Regional President Speech

THE ECONOMY AND FEDERAL RESERVE INDEPENDENCE: A NEW FED PRESIDENT VIEWS THE ISSUES Remarks by Roger Guffey President, Federal Reserve Bank of Kansas City Annual Joint Meeting of the Boards of Directors of the Federal Reserve Bank of Kansas City and its Oklahoma City Branch Tulsa, Oklahoma April 22, 1976 I am delighted to have this opportunity to meet today with you bankers and businessmen of the State of Oklahoma for the first time as president of the Federal Reserve Bank of Kansas City. Meetings such as this are particularly appropriate because I believe we at the Federal Reserve should always strive to better our communication with you-the general public-not only to convey our ideas on various policy issues, but to seek your opinion and advice on what we are doing as well. For that reason, I would hope that I will have many more opportunities to meet with you, both on a fonnal and infonnal basis, in the years ahead. In considering possible topics that I might discuss with you here today, I was struck by the multitude of current issues that are of mutual concern to us both. For example, over the past year or so the banking industry has been operating in a very difficult environment. The economic recession combined with rampant inflationary conditions exposed weak spots in the management practices of many financial institutions, including banks. We at the Federal Reserve, given our regulatory and supervisory responsibilities, were highly concerned about these developments and have been following them very closely. I am happy to report tOday that, on the basis of recent observation, there seems to have been a distinct shift recently on the part of financial institutions to much more prudent and sounder management practices. Thus, most if not all of the mistakes and financial excesses of reCf~nt years now seem to be in the process of correction. In other areas, also, the banking industry has been operating in a difficult environment. Contributing in no small degree to this difficult environment have been the rapid techno­ logical advancements of recent years, which have significantly impacted and complicated the operational side of banking. The rapid development in EFT systems, new methods of -2­ handling checks, the increased use of credit cards, the spread of overdraft facilities. mw the growth of accounts, and other changes that have blurred the distinction between demand and time deposits are just a few of the innovations that have sprung from these technological advancements. Accordingly, we at the Federal Reserve-given our desire to see a stable and efficient payments mechanism-have tried to adopt our regu­ latory policies in an appropriate manner. Needless to say, open lines of communication between the banking industry and the Federal Reserve are going to be even more necessary in the future to ensure that we both respond in a constructive fashion to the problems and challenges of technological change. While these and other topics could usefully be discussed today, I would prefer to comment on some even broader issues that are of concern to us both. These issues are related to the broader goals of the Federal Reserve System, which were spelled out in the Federal Reserve Act of 1913 and articulated in many acts of Congress since then, including the Full Employment Act of 1946. As you know, these goals include the C( furtherence of economic growth and stability, a high level of employment, reasonable price stability, and equilibrium in the balance of international payments. In trying to help achieve these goals, the Federal Reserve operates as a central bank in the United States through its ability to influence the supply of money and credit. In other words, through our conduct and implementation of monetary policy, we try to achieve a healthy expan­ sion in business activity, full employment, and reasonable stability of prices. Given these broader responsibilities and concerns, I think it is most appropriate today for me to provide you my views on the current and prospective economic situation in the United States. In that regard, I also would like to comment on what I believe to be the most appropriate monetary policy prescription for the current year. And, finally, -3­ I would like to discuss briefly some factors that I believe may impinge on the Federal Reserve's ability to conduct monetary policy in an appropriate and independent manner in the years ahead. , First, then, what can be said about the current economic situation? The economic recovery, underway since last spring, continues unabated. This is confirmed by the most recent GNP data, as well as by a number of other specific indicators of economic activity. Industrial production has risen for ten consecutive months and, as of February, was 9 per cent above the April 1975 low point. Housing starts in February rose sharply, reversing three months of declines, and, at an' annual rate of 1. 5 million units, ware almost two-thirds above year-earlier levels. Refiecting the continued strength from the consumer sector, retail sales in March again rose strongly, with domestic auto sales showing especially good gains. The employ­ ment picture in March was marked by another small decline in the unemployment rate-to 7.5 per cent-while total employment registered an all-time high. At the same time, both the Consumer Price Index and Wholesale Price Index continued to reflect the moderating pace of price inflation. Despite the good economic news in these recent indicators, there is still ample reason for concern over the economy. Unemployment remains too high. And, without some evidence of further strength from either inventory investment or capital outlays in the months ahead, significant reductions in unemployment will be hard to corne by. Additionally, the favorable performance of the price indexes reflects, to a large extent, declining farm prices. Thus, the danger of inflation is still with us, and both the recent Teamsters settle­ ment and the heavy collective bargaining calendar remaining for 1976 provide ample reasons for ongolng concern over inflation. The economic problem for policymakers continues to be that of sustaining the recovery in order to put resources back to work, while avoiding a rekindling of inflationary pressures. I should hasten to add that the economic recovery now under way has been materially aided by the monetary poliCies implemented by the Federal Reserve. Since last spring- when we publicly disclosed for the first time our future long-nm monetary policy goals - we have provided reserves to the. banking system in a way to achieve a steady and moderate growth in the availability of money and credit. More specifically, we have <~ sought to achieve moderate growth rates in various measures of the money supply, such as M1 and M2. When we announced our targeted growth rates in the monetary aggregates last spring, we were severely criticized by some people for seeking rates that they considered too low to adequately financ~ a business expansion. Higher growth rates were needed it was claimed, to reduce interest rates and to get the economy moving again. In retro­ spect, it now appears that our poliCies were correct. The economy, as I indicated, is again expanding at a healthy pace and conditions in financial markets have improved considerably. Interest rates are now generally lower than at the trough of the recession a year ago. The Federal funds rate, for example; is currently about 4 3/4 per cent, compared to about 5 1/2 per cent in April 1975. Yields in the bond market also have fallen quite a bit. Moreover, savings flows to thrift institutions have continued to be very ample so that mortgage interest rates have started to edge down. Reflecting in part the drop in interest rates, the stock market has staged a dramatic recovery. And, finally, the liquidity position of financial institutions, businesses, and conSl,lmers has improved quite markedly. -5­ These accomplishments indicate clearly, I believe, that the moderate course we've been following in implementing monetary policy has been entirely appropriate. And, given the current consensus that the economy will continue to expand at a healthy pace in the remainder of this year, I believe we should stay on our present course of monetary policy. In other words, I believe the best way to achieve a good rate of growth in output and employment and the best way to avoid a rekindling of inflation is for the Federal Reserve to continue to follow a moderate and prudent monetary policy. Whether the Federal Reserve will be able to follow prudent and appropriate monetary policies in the period ahead, however, has been a matter of increasing concern to me. The cause for my concern has been the mounting criticism and attacks recently directed at the Federal Reserve at the national level. These attacks are not-I should emphasize­ part of the ongoing academic debate about the correctness of monetary policy, as discussed in the press and elsewhere. Such debates are a healthy .and necessary element in an open society, and I strongly approve of them. What concerns me are the attacks that strike at the very institutional heart of the Federal Reserve and the fundamental manner in which monetary policy has been traditionally formulated in the United States. Many of the recent attacks on the Federal Reserve have now been incorporated into a number of legislative proposals in the U. S. Congress. All of the proposals, in one form or another, seek to change the present structure and organization of the Federal Reserve System. An additional common element of the proposals, which concerns me and perhaps is their true intent, is that they would bring the process of monetary policy formu­ lation under political control. On this issue, I think it's important for the Federal Reserve's position to be clearly understood. We are, of course, a public institution, created by Congress and delegated the -6­ important responsibility of managing the country's money supply. Being a public institution, we fully recognize that the Federal Reserve must be responsive to the wishes and long-run best interests of the American people. And. I believe, we have lived up to that responsibility to the best of our ability. In this broad sense, therefore. the Federal Reserve has been-and should continue to be-responsive to the political process in America. The basic intent of the recent legislative proposals, I believe, is not consistent · with this broad interpretation of political responsiveness. Rather, it seems the intent of the proposals is to subject the monetary policy process to the short-run influence of partisan political pressure, whether originating from within the Administration, the Congress, or elsewhere. Responsiveness to this type of political pressure is, of course, contrary to the original design of the founders of the Federal Reserve System and contrary to the best interests of the American people. The Federal Reserve System, as it was originally designed and as it has evolved over the years, is characterized by two key elements which have allowed it to conduct monetary policy independently of partisan political control. One is that the Federal Reserve Act explicitly isolates the monetary policy process from potential short-run political influences. For example, the members of the Board of Governors--all of whom participate in monetary policy decisions---are appointed for long terms. Similarly, the presidents of the twelve Reserve Banks-who also participate in monetary policy- are appointed for relatively long terms and their appointment process is conducted outside of the political arena. Furthennore, the System is by and Lrge self-financed so it doesn't have to come hat-in-hand to Congress each year for operating funds. The second key element of the System is that it is a decentralized central bank. -7­ The responsibility for formulating and conducting monetary policy is widely dispersed throughout the country. The Board of Governors in Washington plays an important role but so do the twelve regional Federal Reserve District Banks. Since the presidents of these banks participate directly as voting members of the Open Market Committee, the varying needs and economic interests of each of the different regions can be represented in the policy process. The decentralized system also explicitly allows for independent views to be brought to bear. Such views are obtained from the Boards of Directors of each District Bank-who are drawn from within each region, from independent economic research, and from direct bank contact with local businessmen and individuals. The decentralized nature of the System, in my opinion, is one of our primary sources of strength. It has enabled the System to be responsive-in the most direct and broadest sense-to the wishes of the American people of every region. At the same time, it has prevented the monetary policy process from being controlled by a narrowly-based group of indiViduals, whether located in Washington, D. C., or elsewhere. In other words, the decentralized nature of the System embodies the traditional unwillingness of the American people to tolerate any undue concentration of economic and financial power. The disturbing feature of the recent legislative proposals, particularly the "Federal Reserve Reform Act" now being considered by the Congress, is that they would undermine the independence and the decentralized nature of the System. By so doing, they would not "democratize" the System-as has been contended, but "politicize" the System. If we were to politicize the monetary policy process, I believe the dangers to our economy would be extremely serious. I say that because economic history is replete with clear lessons of what happens when the "money creating" process in a country is take.tl over by political forces. Initially, more money is created to finance politically desirable projects; -8­ then inflation takes over; followed by the printing of more money. Inevitably, rampant inflation so weakens the financial structure that the economy collapses, and very often so does the political structure as well. For this reason, I am not in favor_ of the current legislative proposals as they now stand. This is not to say, however, that changes in the System should not be explored and adopted. The Federal Reserve must always be receptive to changes that would improve its organizational structure, widen its perspective, and allow it to continue to be responsive to the broad wishes of the American people. However, I believe that any changes that would jeopardize the independence of the System in its conduct of monetary policy, or would weaken the regional and decentralized nature of the System, would be economically unsound and accordingly not in the best interests of the American people. In closing, I want to say that as we at the Kansas City Bank consider these and other legislative matters, and as we deliberate about monetary policy and other policies affecting banking, I hope that I-like my predecessor George Clay-will be able to call upon you for your sound advice, assistance, and continued support in the period ahead.

J. Roger Guffey (1976, April 21). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19760422_j_roger_guffey

@misc{wtfs_regional_speeche_19760422_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1976},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19760422_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}