Regional President Speech

Kansas City Society of Financial Analysts January 26, 1982 I appreciate to meet with the Society of Financial Analysts today. welcome such forums as opportunitie s '11 {>-4.rt­ to communicate about the Federal Reserve's policy role aaJ~per- rcA formance and to discuss the appropriate course monetary ~ p~licy ~'VI.F ~4/ ~A,f.4S in a difficult economic environment. - • Economic problems dominate our daily headlines, reflecting public concern about the state of the economy. Inflation, reces­ rate~ sion, unemployment, the federal budget deficit, and interest for attention. In addition, financial markets react to compet~ economic news and appear confused at times about the direction of economic policies. I bring no ready solutions for these problems, clarify ~~nfusion but I hope to you may have about the stance of the Federal Reserve. Moreover, I intend to give you my J J __::a.L.- ~ k... thv ~~~appropriate monetary policy for the period ahead. JH4~ be As a point of departure, it i mportant to remind you that - ~ the Federal Reserve's stated goal in recent years has been to ' tim~n achieve a gradual reductiont'0ver the growti Aof money and of credit/ at rate~ consistent with a lessenins inflation and. a , .:IN "''t • (//e~ sustainable pace of economic activity. AThis goal was reinforced by the public mandate voiced in the national elections of 1980 .whi.ch c.alle.d fo.r a .redi rection of our national economic policies. ~ In my judgment, good progress was made toward those goals in 1981. Over the year, the Federal Reserve was able to reduce the growth in Ml-B--the narrow monetary aggregate--to 2.2 per cent. "Il. This slowing of money growth, from as high as 7.S per cent in 1979, contributed to solid anti-inflation in 1981. That proqre~ ~ -2­ progress was emphasized in the announcement last week that the C~r.J:§EI ~e~~ Consumer Price Index grew at only 8.9 per first year since 1978 that the CPI had been below 10 per cent. It's true, of course, that when the reduced supply of money and credit clashed with high credit demands in 1981, to interest rates soared historic peaks. But with reduced inflationary expectations and a softening in business activity in recent mont/", many interest rates have trended downward. Another important effect of reduced inflationary expectations by the public has been a moderation in wage demands. Such moderation is a welcome prelude to further progress toward price stability. But what about the period ahead? What can you expect ----... from monetary policy? As you know, twice each year the Federal Reserve establishes target ranges for growth in the various monetary aggregates, then reports on th'se targets to Congress. Paul Volcker will be discussing the specific targets for 1982 with Congress in mid-February. Wi thout, of course , revealing ~Jf;;"/J'1IetrI'~" 7i!J the details of Chairman Volcker 's & - -c-on{l;!,s, • ~ ~11.11.s .,-;;,,~ I want to &WU!ln : 3 ; the Federal Reserve's ]Commitment to ­ the figh-t against inflation. In my view, the Federal Reserve's adherence to a policy of gradual reduction in money growth - is appropriate /and es sential . In fact, the Federal Reserve has tentatively indicated its intentions to lower further in 1982 - the g..r owth range target for Ml, the narrowest money aggregate, -3­ which includes primarily cash and checkbook money. ThUS! believe the public should harbor no doubt,!about our resolve 0'J'l . . f l ' . t o pursue antl-ln atlonary monetary course. ~ It is obvious, however, that the Federal Reserve's commitment faces some difficult problems in 1982. These problems involve not only issues of policy implementati on, bu;/problems of c<2mmunication and public understanding /as :::::..11. I want to touch dn three of these issues tOday~O~~r;:>.ng ~ ~ t~ your understanding of monetary policy actionsA taken by Federal Reserve. First~rom View~ our point of most perplexing issue is the credit market's unfortunate obsession with short-run in growth. Because of the inherent volatility s~gs mo~etary in the shor t-r un gr owt h rates of the monetary aggregates, the Federal Reserve and others have constantly warned of the futility of gauging monetary policy from week-to-week SWing~ ~Jleven month-to-month movemen;:-:n the monetary aggregates. A. For instances, we know the weekly seasonal adjustments for the monetary aggregates are notoriously poor. A recent example is ""ot:: the widely discussed January 6 'bulge in money growth, which in part ref1@Gts.the ~pl~?~ion of these seasonal factors, but 77L:.e T/A)Jw$ -F ... also a )2 Social Security payments at number of other unknown factors. Some administration officials have contended that the ,( recent bulge in money growth has "unnerved the financial -4­ markets" by raising questions about the Federal Reserve's determination to maintain the moderate money growth needed to slow inflation and bring down interest rates. These officials have suggested that recent money growth will hinder the administration's economic recovery program. However, I believe;'that the underlying concern of the financial markets is ~ b!5Jf';.e"-':~~.~t;~;;un related money growthf t rather to the prospe~tive impa~~ederal defic j ts. That is why, / 1 ~b ..... in my judgment, we are not seeing any significant reduction in long~term int rest rates. ~~y as two months ago, administration were asserting that the slow ~~~~r growth ~ought ~d achieved by the Fed in 1981 goa~ was hamperi progress toward the administration's worsening the recession.} - ) Clearly, the lesson to be learne~is that financial market participants should watch trends in money growth over the longer-run perspective and not the blips and bulges in the money supply in the short run. A s e cond problem of communication and public understanding ~r the Federal Reserve in 1982 is related ~the reliability - of the money supply as an indicator of monetary policy. In 1981, it became increasingly apparent that financial innovation is having an important impact on the public's demand for mone..y ,b alances. While the impact is not yet fully understood, we do know that financial innovation is complicating our understanding -5­ of what actually constitutes money and how money relates to • economic activity. As we all realize, financial innovation accelerated in jWV"r"'PAI't­ 1981 primarily because ofAincentives provided by high interest rates. New financial instruments and techniques have been brought on by Shifts;(n the asset preferenceVof the public. Most notably, these include NOW accounts, money market mutual - $ funds,"qiPurchase agreements of ya r jQ]]§ kjpds , and the new "cash sweep" accounts. innovatio~their While NOW accounts are not recent growth accelerated rapidly when they became available nationwide on January 1 last year. Likewise, money market-type mutual funds were available before last year, but they, too, have grown rapidly to more than $180 billion. In addition, repurchase agreements/ once confined to sophisticated wholesale money market particiPant~have become available even for the general public, through the so-called retail RP ' s . > • A more recent innovation is the "cash sweep" accou-nt for businesses and "Sweep" accounts allow funds to indiyid~als. move automaticaliy between conventional transactions accounts account~such and investment as money market funds or RP'S--! paYin~ implication)1~ market-related rates. But, what are the . .7? '£,~"""'''''''''' of these financial innovations? I ... One impact is the apparent reduction in the public's demand for conventional transaction balances. This impact .. " -6­ which affects the closely watched Ml measure of mone~occurred in 1981 and we expect it to continue in 1982. A related impact - is the public's shift of f-unds from ~pen market instrumen.t s ........ to money ma~ket fund-s and other instruments included in the monetary measures. As these shifts occur, the broader ~oader measures of money will tend to grow more rapidly than otherwise. A clear implication of these developments is that the Reserve will find it increasingly difficult to rely Federa~ solely on the monetary aggregates as a guide for monetary policy . • The r ; liability of the aggregatTs is indeed a significant issue which deserves additional study. At the present time, however, the growing u.nreliability of the monetary aggregates underscores the for the Federal Reserve to remain flexible in its ~ approach to implementing monetary policy in 19~2. The impacts _ ~e~ liJ ~ .. :rtd6;;c;;;r~ I of financial innovation on the m? netary measllresAemphasize how -irresponsible it would be for the Federal Reserve to commit to • a fixed rate of monetary growth, as some observers continue '= to suggest. Thus far, I have identified two of the problems which may the ability of the Federal Reserve to pursue its Both are related t o the ~ aggregates we use as targets and as benchmarks for -- -------­ ~~------~==------------~----- monetary The third problem is related to the Federal Gqvernment's fiscal policy decisi ons and the impact of those decisions on federal budgetary defici.t. s . -7­ As I noted earlier, the public mandate from the 1980 signaled a clear agreement on national economic goals. As a ~~~ ' the new administration and the Federal Reserve, with public support, have been able to move in a direction ~ we in the Federal Re serve have long advocated. The federal tax cut packa­ ge and the unprecedented spending ... - enacted in 1981 gave ample evidence that fiscal policy was firmly~on the side of re... duced federal outlays and in favor of incentives for private saving and investment. Despite this positive start, it has become clear that the huge-iax reductions, together with increased defense spending, will now require further action to p'revent ) he b - udget deficit t f i r i o . m ~ even higher. ~~ ~~ ~ ~ ,.,..,~"- r.---.....- IA woul :1t. urge fiscal policymakersAto draw strength from the public mandate of 1980 and firm to the direction they ~ hold have undertaken. In my judgment, -irconsistent fiscal policies which to restrain spending and reduce the deficits will ~ contribute to expectations of higher inflation and, in turn, -- will worsen condit ions in credit markets. Problems for the Federal Reserve in fhe face of large federal deficits are obvious. Steadfast pursuit of more - moderate monetary growth when large deficits must be financed ~ could well lead to higher interest rates which, in turn, could ~onomic jeopardize recovery. On the other hand, Federal Reserve accommodation of federal deficits Will~nlY lead to < -------------­ -Iii!!. n higher inflation. So l~"'II!!IiI •• truth, now as always, is <---­ -8­ that the Federal Reserve should not be ~U~iS anti-inflation battle alone. hopeful that the momentum of the public mandate will merge ~ with the resolve of economic policymakers to produce the discipline required. In summary, the nation's economic policies are on ~oper ~urse~ my judgment. From the Federal Reserve's perspective, that course must be maintained in 1982. The problems of !OrmUla~ing, POliCY'~ -t im?p:lle!m!?en"ti ng, and communicating monetary .:Jt willr~ which today, arel!roublesome, but they • J V ~cee« -I ./ the co itment of the Federal Reserve. ~alter From my perspective, I am convinced that the monetary policy goals of the Federal Reserve are appropriate. This policy is the proper one to bring down inflation. The goal of restoring price stability is absolutely correct. Its success - is the on-ly way I know to set the stage for a sustainable economic expansion. "ivit'@& ; cdl COfiLllIued help PRIi IWFPort; tiC "itll ucld¥e tb jg !~ul .

J. Roger Guffey (1982, January 25). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19820126_j_roger_guffey

@misc{wtfs_regional_speeche_19820126_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1982},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19820126_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}