Regional President Speech

FOR RELEASE 2 P. M., THURSDAY, APRIL 29. THOUGHTS ON THE ECONOMY AND FEDERAL RESERVE INDEPENDENCE Remarks by Roger Guffey President, Federal Reserve Bank of Kansas City Rotary Club Kansas City, Missouri April 29, 1976 I am delighted to have this opportunity to meet today with the Rotary Club 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, 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 we will have many more opportunities to get together in the years ahead. In considering possible topics that I might discuss with you, I was struck by the mul­ titude of current issues that are of mutual concern. For example, over the past year or so banking and business have been operating in a very difficult environment. The ec:unomic reces­ '~ sion, combined with rampant inflationary conditions, exposed weak spots in the management practices of many financial institutions and businesses. We at the Federal Reserve, given our regulatory and supervisory responsibilities, were highly concerned about these develop­ ments 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. TIlliS, most if not all of the mistakes and financial excesses of recent years now seem to be in the process of correction. While the necessity for sound management practices and other topics could usefully be discussed today, I would prefer to comment on some even broader issues that are of con­ cern 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 Conf,rress since then, including the Full Employment Act of 1946. These goals include the furtherance of economic growth and stability, a high level of employment, reasonable price stability, and reasonable balance in international payments. In trying to help achieve these goals, the Federal Reserve operates as a central bank in the United States through its ability -2­ to influence the supply of money and credit. In other words, through our conduct and imple­ mentation of monetary policy, we try to achieve a healthy expansion in business activity, full employment, and reasonable stability of prices. Given these broader responsibilities and concerns, I want to share with you my views on the current and prospective economic situation. In that rebrard, I also would like to comment on what I believe to be, at this time, the most appropriate monetary policy prescription for the current year. And, finally, I would like to disc uss 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 about the current economic situation? The economic recovery, under way 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, were almost two-thirds above year­ earlier levels. Reflecting the continued strength from the consumer sector, retail sales in March again rose strongly, with auto sales showing especially good gains. The employment 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. In many respects, the good economic news from throughout the nation in recent months has been equalled or exceeded in our own Tenth Federal Reserve District. The area served by the Kansas City Federal Reserve Bank stretches from western Missouri through Kansas, Nebraska, Oklahoma, Colorado, Wyoming, and New Mexico. This region is a vast, diverse, -3­ and productive area which avoided many of the most severe effects of the recent recession. It is an area which is positioned now to take full advantage of the economic recovery. For exam­ ple, employment data from states in our District continue to be better than for the nation as a whole. Construction contracts and housing permits in this region are up sharply over 1975, and District growth in both categories is much better than in the nation as a whole. We should also pOint out that personal income in District states has increased at a 12 per cent rate over the last year, exceeding the 6.8 per cent increase in the Consumer Price Index. But more important than these short-term developments, I believe, is the fact that this heartland of ~ur nation will benefit in the future from increasing demand for the agricul­ tural production and energy resources we have in such abundance. I am confident that the products and resources of our region, combined with the knowledge and energy of our people, are going to be in the center of the nation's future economic progress. Here in Kansas City, the economy appears to be recovering strongly from the reces­ sion, reflecting the healthy economic developments noted earlier. In fact, in some respects, our area's recovery may be outpacing national trends. For example, we were all gratified at the recent report that the Kansas City unemployment rate was down to 6.6 per cent--still uncomfortably high, but well below the national unemployment rate. The sheer diversity of the Kansas City area economy has smoothed the economic ups and downs over the years. TIns means, of course, that while our area may escape many of the most devastating effects of economic downturn, we also may not enjoy the full thrust of soaring economic booms which accrue to some communities with only one or two major industries. Our local economy is reflected in financial institutions with relatively diverse and stable sources of deposits and investments. In fact, during the recession period of 1974-75, deposits and loans at area banks remained level or increased, and both have increased during the current recovery. On balance, area financial institutions came through the sharp economic -4­ slump of a year ago very well and now are strengthening their positions even more. It is apparent that Kansas City banks and savings and loan associations are in an excellent posi­ tion to finance the continuing economic upturn in our area. Thus, I believe that there is every indication that, in the absence of major labor disruptions or work stoppages, the Kansas City area economy will share fully in the nation's economic progress, both in the near term and over the years to come. Despite these good economic prospects, I am still concerned about the national econ­ omy. Unemployment remains too high. And, without some evidence of further strength from either inventory investment or capital outlays in the months ahead, significant addition­ al reductions in unemployment will be hard to come by. Additionally, the favorable perfor­ mance of the price indexes is largely limited to 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 ongoing 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 rekind­ ling 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 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 Ml 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 finance a business expansion. Higher growth rates were needed it was claimed, to reduce interest rates and to get the economy moving again. In retrospect, it now appears -5­ 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. (Short-term money market rates, for example, are about 4 3/4 to 5 per cent, com­ pared to about 5 1/2 to 6 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 iiquidity positions of f.inancial institutions, businesses, and consumers has improved quite markedly. 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 emphas,ize­ 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. -6­ 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 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 -7­ political influences. For example, the members of the Board of Governors--all of whom participate in monetary policy decisions-.,-are appointed for long terms. Simnarly, 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. Furthermore, 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. 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 els~where. In other words, the decentralized nature of the System embodies the traditional unwillingness of the American people to tolerate any wldue 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 W1dermine -8­ 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 this way, I believe the dangers to our economy would be extremely serious. As an example, this legislation would provide for the appointment of Reserve Bank presidents by the President of the United States, sub­ ject to Senate confirmation. The proposal also would remove the current Reserve Bank presidents as voting members of the Open Market Committee until Presidential reappoint­ ment or replacement in about five years. Such action would seriously undermine the repre­ sentative and.independent nature of the monetary policy process. If this legislation becomes reality, and Reserve Bank presidents become directly responsible to members of Congress, the exclusive franchise to create money vested in the independent Federal Reserve System would be effectively passed into the hands of those with authority to spend money. Economic history is replete with clear lessons of what happens when the "money creating" process in a country is taken over by political forces. Initially, more money is created to finance politically desirable projects; 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. -9­ In closing, I want to say that as we at the Federal Reserve Bank of Kansas City consider these and other legislative matters, and as we deliberate about monetary policy and other policies affecting banking, business, and the public, I hope that I-like my prede­ cessor George Clay-will be able to call upon my friends in Kansas City for advice, assis­ tance, and support.

J. Roger Guffey (1976, April 28). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19760429_j_roger_guffey

@misc{wtfs_regional_speeche_19760429_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_19760429_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}