EconSouth (First Quarter 2000)


Inflation: The Central Challenge
For U.S. Monetary Policymakers

s a monetary policymaker, I work with other members of the Federal Open Market Committee (FOMC) to help achieve the long-term goals Congress has given the Federal Reserve. These goals include maximum employment, price stability and moderate long-term interest rates. Through a combination of factors, our economy has operated like a well-oiled machine in recent years — high productivity, low inflation, low unemployment and strong consumer confidence have worked together to bring about the longest economic expansion in U.S. history.

In addition to sound monetary policy, several other developments have contributed to our economic success during the last few years, including a bottoming out of energy prices and an international economic environment that helped keep prices low in the United States.

These developments widened the trade deficit, and they usually would have contributed to a decline in the dollar. With the uncertainties associated with economies in Asia and Latin America, however, foreign investors sought the dollar as a safe haven. The result was an appreciation of the dollar, an inflow of funds and a decline in U.S. interest rates.

Jack Guynn

The central challenge for monetary policy
Taken alone, any one of these developments would have provided a powerful assist to achieving the Fed’s economic goals. Taken together, they constitute a central banker’s wildest anti-inflationary dreams. Today, however, all of these developments are mostly gone. Therefore, the central challenge for monetary policymakers in the coming year will be to keep inflation low.

The importance of low inflation
Low inflation facilitates business investment in durable equipment and technology, allowing businesses to work smarter, empower their workers to produce more goods and employ just-in-time methods to manage inventories. During the low-inflation environment of the 1990s, business investments doubled, a development that in retrospect clearly contributed to the increase in productivity. The lesson here is that low inflation encourages businesses to persist — and prevail — in their quest to create value through investment. But investment spending would not have grown as rapidly as it did if the 1990s had been a high-inflation environment.

Low inflation also has other less quantifiable, but equally important, benefits. Certainly, it has played a critical role in nurturing the entrepreneurial spirit that so characterizes our economy. Low inflation encourages entrepreneurs to have the courage of their convictions, to pursue their dreams and, above all, to take sensible risks.

If you’re like me, you probably know one or two young people (and maybe even a few 40-year olds) who have recently traded the security of a familiar job for the chance to create something new and, of course, strike it rich. Most of the folks I know who have taken this leap have done it with their eyes open — they know the odds are long. But they also know they’ve got a nest egg or the prospect of finding another job in a red-hot market to fall back on if things don't work out.

These folks are, of course, the foundation of our economy and the envy of the world. But if you ask them what they think about inflation, what you get is a blank stare. And that’s how it ought to be. Because if you think inflation will erode your nest egg or undermine the return on your investment, then you quit taking risks altogether.

As I participate with my colleagues in FOMC policy deliberations this year, I assure you that I will work to keep inflation low and our expansion on track in the year ahead.

By Jack Guynn, president and chief executive officer of the
Federal Reserve Bank of Atlanta

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