“Turning to the nation, we’re in the midst of the slowest expansion in post-World War II history, as measured by employment. In the previous nine expansions, it took an average of eleven months for employment to regain its pre-recession peak; the high was twenty-three months in the so-called jobless expansion that began in 1991. At twenty months into our current expansion, jobs are still down 2.6 million from the level in February 2001. So we’re certain to set a new high for the number of months it takes to get all the jobs back.”
This quote is from my opening statement at the FOMC meeting on August 12, 2003. According to the Business Cycle Dating Committee of the NBER, the recession had officially ended in November 2001. There were a few months of job growth after that November, but they turned negative again in 2002 and remained weak in 2003.
It was indeed a “jobless recovery.” The slack in the economy continued to put downward pressure on prices—to the point that Chairman Greenspan was concerned that the disinflation of the time might morph into outright Japanese-style deflation. Hence, the low Federal Funds rates that have been derided lately as “too low for too long” and are blamed for the financial crisis. We began moving rates back up in June 2004; I retired from the Dallas Fed on November 4, 2004.
I recall our frustration in 2002-2003 with an economy growing via productivity gains with little or no job growth. At the September 2002 FOMC meeting, the late Governor Lyle Gramlich and I dissented in favor of a cut in the target Fed funds rate. I wrote the following rationale for our dissent for the minutes:
“Messrs. Gramlich and McTeer dissented because they preferred to ease monetary policy at this meeting. The economic expansion, which resumed almost a year ago, had recently lost momentum, and job growth had been minimal over the past year. With inflation already low and likely to decline further in the face of economic slack and rapid productivity growth, the potential cost of additional stimulus seemed low compared with the risk of further weakness.”
The Committee approved a 50 basis point reduction unanimously at the next meeting, on November 6, 2002. That brought the target Federal Funds rate to 1 ¼ percent. On June 25, 2003, we reduced it to the infamous 1 percent.
I summarized the situation with this limerick I wrote for a speech to The Money Marketeers in New York in October 2003:The recovery is now two-years old Maybe it was over-sold We’ve made the discovery It’s a jobless recovery It wins the silver, but not the gold
Looking back, I find it curious that our efforts during this period to get a weak economy with high joblessness and low and falling inflation moving again are now described a creating a housing bubble which burst and caused the financial crisis. How does the same monetary policy that fosters disinflation in the general economy foster an inflationary bubble in only one sector? Or, maybe it all happened after my watch.