Alan Greenspan: Jackson Hole Conference - closing remarks
Closing remarks by Mr Alan Greenspan, Chairman of the Federal Reserve Board of Governors, at a
symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming,
27 August 2005.
* * *
The Federal Reserve will almost surely face as many uncertainties over the next eighteen years as it
has over the past eighteen. Technology continues to bring rapid change and, hence, considerable
uncertainty, to the global marketplace. Monetary policy, supervision and regulation activities, and
payments system operation will need to be calibrated to respond to the influences of that technological
change.
Other forces will be at work on the economic environment as well. The inexorable aging of our
population will markedly influence the policy milieu in the years ahead. Monetary policy, for example,
cannot ignore the potential inflationary pressures inherent in our current fiscal outlook, especially those
that could arise in meeting commitments to future retirees. However, I assume that these imbalances
will be resolved before stark choices again confront us and that, if they are not, the Fed would resist
any temptation to monetize future fiscal deficits. We had too much experience with the dangers of
inflation in the 1970s to tolerate going through another bout of dispiriting stagflation. The
consequences for both future workers and retirees could be daunting.
Nearer term, the housing boom will inevitably simmer down. As part of that process, house turnover
will decline from currently historic levels, while home price increases will slow and prices could even
decrease. As a consequence, home equity extraction will ease and with it some of the strength in
personal consumption expenditures. The estimates of how much differ widely.
The surprisingly high correlation between increases in home equity extraction and the current account
deficit suggests that an end to the housing boom could induce a significant rise in the personal saving
rate, a decline in imports, and a corresponding improvement in the current account deficit. Whether
those adjustments are wrenching will depend, as I suggested yesterday, on the degree of economic
flexibility that we and our trading partners maintain, and I hope enhance, in the years ahead.
On monetary policy, I envision a continuous refinement of our risk-management paradigm. I presume
maximum sustainable economic growth will continue to be our goal, with price stability pursued as a
necessary condition to promote that goal. To date, we have chosen not to formulate explicit inflation
targets, in part, out of concern that they could inhibit the effective pursuit of our goal.
I remain unpersuaded that explicit numerical inflation targets are a key characteristic that distinguishes
behavior among the world's central banks. Despite the various public characterizations of the form of
monetary policy regime, the Federal Reserve and most other central banks generally pursue price
stability and, consistent with that goal, ease when economic conditions soften and tighten when they
firm. That said, I am certain this will remain a topic of lively discussion here and at other monetary
forums in years to come. Participants on all sides of that debate will be well served by keeping open
minds and remaining attentive to the evidence as events unfold and practices evolve.
Debates on the relative merits of asset price targeting also will continue and possibly intensify in the
years ahead. The configuration of asset prices is already an integral part of our evaluation of the large
array of forces that influence financial stability and economic growth. But given our current state of
knowledge, I find it difficult to envision central banks successfully targeting asset prices any time soon.
However, I certainly do not rule out that future work could improve our understanding of asset price
behavior, and with it, the conduct of monetary policy.
* * *
I will miss debates on such topics with members of the Federal Open Market Committee and with the
staffs of the Board and the banks. The Federal Reserve is a remarkable institution. Aside from its
technical expertise in supervision and regulation and in overseeing an increasingly complex payments
system, it combines for monetary policy an academic sophistication and a market-sensitive
understanding that is brought to bear in formulating the tie between instruments and the goals of
monetary policy.
Surely difficult challenges lie ahead for the Fed, some undoubtedly of our own making, and others that
will be thrust on us by market or other forces. Having been exposed to the inner workings of this
extraordinary institution for nearly two decades, I have little doubt that my successors, and theirs, will
continue to sustain the leadership of the American financial system in an ever-widening global
economy.