quarter average)

Inflation rate (GDP)

Q4: 0.7 percent

Percent

But the 1990s expansion is part of a much longer and more amazing

economic phenomenon

• 1999 will be 17th year of The Long Boom• Includes not only the first, but also the

second longest peacetime expansion in U.S. history – 1990s (now 95 months), – 1980s (92 months)

• Recession in between was short and mild

-10

-5

0

5

10

15

84 86 88 90 92 94 96 98

0.5

3.9

8.6

7.2

7.4

9.3

6.3

2.9

2.6

4.1

2.0

5.7

2.5

5.0

0.4

2.2 2.2

2.5

4.0

3.5

5.9

2.4

4.1

2.4

5.0

3.9

3.0

2.1

0.4

3.9

1.2

-1.9

-4.1

-2.1

1.8

1.0 1.0

4.6

2.5

3.0

4.2

0.1

2.02.1

5.2

2.9

4.6

1.8

3.6

1.7

0.4

3.3

2.7

3.3

5.9

2.1

4.2 4.2

3.9

4.1

2.9

5.4

1.8

3.6

5.9

Growth rate of Real GDPGrowth rate of Real GDP

No period like this in the history of baseball

52

56

60

64

68

72

8/31 9/05 9/10 9/15 9/20 9/25

SOSA MCGWIRE

McGwire in earlySeptember:

"wouldn't it be greatif we ended up tied"

9/25: Sosa takes lead66 to 65 for 45 minutes

Similarly, no period like this in the history of market economies

• Precedented Stability

• 17 years before this (1966-82) had 5 recessions

• In the 1890s there were three big recessions, leading to unrest and populist politics...

We will answer their demands for a gold standard by saying to them:You shall not press down upon the brow of labor this crown of thorns.You shall not crucify mankind upon across of gold.

Why has the Long Boom kept on going?

• Weaker pitching, better baseballs,…?• Good luck?

– No big shocks like the 1970s? • But global shocks were huge in 1998

– Change in the economic rules? • Services, inventories, high-tech “new” economy”?

• Good policy?– Fiscal policy?

• Deficit reduction and elimination?• Counter-cyclical policy?• What about the tax cuts of the early 1980s?

A great supply side policy, but where did the increased stability come from?

The answer is monetary policy

• But what is it about monetary policy

• More reactive to changes in inflation– federal funds rate rises by twice as much when inflation

rises: 75 versus 150 basis points

• This has kept inflation (and expectations of inflation) low, thereby preventing recessions.

He asks and then answers as follows:

• “Why has pricing power [of firms] of late been so delimited?”

• “Monetary policy certainly has played a role in constraining the rise in the general level of prices…”

• “But our current discretionary monetary policy has difficulty anchoring the price level over time in the same way that the gold standard did in the last century.”

This relationship between monetary policy, inflation, and economic stability

was not always so clear. Remember this?

Other potential benefits of the the recent monetary policy

experience

• Policy can be followed in other countries or regions– The European Central Bank?

• Good monetary policy might become less dependent on outstanding people, such as Alan Greenspan– Maybe the ideas can be taught in school!

WELCOME TO

A school dedicated to teaching the science and art of monetary policy.

Out with the old.In with the new.

OLDOLD NEWNEW

Outlook for the rest of 1999 &2000: The Long Boom Goes On.

• Real GDP growth slowing a bit

• Inflation rate increasing a bit

• And the federal funds rate steady in the current 4.75 percent range

But it would be wise to consider some alternative scenarios

• Scenario 1: inflation scare: CPI inflation rises from 1.5 percent to 3.0 percent– high money growth, tight labor markets

– Federal funds rate would probably go up by about 2.25% to 7.0%

– Likelihood of recession in 2000-2001 increases

• Scenario 2: big slowdown: US growth falls to 1.0 percent– Funds rate would probably go down by about .5% to

4.25%