John Rash: Economy got you down? Take the long view

The view from the top floor of Hennepin Avenue's Federal Reserve Bank building offers a panoramic perspective of downtown Minneapolis -- as well as of the region's economy. To the right, glass and steel skyscrapers intermingle with arts edifices like the gleaming Guthrie. To the left lies the economic engine of the University of Minnesota and its associated medical school and hospitals. Splitting the interdependent institutions of business, academia, health care and arts is the Mississippi River, with barges burgeoning with grains and minerals from Minnesota's farms and mines floating past St. Anthony Falls, the historic birthplace of the city, if not the state.

This view, with its mixture of modernity and history, natural and man-made, might give Gary Stern a longer-term view of the region's, nation's and world's economies.

And if the view doesn't do it for Stern, president and chief executive officer of the Federal Reserve Bank of Minneapolis, being the longest-serving Fed president might. Working directly with three Fed chairmen -- Paul Volcker, Alan Greenspan and now Ben Bernanke -- Stern and his Fed colleagues have seen the nation's economy behave just like the river below his office: At times turbulent, at times placid.

He'll need that long view as he heads into today's Federal Open Market Committee meeting, which will decide on the direction of interest rates, among other issues. The Fed is facing a balancing act of tamping down inflation while trying to jump-start a stalled economy.

"We have a dual mandate," explains Stern. "High employment and price stability."

Balancing both can be hard, even in the easier economic times such as mid- to late 1990s. Doing it now, with the unemployment rate hitting a four-year high at 5.7 percent and consumer prices up 5 percent -- the highest since 1991 -- is especially tough.

"This episode resembles in a number of ways the so-called 'headwinds' episode of the early 1990s," said Stern. "A significant disruption in terms of the financial sector, as we have had this time, associated with a short but not especially mild recession. But then the really distinguishing characteristic was that the subsequent recovery from the recession ... got off to a quite a sluggish start that lasted for a year or two or three, depending on how you read the data."

And how do today's "headwinds" compare to the stubborn stagflation of the 1970s, in which interest rates, inflation and unemployment were all at generational highs?

"I don't see those historical comparisons [as being] particularly compelling," Stern said.

"We're talking 30 years. Policymakers around the world have learned a lot since then. The disruptions of the 1970s were in part a consequence of policy mistakes unlikely to be repeated.

"It's widely recognized in central banks around the world that Milton Friedman was right on this issue," said Stern, referring to the Nobel Prize-winning economist. "If you want price stability, it takes disciplined monetary policy. We recognize that and intend to provide that."

Stern is even quicker to negate the notion that eerie echoes of the perfect financial storm right before the Great Depression are gathering again. "We've had one depression in 100 years," he said. "Lots of things happen once. That doesn't mean that they are good guides to the future."

Today, Fed watchers will be looking not only at the results of the meeting but also at whether inflation hawks like Stern signal a longer-term trend on interest rates.

"As long as people are confident that we will provide long-run low inflation and price stability, some of these short-run fluctuations in food and energy, while they may be difficult to adjust to, will not affect the longer-term course of inflation. ... We have to be careful not to squander that credibility. That means that at some point we're going to have to take action to reverse the interest-rate declines that we've engineered beginning last fall."

Heading into this fall, Stern's answer to anxious Minnesotans is to recognize reality, but try to take a similarly long view:

"I understand, at least in part, why you're anxious. I wouldn't try to talk you out of that. One, talk is cheap and your own experience is going to matter more. Two, it's not like we are going to observe immediately a significant acceleration of growth and a significant diminution of inflation.

"But the long-run performance of the U.S. economy -- certainly since the early 1980s -- has been quite favorable by almost every metric. I don't see any reason to believe that in the long run, with appropriate policy, why it won't continue to be favorable.''