Financial Update (Second Quarter 2004)


 Deterring Money

 Surprising Effects

 Conference Eyes
 Wall Street's Future

 Guynn Discusses
 Growth, Policy

 Fed Guidance
 on Fair Banking

 Check Processing

 Mortgage Market
 Hits Record

 New Call Report
 Web Site

 Do Markets Reveal
 Their Future Activity?

 New $50 Unveiled

 Davis Joins
 Atlanta Fed Board

 Atlanta Fed Hosts
 ACH Conference

 Atlanta Fed Issues
 2003 Annual Report


 New Atlanta Fed
 Subscriber Service


 Data Bank

 Circular Letters



Guynn Examines Effects of Low Interest Rates

As growth in the U.S. economy gains momentum, the Federal Reserve will at some point need to reassess its current accommodative monetary policy stance, said Jack Guynn, president and chief executive officer of the Federal Reserve Bank of Atlanta.

“If my forecast for robust economic growth materializes, then, at some point, a federal funds rate of 1 percent will no longer be the best monetary policy,” Guynn said in a late March speech to the Center for Banking at East Tennessee State University.

Guynn expects the strong pace of growth reported in the second half of 2003 to carry forward this year but with a different composition. Spending on housing and durables should continue to grow steadily, but “early indications are that business investment spending will be stronger and may account for a larger proportion of overall growth,” he added.

Text of Speech

Job growth gained strength during 2004 but has not kept pace with gross domestic product growth, Guynn noted. “While businesses now have become aggressive again when it comes to upgrading equipment, they remain cautious when it comes to human capital,” he said, noting that employment has lagged the pace of recovery seen in prior recessions. He cited productivity as an important factor in the “murky” employment situation. “Ongoing gains in labor productivity could act to constrain the overall pace of new hiring for a little while longer.”

Guynn also discussed monetary policy’s role in cushioning a recessionary period. He stressed the importance of eventually returning to more historically normal interest rate levels as the economy gains strength, but he did not cite specific timing.

He advised businesses not to assume a continuation of accommodative policy in future plans. “Just as I don’t want concerns about future inflation to play a major role in business decision making, I also don’t want businesses to build their plans on expectations of a continuation of accommodative monetary policy without regard to prospective economic conditions or the necessary policy changes that may need to accompany them,” he said.

To illustrate the potential risks of leaving monetary policy accommodative for too long, Guynn used a medical analogy. A seriously ill patient may need a strong dose of medication, Guynn noted. “As the patient begins to recover, however, there is a need to recalibrate the dosage or to stop prescribing it entirely to avoid potential side effects.”