Regional President Speech

In more pleasant economic circumstances, an invitation to join you at Shangri-La, with its fabled connotation of a peaceful, perfect, and carefree existence, would have provided a particularly welcome interlude. Nevertheless, I do appreciate your invitation to join you today in Oklahoma because occasions such as these-­ whatever the setting or the circumstances--are good opportunities to discuss the Federal Reserve'~ role and intentions in the current situation and in the period ahead. We come together at ·a time when the economic news is mixed, at best. On the plus side, the rate of inflation has been br.ought down to ~bout half of last year's rate. In addition, we have recently seen a welcome decline in short-term interest rates accompanied by a vigorous upsurge in the stock and bond markets. On the other hand, however, because of continuing sluggishness in basic industries like housing and automobiles, the nation's unemployment rate remains distressingly high. Business failures are occurring at a record postwar rate; idle production capacity is high; capital spending is low. Interest rates may yet be too high to spark spirited demand for new homes, automobiles, and other durable goods. And of concern to all of us, public confidence in our financial institutions is being tested by earnings problems among Sand L's and well- publicized failures of banks and thrifts. Of immediate concern, of course, is the health of your own industry. The nation's Sand L's have deteriorated so sharply -2­ in recent years that the industry sustained a loss in 1981 greater than its earnings in any single previous ye ar. You have watched your profitability collapse as yields on your mortgages remained .below the skyrocketing rates you have been forced to pay for deposits. As a result of this perilous situation, many of you are not just involved in finding solutions, but committed to courses of action which will permit your associations to be effective in any future economic environment. As you know, there is a difference between involvement and commitment. Let me illustrate it this way: if you had ham and eggs for breakfast this morning, the chicken was involved in that breakfast, but the pig was committed! Whether you are involved or committed, you know that associations in Oklahoma are in relatively better shape than u.s. associations as a whole. Recent data confirm that Oklahoma S and Lis recorded net new savings in the first half of 1982 while u.s. associations continued to experience huge withdrawals. In addition, net worth of Oklahoma S and Lis is about one-half per cent better than u.s. S and Lis, and your delinquency rate lS a full percentage point better. Your borrowing is growing more slowly than borrowing by u.s. associations as a group. These numbers undoubtedly reflect the relative good health of the Oklahoma economy and may indicate something about the quality of management among Oklahoma savings and loan associations. Despite the pressing problems facing savings and loans, we all know that any short-run solutions put in place by regulators -3­ or legislators can only buy us time until a fundamental economic recovery takes place. In fact, it seems clear to me that the fortunes of thrift institutions are linked rather closely to the process of longer term economic recovery and stability. In this context, let me assure you that your commitment to finding solutions for your industry is matched by the commitment of the Federal Reserve to pursue the policies required to undergird an economic recovery. Thus, the Federal Reserve and thrift institutions clearly share a common agenda for the future. Today, I want to discuss with you some of the concerns shared by the Federal Reserve and thrifts. In so doing, I want to note the evolving relationships between the Fed and thrifts, to indicate what you can expect from the Federal Reserve in the near term, and finally, to share my views of the outlook for the economy. First, ln examining the evolving relationships between the Federal Reserve and thrift institutions, I should note briefly the role of the central bank in the nation's economy. Nations establish central banks to manage money and credit, and the Federal Reserve System was created nearly 70 years ago for just this reason, following decades of "money panics" in the United States. What has evolved over the years is a major national institution whose monetary policies exert a powerful and pervasive influence in the national economy. Other Federal Reserve responsibilities include assisting the Federal government in fiscal matters, serving the nation's payments system, supervising -4­ some banks and all bank holding companies, and acting as the economy's lender of last resort. But the Federal Reserve's most important role is monetary policy, that is, determining the appropriate level of money and credit for the nation's economy. As the nation's central bank, the Federal Reserve must focus on total economic activity and broad national goals. The Federal Reserve cannot be concerned primarily with who receives money and credit or with how those funds are spent. Nor can we formulate or implement policy with certain regions, industries, borrowers, or lenders solely in mind. Nevertheless, as a policymaker, let me assure you that the Federal Reserve is acutely aware and sensitive to specific problems in our economy. While the Federal Reserve has numerous policy tools at its disposal, including reserve requirements, the discount rate, and, most importantly, open market operations, monetary policy is not perfect. As you recall, more precise policy was one of the goals of the Monetary Control Act of 1980. By making transaction accounts from all depository institutions subject to Federal Reserve requirements, it was thought, the central bank's ability to track developments in money growth would be enhanced, leading to more effective policy. Though the final report card on the Monetary Control Act is still out, we do know that a major result of the MeA was to bring the Federal Reserve and many thrifts together for the first time. -5­ This new re at i onship between the Federal Reserve and thrift institutions has many contact points, including reserve requirements, Federal Reserve credit, and Federal Reserve services. As you know, thrifts with transaction accounts are required to hold r e serves with the Federal Reserve; many of you are doing so and others will be holding reserves at the Fed as the reserve phase-in oc c urs in coming years. In addition, thrifts with reserves at the Fed now have access to the Federal Reserve's discount window and three credit programs are available for qualifying institutions: adjustment credit, seasonal credit, and other extended credit. Finally, thrifts now have access to Federal Reserve service s, giving them entree to the Federal Reserve's well developed payments and securities services. Let me insert a brief commercial: s hould you want further information on your e ligibility or access to Federal Reserve credit or services, you'll want to talk to Bill Evans and his staff at our Oklahoma City Branch. Although none of us can y e t define the ultimate relationship between the Federal Reserve and thrift institutions, I believe that our future links will be close, forged by the common goals of a more productive, growing economy and a stable, efficient financial system. While that future relation ship may not be clear yet, most of you will agree, I believe, that Federal Reserve policies will have an important bearing on your environment. Thus, over the near term, as the economy makes the transition to r e covery, you are concerned about the direction of Federal Rese rve policy. -6­ Any discussion of the Federal Reserve's posture during the upcoming period must take place in the context of the nation's economic recovery program. As you know, that strategy, designed to wring out inflation and bring about sustainable economic growth, has four major compononts: reduced taxes, reduced government spending, reduced regulation, and slower growth in money and credit. As a major proponent of such a recovery strategy, the Federal Reserve, for its part, has announced its intentions and then has consistently followed a path intended to reduce, gradually over time, the rate of growth in money and credit to a pace consistent with the economy's capacity for sustainable noninflationary growth. Most observers now agree that the Federal Reserve has established its credibility. While the Federal Reserve has been successful in slowing money and credit growth, and while government regulations have indeed been reduced, continuing problems in efforts to balance the Federal budget leave a serious roadblock in the path of further gains against inflation and a vigorous economic recovery. In my judgement, so long as Federal budget imbalances lead to large deficits, there will be a cloud over the economic outlook. The fight against inflation is not yet won, and a robust economic recovery is not yet assured. What then, will be the objectives of monetary policy in this environment? As you are aware from the Federal Rese rve's public statements, monetary policy over the coming pe riod will continue to be directed toward achievement of moderate, sustainable, noninflationary growth. -7­ At the same time, the Federal Reserve will guard against excessive growth in money and credit, which would risk undoing much of our hard-won progres s against inflation. Indeed, to me et such objectives, the Feder al Open Market Commi ttee h s establ ished t ar get r anges for monetary growth for the rest of this year and for 1983 which seem to me appropriate for the task at hand. The FOMC's targets are the same as those originally set for 1982, that is, gr owth in the 2 1/2 to 5 1/2 per cent range for the widely followed Ml aggregate, and 6 to 9 per cent for M2. These targets represent a Federal Reserve objective which is fully consistent with economic recovery at a moderate pace, particularly in light of the decline in the rate of inflation. However, should there occur some strong unanticipated demand for money because of unusual liquidity or precautionary needs related to economic uncertainty or turbule nce, the FOMC has indicated that monetary growth at the top or somewhat above the target ranges would be tolerated. Not only are the Federal Reserve's targets consistent with a moderate economic recovery scenari.o, but I believe they also are consistent with a longer-run downtrend ln interest rates. Recent declines in rates occurred for several reasons, but a major factor is that longer-term growth in money and credit continues as targeted by the Federal Reserve, confirming our approach and permitting us to supply ample reserve s to the banking system. To be sure, the sluggish economy and weak credit demand has helped ease pressure on rates, as has the improved public -8­ psychology resulting from lowered inflationary expectations. But despite these welcome interest rate developments, some voices continue to call for the Federal Reserve to speed up the growth of money. Such action, some suggest, would bring rates down more rapidly and spur credit demand and economic expansion. While the appeal of this view lS understandable, I believe that an attempt to increase the money supply beyond the current targets would be dangerous and ill-advised in the current environment. Looking beyond the current situation, my view of the economic outlook centers on my belief that it is a mistake to be a gloomy pessimist. I reject the notion that a 1930's style depression is in the wings. Rather, I think we are at an economic plateau and that additional signs of economic expansion will be appearing soon. With continued progress on the inflation front, and with the additional psychological lift of lower interest rates and the recent stock market surge, consumers will be in a more confident mood. Their spending should encourage business to build inventories and the process of recovery should be under way. For the year ahead, I look for real economic growth in the 2-3 per cent range or so--no t a boom~ but so lid moderate growth. The actual dimensions of the recovery will depend largely on the course of interest rates. High rates will dampen recovery; l ower rates will hasten it. The key to lower rates and the trigger for renewed economic growth is further progress in reducing the federal budget deficit. Such action would bolster i nvestor and consumer confidence that the nation is willi ng to -9­ deal with its problems, wh i le relieving pressures in financial market s . Just as l ower inter e st rat es are impor tant to overall e c onomic recovery, lower rates also will measurably improve the outlook for savings and loan industry profitability. With interest rates which come down and stay down, the spreads between your asset yields and liability costs can turn positive again and profits will follow. In fact, I agree with a number of observe rs who have projected recently that if the current rate environment can be sustained into next year, the industry could return to profitability in 1983. For sure, the prospects vary from region to region and among institutions, but these prospects do undersco r e, I believe, the closely mat ched interests of the Federal Re serve and thrift institutions. Though prosperity undoubtedly will be delayed as we transition to r ecovery, I am optimistic that the nation's broad economic strategy, which incorporates deregulation and incentives for savings, inve stment, and productivity, shows real potential as a path to a bright economic future. From my perspective, the Federal Reserve's commitment to a policy which fosters noninflationary economic growth fits perfectly with these other objectives. As the savings and loan industry recovers along with the economy, you may be assured that the Federal Reserve will continue to be sensitive to your concerns and needs in the new environment. We look forward to a lasting and productive relationship with you based on the fundamental goals we share.

J. Roger Guffey (1982, September 20). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19820921_j_roger_guffey

@misc{wtfs_regional_speeche_19820921_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1982},
  month = {Sep},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19820921_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}