Speech

The Impact of Monetary Policy on Agriculture 2000ASUAgriculture-BusinessConference,“Agriculture2000:IssuesandAlternatives” ASUConvocationCenter Jonesboro,Arkansas February16,2000 IwasdelightedwhenBertGreenwaltinvited discussoutcomesforpriceandoutput.Iwillalso me to speak at this conference. The topic compareagriculturebrieflywithcomputermanu- of the impact of monetary policy on agri- facturing,anotherindustrycharacterizedbyrapid culture is an old one, and one subject to a productivitygrowthandfallingprices. lot of misinformation. Most of my speech will Onlyafterdiscussingthefundamentalsof be about the nonmonetary influences shaping agriculturewillIgettomonetarypolicy.Mymain the industry. The reason is not that I’m dodging messageisthis:TheFederalReserveneedsto the issue, but that most of what goes on in agri- concentrateonitsprimaryresponsibilityofkeep- culture has nothing to do with monetary policy. inginflationlowandstable.Achievingsustained By discussing the fundamental forces shaping lowinflationrequiresthatinterestratessometimes the industry, I hope to convince you that most of riseandsometimesfall.Iknowthatinterestrate what we observe in the behavior of agricultural fluctuationscancauseproblemsinagriculture. prices and output is a consequence of nonmone- Butthereisnootherknownwaytokeepinflation tary forces. My main message is that trying to lowandstable;furthermore,compromisingmone- change these outcomes through monetary policy tarypolicyobjectiveswillnotintheendhelp is an invitation to messing up monetary policy agriculture,butwillactuallymakethingsworse bygeneratinginstabilityintheinflationrate, without fixing problems in agriculture. In fact, interestrates,andthelevelofeconomicactivity. messing up monetary policy will only make agricultural conditions more difficult. Beforeproceeding,Iwanttoemphasizethat INCOME VOLATILITY IN theviewsIexpressherearemineanddonot necessarilyreflectofficialpositionsoftheFederal AGRICULTURE ReserveSystem.KevinKliesenoftheSt.Louis Asnearlyeveryoneknows—includingevery- Fedisaco-authorofthisspeech.Iappreciatehis onewithoutexceptioninthisaudience—the contributionandthankothercolleaguesatthe UnitedStatesiscurrentlyinthemidstofarecord- FederalReserveBankofSt.Louisfortheircom- breakingbusinessexpansion:107monthsand ments.However,Iretainfullresponsibilityfor counting.Nearlyasremarkable,thecurrentexpan- errors. sionfollowsontheheelsofthe92-month-long I’mgoingtoproceedintheonlywayaformer expansionin1982-90.Moreover,thetwoexpan- professorofeconomicscanproceed—byorganiz- sionswereseparatedbyoneofthemildestreces- ingmyremarksaroundthesupplyanddemand sionsinU.S.history.ProfessorJohnTaylor,a conditionsinagriculture.I’llstartwithafewfacts distinguishedeconomistatStanfordUniversity, aboutincomevolatilityinagriculture,before hasdubbedthe17-yearperiodsince1982“The movingontoanalyzesupplyandthendemand LongBoom.”Since1982,theoutputofU.S.final conditions.Next,Iwillputthetwotogetherto goodsandservices—orrealGDP—hasnearly 1 MONETARYPOLICYANDINFLATION doubled,growingatanaverageannualrateof fromanearly$11billionjumpingovernment almost3¾percentperyear. incometransferstofarmers.Foralonger-term Ibelievethatimprovedmonetarypolicyhas perspective,considerthatrealnetfarmincome playedanimportantrole,thoughcertainlynot averaged$47.7billionbetween1990and1998, theonlyrole,inachievingthislongperiodof roughly20percentmorethanthe$39.8billion sustainedeconomicgrowthatahealthypace. annualaverageseenduringthe1980s. Whateverelsemighthavebeengoingon,therate Theearly1990s,then,werenotsobad,but ofCPIinflationcouldnothavedeclinedfrommore farmincomeduringthoseyearspalesnexttothe than13percentin1980to2.7percentoverthe $62.6billionaveragerealnetfarmincomeduring 12monthsendingDecemberoflastyearifthe the1970s.Thetumultuous1970s,frankly,were FederalReservehadnotconcentrateditsefforts anunusualdecade.Someofagriculture’sgood oncontrollinginflation.Bysharplyreducingthe fortuneofthatperiodwaspurchasedatthecost rateofpriceinflationandestablishingfirmexpec- ofsevereproblemsinthe1980s.Althoughfarm tationsinthemarketplacethatinflationwould incomesduringthe1970sroserathersharplyfor remainlow,monetarypolicyhascontributedto afewyears—realnetfarmincomejumpedfrom higherproductivitygrowthandenhancedthe $52billionin1971to$108billiononlytwoyears economy’sstability. later—thissurgewastheresultofseveralunsus- EventhoughtheU.S.unemploymentrate hasfallenfromabout11percentattheendof tainablefactors,suchastheUnitedStatesallowing 1982to4percenttoday,weknowthatsomemem- theSovietstoentertheU.S.markettobuyevery bersofoursocietyhavebeenleftbehind.Isuspect bushelofcorn,wheat,andsoybeanstheycould thatmanyinthisaudiencewillrespondtothese gettheirhandson.Butby1980,againsttheback- wordsbythinking,“Yes,manyofusinagriculture dropofhighandrisinginflation,highandrising havebeenleftbehind.”Indeed,thelastcouple interestrates,andadepreciatingdollar,realfarm ofyearshavebeenroughforU.S.agriculture. incomehadplummetedto$29billion.Justthree Agriculturehasalwaysbeenariskyanduncer- yearslater,itplungedanother27percentto$21 tainbusiness.Inancienttimes,farmerssuffered billion.By1983,realnetfarmincomewasmore fromdroughtsandlocusts.Today,farmersstill than80percentlowerthanithadbeenjusta sufferfromdroughtsandlocusts.Idon’tknow decadeearlierandevenlowerthanthe$25bil- myancienthistoryverywell,butIsuspectthat lionlowpointreachedduringthedepthsofthe severalthousandyearsagofarmerssufferednot Depressionin1932. onlyfromnaturalhazardsbutalsofrommarket Manyspecificfactorsaccountedforthesharp disruptionsbroughtonbywar,theedictsof swingsinfarmincomeI’veoutlined.Thesehave emperors,andotherman-madeproblems.I’ll beenwelldocumentedandIwon’trepeatthem leaveittoyoutotellmeiffarmerstodayfeelany here.Mypointismerelytostatethatfarmingis betterknowingtheirkinshipwithallfarmers aninherentlyriskybusiness.Swingsinfarm overallagesandallpartsoftheworld. incomesovertimecanbe,havebeen,andproba- Let’stakeaminutetolookatsomerecentdata blywillcontinuetobequitedramatic. forU.S.farmersandranchers.Afterrisingtoa21- WhatI’mgoingtodonowistoanalyzethe yearhighof$54.9billionin1996,real,orinflation- basiccharacteristicsofagriculturalproductmar- adjusted,netfarmincomesubsequentlyfell13 percentin1997androughlyanother10½percent kets;thenI’lldiscusstheroleofmonetarypolicy. in1998.Althoughthelatestprojectionsfromthe I’llexaminesupplyconditionsfirst,thendemand U.S.DepartmentofAgriculture(USDA)suggest conditions,andfinallytheinteractionofsupply thatsomeimprovementoccurredin1999,this anddemandthatdeterminespricesandquantities upswingwillmostlikelyhavestemmedentirely ofagriculturalproducts. 2 TheImpactofMonetaryPolicyonAgriculture SUPPLY CONDITIONS IN technologicalinnovations.Doane’sAgricultural Report,atradepublicationmanyofyouare AGRICULTURE undoubtedlyfamiliarwith,recentlyrankedthose Intermsofsheerproducingpowerperunitof innovationsthathavecontributedtoagricul- input,Americanagricultureranksasanunquali- ture’stremendousproductivityadvancesduring fiedsuccess.TheaverageU.S.farmerisgrowing the20thcentury.InDoane’sview,researchand andharvestingmorenowthanhehasatanytime education,mechanization,hybridseedcorn, inhistory—andhe’sdoingit,intheaggregate, commercialfertilizers,andchemicalpesticides withfewerinputs.Indeed,for100yearsormore, werethetopfiveimprovements.Mosteconomists U.S.agriculturehasbeencharacterizedbyfantas- wouldprobablyconcurwiththeseassessments. ticproductivityadvances.Acloserlookatthis Butjustasthenewtechnologiesassociatedwith productivityexplosionrevealssomestartling thecomputer,theInternet,lasers,andtelecom- statistics.Duringthepast75years,thenumber municationshaverevolutionizedmanyaspects ofacresharvestedforcorngrainhasdeclinedby ofthenonagriculturaleconomy,moreinnovations 16percentwhileproductionhasincreasedfive- areonthewaywhich,ifdevelopedproperly, fold.Similarly,whilecottonproductioninrecent yearsislittlechangedfrom1926,whencotton promiseevengreateradvancesinagricultural acreagepeakedatjustunder45millionacres, productivityinthefuture. yieldsperacrehavemorethantripledwhilethe Theadventofgeneticallymodifiedorganisms numberofacresharvestedhasfallenbymorethan inmanycrops,whichfollowstheadvancesin two-thirds.Andit’snotjustcropproducerswho geneticimprovementsappliedtolivestockpro- havebecomemoreproductive.Thenumberof duction,promisesbothincreasedproductionand cattleandcalvespeakedataround132millionin reducedrelianceonpesticides.Likewise,theuse 1975.Sincethen,thecattleinventoryhasdropped ofsatellitetechnologytobetterapportionfertilizer byaboutaquarterwhilemeatproductionhas andothersoilnutrients,combinedwiththe increased11½percent.Likewise,thenumberof increasedusageoflow-tillfarming,offerthe poundsperbroilerproducedhasrisenfrom promiseofincreasedproductionwithreduced roughlythreein1950tonearlyfivetoday. chemicalfertilizerapplications. Intheaggregate,accordingly,theamountof Someofthesetechnologicalinnovationsare outputproducedbyeachfarmer,includingfarm controversial—nodoubtaboutit.Butthesecon- employees,hasrisenfromalmost$2,300in1910 troversiesareawholeothersubject.WhatIwant toroughly$35,600in1998—oralittlemorethan toemphasizeheretodayisthatproductivity 3percentayear.(Thesefigures,includingthe improvementinagricultureisagreatAmerican realnetfarmincomemeasurecitedearlier,arein triumph,andunderstandingitisessentialto constantdollars,withabaseyearof1996.)Much understandingthebasicsofagriculturalmarkets. ofthisincreasehasoccurredsince1973,aperiod IfIhadachalkboardbehindme,Iwould whenproductivityinthenonfarmsectorbegan summarizethisdiscussionbydrawingtheusual toslowdramatically.From1973to1998,the upward-slopingsupplycurvewithabigarrowon amountoffarmoutputperworkerroseatan it,pointingtotheright,toindicatethattheentire averageannualrateofnearly5percentperyear. Incontrast,theproductivitygrowthinthenonfarm supplycurveisshiftingoutrapidlyovertimeas businesssectorduringthisperiodmeasured1½ productivityimprovementsaccumulate.Iwould percentayear. alsodrawacoupleofdashedsupplycurvespar- Thattheindustryhasbeenabletoincrease alleltothesolidonetoindicatethatsupply productionwithfewerfarmersandranchersis bouncesaroundfromyeartoyeardependingon testamenttothetremendousbenefitsgleanedfrom growingconditions—thedroughtsandthelocusts. 3 MONETARYPOLICYANDINFLATION DEMAND CONDITIONS IN exportsaretoU.S.producers,therealityisthat fooddemandaroundtheworldissubjectto AGRICULTURE Engel’slaw,whichmeansthatworlddemandfor Whenyouaddademandcurveintothedia- U.S.farmoutputisunlikelytogrowrapidly.More- gram,thecurve,ofcourse,slopesdown.Buthow over,astherecentAsiancrisisshowed,unex- steepisitandhowdoesitmoveovertime? pecteddemanddisturbancesfromforeign Let’sstartwiththemovementovertime.The marketsareafactoflife.Itisprobablytruethat demandforfoodrisesasthepopulationrisesand exportdemand,welcomethoughitcertainlyis, astheaverageincomeofconsumersrises.The ismorevolatilethandomesticdemand. effectofrisingincomehasbeenunderstoodfora Whatabouttheshapeofthedemandcurve longtime.Inthemid-19thcentury,Prussian forfood?Thisanalysiscanbeverybrief.Wedon’t economistErnstEngelputforththeproposition consumeverymuchmorefoodwhenitsprice thatthemoreincomeyouhave,thesmallerthe declines,orverymuchlesswhenitsprice fractionofyourincomespentonfood.Thispropo- increases.Thus,thedemandcurveispretty sitionwassowellestablishedthatitbecame steep—inelastic,ineconomists’lingo. knownas“Engel’slaw.”Thedemandforfood Wecansummarizethedemandconditions productsincreasesaboutproportionatelywith thisway:Thedemandcurveforagricultural population,butbeyondthatincreasesmoreslowly productsisquitesteep,shiftsoutonlygradually thandoespercapitaincome.Forexample,ifper overtime,andissomewhatvolatilebecauseexport capitaincomerisesby3percentinrealterms,the demandisvolatile.Thatisthedemandcurveon percentageincreaseindemandforfoodproducts myimaginarychalkboard. wouldbeconsiderablyless—perhapsonly1per- cent.IntheUnitedStatesandotherhigh-income countries,weobservetheconsistentpatternthat SUPPLY AND DEMAND expendituresonfarmcommoditiesgrowmore slowlythantotalexpenditures.Thus,expenditures TOGETHER—PRICE AND OUTPUT onfarmcommoditiesdeclinerelativetotheecon- TRENDS IN AGRICULTURE omyasawhole.Foralong-termperspective, Inanymarket,priceandquantityaredeter- expendituresonfoodasashareoftotalconsump- minedbytheinteractionofsupplyanddemand. tionexpendituresfellfromabout25percentin Thelong-runoutcomeinagricultureisdominated 1929to14percentby1999. bythefactthatthesupplycurve,drivenbyrapid ThemarketforU.S.agriculturalproduction productivityimprovement,isshiftingoutmore isnot,ofcourse,limitedtoU.S.consumers.The rapidlythanthedemandcurve.Thus,agricultural UnitedStates,byvirtueofitsabundantnatural pricesrelativetopricesingeneralhavebeen resourcesandplentifulsupplyofcapital,enjoys trendingdown.Indeed,farmpriceshavebeen adistinctcomparativeadvantageinagriculture fallingrelativetononfarmpricesforaslongas productionrelativetomostothercountries.Given thelimitedupsidetoboostingthedomestic wecanmeasurethem.From1909to1941,farm demandforfarmproducts,onewaytoincrease priceincreasestrailedaggregatepriceincreases salesofU.S.farmproductsistomakethemavail- byabout¾ofapercentagepointayear.Thatmar- abletoconsumersinotherpartsoftheworld.And gindoesn’tsoundverylarge,butmaintainedfor infact,theshareofU.S.farmproductionthatis 30years,itcutstherelativepriceofagricultural exportedhassteadilytrendedupovertime.From pricesby21percent.DuringWorldWarIIandits 1935to1954,U.S.farmexportsaveraged8½ immediateaftermath,farmpricesshotupdramati- percentoftotalfarmoutput.Thissharereached cally:From1941to1948,farmpricesadvanced ahighof28percentin1980andhasaveraged atroughly14½percentayear,whileaggregate roughly25percentsince1988.Asimportantas pricesrosealittlemorethan7½percentayear. 4 TheImpactofMonetaryPolicyonAgriculture Farmpricessubsequentlyresumedtheir Letmeputafewnumbersintotheanalysis. downwardtrend,asthewavesoftechnological From1910to1932,U.S.farmemployment innovationsrampedupproduction.Although declinedmodestly,from13.6millionto12.8mil- U.S.livingstandardsroseintheaftermathof lion,orabout0.25percentperyear.Duringthe WorldWarII,Engel’slawremainedinforceand 1930s,laboroutflowsacceleratedmarkedlyand fooddemandgrewrelativelyslowly.From1948 continuedlargelyunabateduntilroughly1987, to1998,relativefarmpricesdeclinedbyroughly whenfarmemploymenttotaledjustunder3mil- 3percentayear;by1998,therelativepriceof lion,oraboutaquarterofwhatitwas50years foodwas78percentbelowits1948level.Falling earlier.In1999,farmemploymentwasabout2 relativefarmprices,inturn,causedfarmincome percentoftotalemployment,whereasin1929 togrowmoreslowlythannonfarmincome. aboutone-fifthofcivilianemployeeswere engagedinfarmemployment. Outputhasbeengrowinginabsoluteterms, Itappearsthatthemajoradjustmentinthe butlessrapidlythanoutputofallgoodstaken numberofagriculturalworkersisnowover.Since together.Modestoutputgrowthisadirectoutcome 1987,farmemploymenthasstabilized,andeven ofthefactthattheU.S.populationhasbeenpretty risenslightly.Ofcourse,farmemploymentcon- wellfedforalongtime,anddoesnotchooseto tinuestofallasashareoftotalemployment,but eatthatmuchmoreevenwhenthepriceoffood themostdifficultperiodinwhichalargeabsolute goeslower.Thebottomline,intermsoflong-term declineoccurredisnowpast. trends,isthatagriculturalpriceshavebeenfalling AccordingtotheUSDA,theindexoftotal andtotaloutputrisingonlymodestly. farmoutputincreasedbyroughly135percent Theinevitableoutcomeofrapidtechnological from1948to1996(thelatestobservation).Over advanceandslowgrowthoftotaldemandisthat thisperiod,though,theindexoftotalfarminput— thedemandforworkersinagriculturedeclines. ameasuredesignedtocapturetheinfluenceof Itseemssomehowunfairthataparticularlyinno- intermediateinputslikefertilizer,fuel,laborand vativeandproductivesectorsuchasagriculture capital—actuallydeclined.Whatisinterestingis tendstogeneratelowincomes.Indeed,income thatnearlyallofthisdeclineininputstemsfrom prospectsareespeciallybleakforthoseinagricul- reductionsinlaborinput.Whereasinputsofinter- turewhofallbehindthecuttingedgeoftechno- mediateproductsrose84percentandcapitalinput logicalimprovement.Inthewordsofthe rose33percent,laborinputdropped70percent. economistHendrikHouthakker,“Thegreaterthe Althoughfarmoutputhasincreasedsubstan- increaseinfarmproductivity,thegreaterthe tiallyovertime,ithasnotkeptpacewithgrowth imbalancebetweensupplyanddemandoffarm inthenonfarmsectoroftheeconomy.From1889 productswhichhastobecorrectedbyanoutflow to1966,realfarmoutputasapercentoftotalGDP oflabororbylowerfarmprices.”Moreover, declinedfromnearly8½percenttoabout1¼per- Houthakkernotesthat“unlesstheoutflowoflabor cent.Sincethen,ithasremainedfairlyconstant, fromfarmingisfastenough,anincreaseinfarm implyingthattherateofreturntoagriculturehas productivityleadsonlytolowerfarmprices moreorlessstabilizedatitslongrunrate.The andlowerfarmincomes.”Howlowincomesgo continuedexistenceofsmall,inefficientfarms, dependsonhowrapidlyworkersmoveoutof though,suggeststhatotherfactorsarekeeping agriculturetoindustrieswithbetterincome someresourcesintheindustrythatmightwell prospects.Lowincomesinagriculturemayseem earnahigherreturnelsewhere. unfair—andthisanalysismayseemratherbrutal— I’vediscussedlong-runtrendsinagricultural butthefactisthatlowincomesaredrivenbythe pricesandoutputs,andearlierIdiscussedthe inexorableeconomicforcesofhighproductivity volatilitythatcharacterizesthisindustry.NowI growth,slowdemandgrowth,andinsufficiently needtheimageofachalkboardinmotion.The rapidexitofworkersfromagriculture. supplyanddemandcurvesaredancingaround, 5 MONETARYPOLICYANDINFLATION sometimescreatinglargeandpainfuldeclinesin nessdemandforcomputersisrisingrapidlyas prices,andsometimesdelightfulincreasesin wellbecausecomputerssoenhancetheproduc- prices—delightfulforproducers,anyway.The tivityofproductionprocessesofallsortsofgoods, dancesometimesyieldspainfuldeclinesinout- includingagriculturalgoods. put—theyearsofdroughtsandlocusts—and Thus,risingrealpersonalincomesand sometimesenormousbumpercrops.Andthese increasingbusinessuseofcomputerspropelthe fluctuationsoccurontopoflong-runtrends computerdemandcurveoutward,anddeclining characterizedbydecliningpricesandmodestly computerpricesdrivenbytheoutwardshiftin risingoutput. supplystimulateshigherpurchasesasweslide downtherelativelyflatdemandcurve.Theout- comeisthatcomputerproductionisexploding. AGRICULTURE AND COMPUTER Since1959,outputofcomputerandofficeequip- menthasincreasedatanaverageannualrateof INDUSTRIES COMPARED 21percentperyear,whereastotalfactoryoutput Itisinterestingtocompareagriculture,just andrealGDPbothroseonlyabout3½percentper briefly,withanotherindustry—computers— year. characterizedbyhighproductivitygrowth. Ifonlyfarmerscouldfindawaytostimulate Thoughthetwoindustriesarevastlydifferentin demandforabushelofcornoneverydesktop… termsoftheiroutput,thequalitativenatureof butI’llnotpursuethatwhimsicalnotionany theirlaborinputandtheproductionprocesses further! theyemploy,thecomputerandagricultureindus- triesdoshareacoupleofkeycharacteristics.First, thetwoarebothcapitalintensive.Second,the MONETARY POLICY AND pricesoftheiroutputscontinuetofallrelativeto AGRICULTURE thepricesofallothergoodsandservices.Infact, unlikefarmprices,personalcomputerpriceshave Fromtimetotime,everycentralbankfinds actuallyfalleninabsolutetermssincetheyentered thatitmustchangeinterestratestomaintainlow themarketplace.Since1978,computerprices andsteadyinflation.Let’stakeamomenttounder- havefallenbyanaverageof17percentperyear, standwhy. whilepricesforalloutput,asmeasuredbythe Supposethereweresomewayforthecentral GDPchainpricedeflatorhaverisenby3¾percent banktoachievelowinflationwithoutacting peryear.Thus,therelativepriceofcomputers directlyoninterestrates.Forexample,suppose hasdeclinedbymorethan20percentperyear— thecentralbankcontrolledmoneygrowth muchmore,recall,thanthe3percentperyear directly—indeed,thereisanextensiveliterature dropinrelativeagriculturalcommodityprices. arguingthatthispolicyistheonecentralbanks Whyarecomputerfirmsgettingrichwhilefarmers shouldpursue.TheFederalReservemightraise facethethreatofbankruptcy? andlowermoneygrowthasneededtoachieve Inbothagricultureandcomputermanufactur- itsobjectiveoflowandsteadyinflation.Interest ing,supplyconditionsaredominatedbyrapid rateswouldfluctuatefreelyinthemarketplace. productivityimprovement.Butdemandcondi- EvenwhentheFedmaintainedrocksteadymoney tionsinthetwoindustriesareverydifferent.While growth,interestratesmightriseorfall.Inparticu- thedemandforfarmcommoditiesisrelatively lar,whentheeconomyboomed,rateswouldtend insensitivetopriceandincomechanges,the toriseashouseholdsandfirmsbidforfundsto demandforpersonalcomputersisnot.Thecom- financespendingonnewinvestment,onhouses, puterdemandcurveontheimaginarychalkboard oncars,andalltheotherthingspeoplecommonly behindmeisshiftingrapidlytotheright,as financebyborrowing.Similarly,whentheecon- incomerises,andhasarelativelyflatslope.Busi- omyslowed,interestrateswouldtendtofall, 6 TheImpactofMonetaryPolicyonAgriculture eveniftheFeddidnothingbutmaintainsteady increases,butinsteadimposesbothhigherinfla- moneygrowth. tionand,eventually,evenhigherinterestrates Thatastrongeconomytendstopushinterest onsociety. ratesupandaweakeconomytendstopushinterest Becausethelessonsthatflowfromprocrasti- ratesdownisillustratednicelybyrecentJapanese nationinmonetarypolicywerelearnedsopain- experience.MostareawarethatJapanesegrowth fullyinthe1970s,andbecauseFedpolicyhas hasbeensomewherebetweenanemicandnon- beensosuccessfulsince1982,whentheinflation existentforagoodnumberofyears—infact,for ofthe1970swasfinallyconquered,complaints thewholeofthedecadeofthe1990s.Interestrates aboutperiodsduringwhichinterestratesrise onshort-termJapanesegovernmentsecurities havebeenrelativelymuted.ButIhavetoputthe havebeenatornearzeropercentforthelastyear, emphasison“relatively.” andstilltheeconomyisstumblingalong. Wheninterestratesrise,farmers,agricultural TheFederalReserve,alongwithalmostall implementmanufacturersanddealers,andother othercentralbanks,conductsmonetarypolicy relatedbusinessesoftencomplain.Soalsodo byadjustingitstargetfortheinterestrateon homebuilders,whoseindustryisespecially short-terminterbankborrowing,knowninthe interestsensitive.Sodocarmanufacturersand UnitedStatesasthefederalfundsrate.TheFed dealers,andmanyothers. callsthistargetthe“intendedfederalfundsrate.” Sometimestheargumentisabitdifferent. WhattheFedtriestodoistomimic,inbroadout- Whenagriculture,oranyotherindustry,isgoing line,howthefederalfundsratewouldfluctuate throughadifficultperiod,pleasforassistanceare iftheFedcouldsettherateofinflationdirectly, understandable.Whycan’ttheFedlowerinterest orthroughsomeotherpolicytoolsuchasmoney ratesabittohelpinsuchsituations?Forexample, growth.IftheFedfailstoadjusttheintended whentheAsianeconomiccrisishitinmid-1997, federalfundsrateappropriately,itwillfailinits U.S.agriculturalexportswereespeciallyhardhit. missiontoachievelowandsteadyinflation. Thecrisisdeepenedinmid-1998withtheRussian WhentheFedraisestheintendedfederal default.TheFeddidlowerinterestratesinthe fundsrate,otherinterestratestypicallyfollow.In fallof1998,topreventthefinancialdisruption fact,otherratesnotinfrequentlyleadtheintended fromspillingovertoaffectthestabilityofthe rate,asthemarketanticipateswhattheFedis U.S.economy.Asfinancialconditionsreturned goingtodo.Everyonewhohasborrowedfunds tonormallastyear,theFedraisedtheintended usingshortmaturityloansandthereforeexpects fedfundsrate,andmarketratesroseaswell.But topayhigherratesonthoseborrowingsinthe theeffectsoftheAsianproblemsonthefarm future,everyoneintheprocessofborrowingfunds, economylingered,andlingertothisday. andeveryonethinkingaboutborrowinginthe Now,I’mnotsuggestingthatFedpolicyshould futurefeelshurtbytheincreaseininterestrates. beunaccountable.Indeed,Fedpolicyshouldbe Andsincealmosteveryoneinthecountryeither examinedandreexaminedcontinuouslyinvigor- hasborrowed,isintheprocessofborrowing,or ouspublicdebate,anditis.TheFedneedsto expectstoborrowinthefuture,thatmeansthat defendandexplainitspolicydecisions,andIdo thereisalmostuniversalpainwheninterestrates mybesttocontributetothatprocess. rise. Manypeopledonotunderstand,however, Butwhatisthechoice?Ifinterestratesdon’t thataspowerfulasmonetarypolicyis,acentral riseinatimelyfashion,thensoonerorlater bankhasessentiallyonlyonepolicyinstrument. inflationwillbegintorise.Whenthathappens, Iliketothinkofthatinstrumentastherateof investorswillputadditionalupwardpressure moneygrowth—or,moregenerally,theprovision oninterestrates,toprotecttheircapitalfrom ofliquiditytotheeconomy—overthelongrun. beingerodedbyinflation.So,acentralbankthat Intheshortrun,theFedimplementsitscontrol delaysraisingratesdoesnotintheendavoidrate overthegrowthofliquiditybysettingtheintended 7 MONETARYPOLICYANDINFLATION federalfundsrate.Withonlyonepolicyinstru- oftime.MostU.S.successstoriescanbecharac- ment,thecentralbankcanatbestachieveonly terizedasenjoyingaperiodofrapidgrowthand onepolicyobjective.Thatobjectiveisalowand innovationfollowedinarelativelyfewyearsby stablerateofinflation.IftheFedtriestopursue amaturestageofslowgrowth.Thinkofrailroads, otherobjectives,itmaylosecontrolovertherate automobiles,andsteel.U.S.agriculture,onthe ofinflation. otherhand,ischaracterizedeventodaybyexcit- Ourexperienceinthe1970sdrovehomewith inggainsinproductivity;itisnotyetamature starkclaritytheconsequencesoflosingcontrol industry.Agriculturetodaysuffersfromthesame overtherateofinflation.Theeconomysuffered problemsithasalwayssufferedfrom:droughts, fromhighandunstableinterestrates,rapid locusts,andmarketdisruptions.Itisariskyenter- swingsintheinternationalvalueofthedollar, prise,andIhavegreatrespectforthosewhocope andincreasedinstabilityofemploymentand andprosperinthisbusiness. output.Therecessionsof1973-75and1981-82 Thecontributionmonetarypolicycanmake wereamongthemostseveredownturnsinU.S. toagricultureistomaintainlowandsteadyinfla- history.Theinstabilitiesofthisperiodaddedto tion.Thoseofyouinagricultureshouldaskthe theburdenssufferedbyagriculture,homebuilders, Fedtokeepitseyeontheinflationball.Criticize andotherindustries. uswhenwearegoingofftrack,butdefine“off TheU.S.economyisdynamicandrapidly track”bytheeconomyasawholeandnotby changing.Atanygiventime,certainindustrial conditionsinagriculturealone.Donotunderes- andgeographicsectorsareboundtolagtheover- timatetheimportancetoagricultureofastable alleconomy,whileothersdobetterthanthe overallU.S.economy.Lowinflation,stableinfla- overalleconomy.Monetarypolicycandolittle tionexpectations,relativelylowinterestrateson tohelpthelaggingsectors—therearenopolicy theaverage,highandstableemployment,allcon- instrumentsattheFed’sdisposalthathavesector- tributetostabilityoftheagriculturaleconomy. specificeffects.Ourresponsibilityistomaintain TheFedcandonothingaboutthefundamental lowandstableinflationand,totheextentpossible economicforcescontrollingthedestinyofagri- withinthisbasicobjective,tosmoothtemporary culture:highproductivitygrowth,thehazardsof disturbances. nature,thelowpriceandincomeelasticitiesof demand,andtheinstabilityofconditionsin importantexportmarkets.ButtheFedwilldoits A FINAL WORD besttomaintainastabledomesticeconomy.If theFedcancontinuetobesuccessfulintempering Mymessagetodayissimple.U.S.agriculture thatimportanthistoricalsourceofinstabilityto isaspectacularsuccessstoryofhighproductivity U.S.agriculture,theFedwillhavedoneitsjob. growthmaintainedoveranamazinglylongperiod 8

William Poole (2000, February 15). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_20000216_poole

@misc{wtfs_speech_20000216_poole,
  author = {William Poole},
  title = {Speech},
  year = {2000},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_20000216_poole},
  note = {Retrieved via When the Fed Speaks corpus}
}