Testimony of Federal Reserve Officials

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Testimony of Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, September 20, 2001

I would like to begin my remarks this morning by noting how deeply saddened I and my Federal Reserve colleagues are that so many talented and productive people from so many walks of life were lost or irreparably harmed last week. Although we are here today to discuss some of the immediate economic and financial implications of that tragedy, we are all too aware that the topic we discuss will be a mere footnote.

The terrorism of September 11 will, doubtless, have significant effects on the U.S. economy over the short term. An enormous effort will be required on the part of many to cope with the human and physical destruction. But as we struggle to make sense of our profound loss and its immediate consequences for the economy, we must not lose sight of our longer-run prospects, which have not been significantly diminished by these terrible events.

Over the past couple of decades, the American economy has become increasingly resilient to shocks. Deregulated financial markets, far more flexible labor markets, and, more recently, the major advances in information technology have enhanced our ability to absorb disruptions and recover. In the past, our economy has quickly regained its previous levels following the devastation of hurricanes, earthquakes, floods, and myriad other natural disasters that periodically batter various regions of our country. Although the trauma of September 11 shares some characteristics with such disruptions, the differences are important. In contrast to natural disasters, last week's events are of far greater concern because they strike at the roots of our free society, one aspect of which is our market-driven economy. All modern economies require the confidence that free-market institutions are firmly in place and that commitments made today by market participants will be honored not only tomorrow, but for years into the future. The greater the degree of confidence in the state of future markets, the greater the level of long-term investment. The shock of September 11, by markedly raising the degree of uncertainty about the future, has the potential to result, for a time, in a pronounced disengagement from future commitments. And that, in the short run, would imply a lessened current level of activity. Indeed, much economic activity ground to a halt last week.

But the foundations of our free society remain sound, and I am confident that we will recover and prosper as we have in the past. As a consequence of the spontaneous and almost universal support that we received from around the world, an agreement on a new round of multilateral trade negotiations now seems more feasible. Such an outcome would lead to a stronger global market system. A successful round would not only significantly enhance world economic growth but also answer terrorism with a firm reaffirmation of our commitment to open and free societies.

But before the recovery process gets under way, stability will need to be restored to the American economy and to others around the world. Arguably, that stability was only barely becoming evident in the United States in the period immediately preceding the acts of terrorism. Aggregate measures of production, employment, and business spending continued to be weak.

That said, consumer spending moved higher in August and appeared to be reasonably well maintained in the first part of September. Industry analysts suggest that motor vehicle sales were running close to August levels, and chain store sales were only modestly lower. Purchasing managers had noted an improvement in the orders picture in August. Moreover, the dramatic rate of decline in profits was slowing. To be sure, these signs were tentative but, on the whole, encouraging. During the past week, of course, the level of activity has declined. …