"The Economy Is Flexible and Resilient"


Minneapolis Federal Reserve Bank President Gary Stern has no illusions about the importance of the central bank to the economy. In a June 1 interview with BusinessWeek Senior Writer Rich Miller, the 22-year central bank veteran argues that the Fed only needs to get policy "approximately correct" for the resilient U.S. economy to grow. Edited excerpts of their conversation follow:

Q: Are you worried by the recent uptick in inflation?

A: It surprised me, but it hasn't concerned me a great deal. I don't think it has been more than a very mild increase as measured by almost any index you want to cite. There's always a danger - this may be another good example of that - of making too much out of a few months worth of data. My guess is that if we look back at 2004, say from five years down the road, we'll simply look at this as another year of low inflation, and we won't be paying much attention to the month to month fluctuations.

What has caught my attention more than the numbers is that when you talk to businesspeople, it clearly seems that there's a little more pricing leverage than there was, certainly a year ago. They're seeing more cost increases, and they're more able to pass them along, or to institute price increases on their own than they were a year ago. On the other hand, this doesn't seem to be a period of rapid inflation by any measure or any anecdote that I've come across.

Q: Don't you think inflation expectations are rising, though?

A: I don't have a sense from the people I talk with, nor do I have a sense when I look at the bond market, that people's long-run view of inflation prospects has changed very much, if at all.

Let's not lose sight of the fact that by virtually any sort of post-war historic measure you can come up with, inflation seems to be pretty low. People have a good deal more confidence than they did, say, a couple of decades ago, that the Federal Reserve and other central banks around the world are committed to and will be relatively successful at keeping inflation low.

Q: Are you concerned that the Fed's ultra-easy monetary policy may be promoting excessive leverage and risk-taking in the economy and financial markets?

A: If you're a central banker, it's hard to say it's not a concern. We're paid to worry. But my job is not to be somebody's grandfather, running around saying, "Do you realize how risky that might be?" I think most of the people can judge that perfectly well by themselves. I'm reluctant to second-guess them.

After the fact, there's no doubt that some participants will realize that they took on too much risk, and some may realize they took on too little. That's what a market economy is all about.

Q: Is there a housing bubble?

A: I don't have a sense that we have a nationwide housing bubble. It sounds like most of the purchasing that's going on is by people who intend to occupy the houses they buy. They're not simply speculating. That doesn't mean there won't be some particular markets where you'll get some corrections. But I don't expect anything like that as a nationwide phenomenon.

Q: What's your outlook for the economy?

A: I think the economy can grow 4% to 5% this year and probably closer to 5% than to 4%. And I think next year will be another pretty good year of 4%-plus growth, with inflation staying low.

The economy is flexible and resilient. I don't think we have an economy that's so fragile that unless policymakers do everything exactly correct, something really terrible is going to happen. We have to avoid large errors and get policy approximately correct. If we do that, I would expect the economy to perform pretty well most of the time.


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