more from already low levels. to a considerable extent, monetary policy easing is working no differently today than in the past : it stimulates interest - sensitive spending. but there are many forces at work in this cycle that have required interest rates working through their effects on household spending to shoulder an unusually heavy burden to support growth. unlike most other cycles in recent u. s. economic experience, the weakness was initiated by a cutback in investment spending. this contrast is illustrated in chart1 which shows spending relative to gdp for a number of components of investment. while business fixed investment, shown in the upper panel, typically drops more than gdp when the economy weakens, the recent episode is remarkable in a couple of ways. first, the drop in the high - tech share, the red line, is unprecedented. second, the drop in the share for non - high - tech equipment, the black line, has been unusually steep, exceeded only in the 1979 - 82 episode, when the contraction in output was far deeper. another unusual aspect of the current cycle is that equity prices and wealth continued to move lower long after interest rates started falling and kept declining well after the economy seemed to have bottomed out. this pattern appears to have occurred because the re - evaluation of corporate profitability has persisted for some time ; because of last summer's revelations of corporate misdeeds ; and because the recent increase in perceptions of geopolitical risk. these same concerns have continued to raise risk spreads in credit markets, damping the passthrough of lower policy interest john roberts of the board's staff contributed to the preparation of these remarks. rates to the cost of business credit. with uncertainty high and financial markets skittish, firms have remained hesitant to commit their cash and investment has been very slow to turn around. in addition, economic weakness and sharp declines in equity prices have been widespread globally, and, until recently, these developments have helped keep the dollar strong despite the reduction in interest rates. sluggish growth in the economies of our trading partners and the relatively high dollar have held down net exports, blunting another potential channel for monetary policy easing to bolster spending. in the late 1990s, the rise in the dollar reflected global perceptions of expanding investment opportunities in the united states and the resulting current account deficit provided a safety valve through which strong domestic demand was met in part by higher foreign production. but even though we do not need that safety valve anymore, the current account deficit has continued to increase

analysts argue that loose monetary policy is feeding a bubble in housing prices that will eventually burst. in short, the question is whether the stimulus to household investment, while cushioning the economic cycle in the near - term, is setting the stage for greater instability in the longer run. taking these concerns in turn : reallocation costs. there is little doubt that it is costly to build up a commercial enterprise. workers must be hired, office space rented, equipment purchased, management expertise redirected. all of these actions entail costs. at the same time, as i already noted, if the yield curve is any indication, interest rates will one day go back up, giving rise to the possibility that some of the current expansion of construction firms will eventually need to be unwound. so relying on the housing sector to offset weakness elsewhere in the economy clearly entails costs. but these costs need to be put against the costs of underutilized resources. facilitating an increase in residential construction puts resources to use that would otherwise lie idle. implicit in the conventional story is the assumption that the costs of unemployment are significantly greater than the costs of shifting resources across sectors ; if so, the presence of adjustment costs should not seriously impede the desire to offset weakness in spending elsewhere with greater spending on household investment. alternatively, a judgment that the adjustment costs were large, or the shock to demand temporary, might argue in the direction of a more measured policy response. while it is hard to know for sure how important these adjustment costs may be, it is worth noting that, historically, there has been considerable variation in employment and production in the residential construction sector. seasonal fluctuations in residential construction are quite large, and in business cycles from the early 1970s to the early 1990s, it was not uncommon for housing starts to drop by more than half. so it appears that this sector of the economy has evolved in such a way that it can expand and contract rapidly. moreover, in the current episode, the falloff in commercial construction has freed many resources that can readily be put to work building houses for now, then shifted back when business spending picks up. similarly, even with the strong sales of light motor vehicles and other consumer durables last year, capacity utilization in these industries for the most part has remained at moderate levels, which suggests that the additional production induced by the monetary stimulus has occurred without important and costly new investment in production capacity. another possibility is that the buildup of debt associated with the strength in household investment will