Regional President Speech

Conduct of U.S. Monetary Policy: Recent Problems and Issues Remarks by Roger Guffey President Federal Reserve Bank of Kansas City Swiss-American Chamber of Commerce Zurich, Switzerland November 8, 1979 Remarks by Roger Guffey President Federal Reserve Bank of Kansas City before the Swiss-American Chamber of Commerce Zurich , Switzerland November8,1979 Conduct of u.s. Monetary Policy: Recent Problems and Issues In view of the dramatic policy actions announced early in October by the Federal Reserve, I welcome this opportunity to discuss these actions with you, as well as other issues and problems pertaining to the conduct of U.S. monetary policy. From my perspective as president of the Federal Reserve Bank of Kansas City during the past four years, and my association with the System in the previous decade, there is no doubt in my mind that the most serious problem facing monetary policy today-both in unit labor costs. the United States and abroad-is the On a more fundamental Ie el it is said chronic inflationary environment that is that, beginning in the mid-1960s, there now gripping the economies of the entire was a marked upward shift in the demand free world. As a consequence of th is for government services on a broad social inflationary environment, the normal flow leveL And, as part of that shift, there was of financial savings into productive a renewed emphasis placed on investment has been seriously reduced, government policies designed to attain economic growth and job opportunities full employment- even at the cost of have diminished, and the stability of the incurring an increase in the degree of international monetary system has been inflation. The net effect of this shift in the periodically threatened. In sharp contrast role and emphasiS of governmental to the period of the 1930s, when chronic poliei was to impart an inflationary bias unemployment was the No. 1 economic to the economy which, it is claimed, the problem, chronic inflation is clearly the Federal Reserve, as a public institution, No. 1 economic problem of our day. found difficult to resist in its entirety. As a central banker, I find this situation The money-price link to be highly disturbing. After all , it is generally agreed that the most While these and other nonmonetary fundamental tasR. and responsi bility of a explanations of inflation have varying central bank is to pr vide for the degrees of appeal, it is, nonetheless, continued soundness and stability of its difficult to ignore the basic long-run nation's cun ncy, both domestically and relationship between money and prices. internationally. If this is true, however, it As most economists agree, an expansion must be concluded that central bankers of money and credit in excess of the have not been as effective as they should long-run output potential of an economy be in coping wi th the inflationary will invariably lead to a rise in the overall problem . price level. This relationship is not new, In trying to rationalize this of course, but its importance has become uncomfortable conclusion, it is very easy increasingly emphasized by central to come up with numerous nonmonetary bankers in the conduct of monetary causes of the inflation spiral. In the policy. In the United States, as you may United States, for example, it is often know, the Federal Reserve has publicly claimed that a large part of the inflation announc d its desired growth rates of is due to exogenous or uncontrollable money and credit for the year ahead since shocks to the economic system-such as -1975. These targeted growth rates have the worldwide crop failures and been almost steadily lowered out of a devaluations that occurred in the early desire to gradually reduce the rate of 1970s, and the sizable oil price increases inflation . of recent years. It is also argued that the Despite these good intentions, regulatory burden of government has however, the actual growth rates of become so pervasive as to discourage money and credit have tended to be in innovation and new investment which , in exces of our established targets, turn, have contributed to a slowdown in especially during the past half year. I can productivity and an upward ratcheting in assure you that these excesses in money growth, both this year and last year, were rapid growth in money in the United neither int nded n r desired by any States this year can be traced to member of th Federal Open Market difficulties in properly interpreting the Committee (FOMC). Rather, I believe data on the monetary aggregates. A these excesses were the direct resolution of these difficulties, I should consequence of the inflationary spiral note, is now being intenSively examined itself, which distorted and obscured the by the Federal Reserve. v ry informational variables through These and other factors have led to a .which we have traditionally conducted marked increa in the growth rates of monetary pol icy. money and credit in the United States ./ One informational variable that central over the past hal f year. And, bankers have traditionaly utilized is the commensurate with this growth in level of nominal interest rate. As a money, inflationary pressures have general rule, rising interest rates are taken acceler ted and an inflationary as a sign of restraint. Al so, high and rising psychology has b come more wide­ interest rates are deemed consistent with spread. As a reaction to these develop­ trying to curb the demand for money ments, th U.S. dollar came under very growth. In times of rampant inflation, strong downward pressure in xchange however, interest rates become a very markets this fall, the price of gold soared poor guide for policy and a very poor above $400 an ounce, and speculative instrument for controlling money growth. activity increased sharply in other That is because an inflationary premium commodity m rkets. Quite clearly, there tends to be incorporated into interest became a dire need for much more force­ rates, which makes it extremely difficult ful measures of monetary restraint. to know what, if any, restraint is being Federal Reserve actions applied by a high level of interest rates. Needless to say, this problem became On the evening of October 6, the quite apparent in the United States over Federal Reserve announced a series of the past half year when - de pite higher forceful and complementary actions interest rates-money growth accelerated designed to curb the growth of money rapidly. and dampen the forces of inflation. These Other informational variables that have actions included: (1) an increase in our been distorted by the inflation spiral are di count rate, (2) an imposition of the various con epts of money marginal reserve requirements on itself. With interest rates rising due managed liabilities of member banks, and to inflation, ther has been an immense (3) a change in the procedure by which change in the practices of financial J we conduct monetary policy. Under the intermediaries and a virtual explosion in new procedure, less emphasis is now ! the development of near-money being placed on interest rates as a means substitutes. As a result, many of the of controlling money and greater traditional measures of money no longer emphasis placed on the supply of bank provide the same informational content reserves. as they did in the past; nor do th y s rve The response to these actions has been as a reliable guide as to what policy both dramatic and widespread. should be. W ithout a doubt, some of the Short-term interest rates in the United States have increased sharply, as the Answers to these questions will still sizable demand for credit is now being require considerable analysis and limited by the avai lable supply of cr dit. flexibility in policy operations . Also, the value of the dollar has improved On a more technical level, we fully in the foreign exchange markets and recognize that there can be potential much of the speculative froth has gone sl ippages between the growth rate of out of th commodity markets . In short, bank reserves and the growth rate of the the actions we took have thus far been money supply. These slippages might well received and supported by both the occur for two reasons . irst, our ability to Finan ial community and the general control bank reserves may not be overly public. precise, espe ially in the short run . And, Of the three policy actions taken, the second, there may be variability in the one receiving the most attention has be n multiplier relationship between bank our shift to new operating procedure to reserves and the money supply. The latter control the money supply. In some is very likely to be true in the very large quarters, there has been considerable and diffuse banking system that exists in uphoria about this shift in procedure. the United States . A further Some people, for example, have hailed it consideration is that it is not reasonable as a complete victory for the monetarist to expect the Federal Reserve to ignore school of thought and even as the entirely ongoing developments in the ultimate solution to our monetary money and capital markets or in the problems. Needless to say, many of these foreign exchange markets just to rigidly assessments have tended to go too far . pursue a reserve-targeting procedure. Without a doubt, recent events have These considerations suggest, it seems d mon trated clearly the need for a to me, that not too much too soon should change in our operating procedure . be expected from our shift to a new Pegging an interest rate to achieve our operating procedure. Many basic money supply targets was just not conceptual and technical problems still producing the intended results. remain unresolved. Moreover, precise Therefore, I am very much in favor of the control of the money supply is just not change to the new operating procedure, likely to be achieved, especially over a which emphasizes bank reserves, and I short period of time. Thus, an evaluation enthusiastically support it. of this new technique can only be made in an objective manner after it has been Reserve-targeting procedures in effect for a longer period of time. It should be well understood, however, Despite these words of caution about that a reserve-targeting procedure in the our new procedure to control the money United States is not a simple, risk-free supply, I want to emphasize that the new technique. On a very basic level, the new technique-along without other recent procedure does not assure that our actions-offers great promise in our targeted growth rate of money will, in battle against inflation . While it is true fact, be appropriate for the economy. Nor that the U.S. economy may experience a does it resolve the problem of temporary period of adjustment, our determining which concept of money the recent actions were taken with longer run Federal Reserve should try to control. objectives in mind. To the extent we can reduce the growth rate of money to restrictive monetary policy must moderate proportions, it is very I ikely that be highly credible in the eyes of inflationary expectations will be the public. In any venture, it is diminished, the high level of interest rates self-defeating to promise more will sub-ide, and confidence in the than is delivered. So, too, in purchasing power of the dollar will be central banking. Thus, to be restored . credible, an anti-inflationary I am sufficiently reali tic, however, to policy mu t actually a hieve a believe that our battle against inflation significantly lower growth rate of has only just begun. Indeed, even though money and credit. the actions we have taken have been both 3. Finally, and perhaps most dramatic and forceful, it is rather importantly, restrictive monetary simplistic to view our change to a new policies must be followed in a operating procedure as the sole solution onsistent manner. All too often, of the problem of inflation. The restri tive policies are put into inflationary bias of our economy- and place only for a very short period the economies of other countries, too- is of time at the peak of the a very deep-rooted problem It is lodged business cycle-when fighting in the basic political and philosophic inflation is a popular cause. For thought that has1nfluenced ollr economic the rest of the busi ness cycle, system during the past two decades. however, these policies are often Thus, the battle against inflation promises quickly abandoned -in both the to be very long and arduous . downturn and in the subs quent upturn. The net result is that Principles for policy policies have an expansionary As an absolute prerequisite for our bias most of the time, which doe· battle against inflation to be successful, I much to explain the persistence believe entral bankers must do a much of the inflationary problem more effective job than we have in the Therefore, it follows that an pa t in short, we can no longer be effective mon tary policy will unwilling participants in the inflationary need to adopt a restrictive stance process. To assur that we will be more consist ntly throughout the eft ctive, I believe our policies mList be busin ss cycl guided by the following principles The adherence to these principles of 1. Emphasis should be given to a monetary management, 1 believe, will firm and restrictive monetary enable us to achieve signifi ant progress policy stance. By itself, a better in curbing our chroni inflationary lechnique to control money is no probl m The task ahead, however, assurance that the right growth promises to be both long and difficult and rate of money will, in fact, be everely challenging. Nonetheless, re ent sought What is required to anti-inflationary a tions t ken by the corre t inflation is a significantly Federal Reserve should erve to forcefully lower expansion of money and underscore our desire to rise up and meet credit. that chall nge successfully. If is my 2. The implementation of a f rvent hope that we, as well as other central banks, will vigorously pursue this course. By so doing, we can clearly demonstrate the economic leadership that is vitally needed to restore price stability and economic vitality to the nations of the free world .

J. Roger Guffey (1979, November 7). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19791108_j_roger_guffey

@misc{wtfs_regional_speeche_19791108_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1979},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19791108_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}