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PJ:MABKS OF MR, RoBERT P, Mi\YO
PRES.I.DENT, ~EDERAL RESERVE BANK OF U-HCAOO
BEFORE IHE lNVESTMB'IT Arw_YSTS Soc I E1Y OF 0-H CAOO

JANUARY 17, 19-3)

I HAVE A SPECIAL REASON TO BE PLEASED TO MEET WITH YOU TODAY, IN 11-iE
TRADITION OF THE lr-NESTMENT ANALYSTS Soc1ETY I CAN crnE BEFORE YOU AS TI-fE
PRESIDENT OF A Ml\JOR CORPORJ\TION TO REPORT ON OUR FINANCIAL SLCCESSES FOR

1979,
THE FEDERAL RESERVE Bt\NK OF 0--tlCAOO HAD RECORD EARNINGS LAST YEAR,

WE

HAD A RESPECTABLE INCREASE IN Cl.RRENT EARNINGS OF 11..6 PERCENT, TO A LEVEL
OF ABOUT

$1. 6 BILLION, DLR EXPENSES WERE HELD TO $88 MILLION FOR 11-tE YEAR,

AN INCREASE OF ONLY 6,2 PERCENT,

THAT

LEFT US Willi NET EARNINGS OF

JUST

$1,5 BILLION,

THE BEFORE TAX RETI.RN ON STOCKrOLJ)ER EQUllY IS CALCULATED AT A rvn:IEST 900 PERCENT, I MUST HASTEN 11-fAT SINCE OLR EFFECTIVE 11TAX

OVER

RATE" EXCEEDS 9;J PERCENT, Ol.R PAYMENTS TO THE TREASlRY WERE A HEFTY $1,487
MILLION~ Au_ THAT'S LEFf FOR 0~ f1:MBER PANK STOC~LIERS IS THEIR MEAGER
STATIITORY 6 PERCENT DIVIDEND, TOTALING $10 MILLION,

A PROFITABLE YEAR±
Bur

WE WERE TRYING TO 00 S0'1ETI-flNG OTHER TI-IAN fviAKE A PROFIT LAST YEAR-

AND llil\T IS OBVIOUSLY WHAT

I WANT TO

TALK AOOlff AND YOU WANT TO HEAR,

IT IS HARil..Y SURPRISING ™AT IN THE LAST FEW M:>N'rnS INCREASING. ATTENTION
HAS BEEN RX:USED BY

Al.JIOST

EVERYONE ON ~NEfARY POLICY, lJEvaOPMENTS IN lliE

FINANCIAL MARKETS, TO PlJf IT MIL.Il..Y, HAVE NJT GONE Uf\OBSERVED BY CONSLMERS,
fmE BUII.JERS, BUSINESSr-1:N FRCT1 FI~ OF ALL SIZES, AND 11-fE FINANCIAL AND

INVESTMENT ca~ITIES GENERALLY, BEBATEs HAVE BEEN INTENSE AOOUT hHAT lliE
FED IS OR Sl-OULD BE OOING, flNn OVERLAYING
SEARCHING QUESTIONS

OONCERNI~ THE

AU_

RELATIONSHIP

ING NEMESIS OF OUR COLNTRY-AND TI-IE GROYffii ·OF

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

OF TI-fE DISCUSSIONS Hl\VE BEEN
BElliEEN INFLATION-·ll-1E SEEM-

-£<1

fvONIM,

-2I DIDN'T

AND SO MY TIRE FOR TIHS NOO[J, '1-fr-tAT IS nx~EY."
Tlll.E,

Bur

IT

cou..n

SELECT TI-fE

THAT QL£STION AND

HARDLY BE ~ORE APPROPRIATE TODAY.

l~H~C

le~

THE RELATED ONE OF I-OW TO CONTROL M)NEY GROWlli LIES AT TIE VERY BBART OF

RECENT

POLI CY

r'ONETARY

ACT! ONS.

(-bPEFULLy,

BY

eocus ING FDR A FEW

MI NlJTES

ON lliESE QUESTIONS TODAY, J CAN GIVE YOU A BETTER JJmEA OF WHI\T rvDNETARY
POLI CY IS ALL ABOlJf AT TI fE PRESENT TI ME•
RAISING THE QBBSTION '\-,'HAT IS l·-'DNEY'

IMPLIES, OF COURSE, THAT

THING llil\T WE MIGHT CALL ,nr~EY IS IMPORTANT,

Ir

SCJv1E-

IS!

CERTAINLY

THERE IS A SUB.STANTAL BODY OF EVIDENCE INDICATING THAT ffiNEY IS RELATED TO THE TOTAL LEVELS OF SPENDING IN OUR
TO PRODLCTION, AND TO EMPLOYMENT,
IMPORTANTLY

11

TO THESE REAL11

ECO~K>.'~IC VARIA.BLE,

ECOi'O1Y,

ASPECTS OF

OUR EC0NCMY

TiiAN AfN

OTHER SINGLE

vh-fILE 1HERE ARE DISAGREEMENTS ABOlIT 11-IE PRECISE NATL.RE

AGGREGATE

EO)i'O~IC

~O DISAGREEMENT llil\T AN INSUFFICIENT Ar"OlNf OF t'ONEY

INDLCE

TO INOOME,

FURTI-iERr'DRE, r-nNEY IS RELATED MJRE

OF THE RELATIONSHIP BffiJEEN l"DNEY AND

AND

PRICES,

TO

ACTIVIlY

WILL

THERE

IS

J-W1PER cavr-~CE

A SLOWING OF SPENDING AND INCCJvlE AND A rECLINE IN EMPL0\1\ENT,

THERE IS ALSO t-n DISAGREBvlENT TI-iAT TOO LARGE A QUAJITITY OF t-'DNEY WILL RESLLT
IN PEOPLE

ffiVING

VIRTI.ll\LLY

~AV FRa'-1 fvONEY INTO GOODS AND SERVICES, PUSHING UP PRICES,

EVERYONE

AGREES WITI-1 TI-fE BASIC PR8v1ISE 11-lt\T IS TI-fE CORNER-

STONE OF CURRENT t·ONETARY POLICY-"TI-iE INFLATIONARY PROCESS IS LLTI~TELY
RELATED TO EXCESSIVE GROWTI-f IN rvtlNEY AND CREDIT,"

CULTIES WE

SEEM

TO HAVE ENCOLNfERED?

THE

Bur w-iY

OBVIOUS ANSWER

TI-IEN 11-IE BIFFI-

IS THAT w-tILE THE

OONCEPT IS SIWLE, IMPLEMENTATION IS COMPLICJ\TED AND DIFFICLLT,

ESSENTIALLY, 11-IE

PROBLEM BOILS OO'f>IN TO THE FACT 1HAT lHE

RELATIONSHIP

BETWEEN INFLATION AND EXCESSIVE GROWTI-1 IN t'ONEY IS l'OT SO CLOSE 11-IAT ONE
NEED ONLY SET A r,tONETARY DIAL AND lHEN STEP BACK,

THERE HAVE BEB~ AND

CONTINUE TO BE C~GES IN TI-fE STRLCTLRE OF OUR ECOt01Y AND IN FINANCIAL


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3INSTRlJ1:NTS TitAT AFFECT TI--iE OBSERVED RELATIONSHIPS BETI·lEEN r,or~EY AND ECONOMIC
ACTIVIlY,

h'HAT

IS r-'ONEY HAS BEOJv1E AN INCREASINGLY IMPORTANT PART OF AfN DECISION

ON SETTING lrlE AROPER COURSE.

You

ARE ALL ftWARE OF THE DISCUSSION THAT

HA.VE BEEN TAKING PLACE ABOUT THE INt\DEQU~ES OF TiiE rnNETARY MEASURES

rbsT

Cl.RRENTLY BEING PUBLISHED,

ECOtOMISTS IN 1liE UNITED STATES PLACE TI-IE

GREATEST 8'-'1PHASI S ON t'ONEY' S USE FOR CARRYING OUT lfRANSACTIONS.

M-1 MEASURE

1HE CURRENT

0RIGINAU..V,

(CURRENCY AND DE1WID DEPOSITS) ~lAS DEVELOPED AS

TI-IAT MEASURE OF TRANSACTIONS fvONEY,

BUT RECENT FINANCIAL INNOVATIONS AND

REGULATORY CHANGES HAVE LED TO A HOST OF TRANSACTIONSIINSTRl.Jv1ENTS t-OT IN
CLRRENT

M-IL

FOR EXAr"1PLE,

tow

ACCOU'ITS AT BANKS AND THRIFTS,

ATS

ACCOUNTS

AT PANKS AND TI-IRIFfS AND CREDIT ll'H0N SHARE DRAFfS,
THERE .IS·· r«Jtl WIDESPREAD AGREEMENT THAT TiiE CLRRENT MEASURE OF

Bur

IMPERFECT,

r-1-1

IS

hHAT GUI DE OOES ONE USE?

THERE ARE A Nl11BER OF ECDf\OMISTS AND ANALYSTS THAT PREFER TO DEFINE
r-toNEY ON TiiE BA.SIS OF THE DEGREE OF SUBSTITUTABILllY NOJG FINANCIAL ASSETS,
THAT WAS lHE BASIS FOR 11-1E Cl.RREtIT

M-2

AND

M-3 MEASURES

SINCE Tlt1E Ai'ID

SAVINGS IEPOSITS AT BANKS AND lliRIFTS WERE CONSIIl:RED TO BE CLOSE SLIBSTITUTES,

BITT AMIN, Cf-WIGES HAVE OCCURRED,

v!HLE SAVINGS ACCOUNTS l-11\VE BE-

mME t'ORE LIQUID, TIME DEPOSITS ARE LESS LIQUID BECAUSE OF WITIIDRAWAL
PENALTIES,

f\Nn

IN DDDITION, NEW INSTRLfvlENSS HAVE BEEN IEVEL0PED St.CH AS

r.'ONEY MARKET MJTl..Lf\L A.JNDS AND OVERNIGIT

So

RPs,

IS IT REALi_Y SO ClEAR lliAT TI-IE CONCEPT OF fvONEY CAN BE CAPTURED IN

A SIMPLE STATISTIC OR Tht), ESPECIALLY WHEN INSTITLrrIONAL CHANGES ARE LIKELY
TO CONTINtE?

l

N-1 f\OT lRYING TO ARGUE TiiAT WE OON'T Hl\.VE AfN IDEA ~T

t'ONEY IS AND, lHERERJRE, WE CAN'T LSE MJNEY AS A FtJ-UW-iENTAL GUIDE TO rvt>NETARY POLICY,


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

RATHER,

J WANT

TO STRESS 1liE PROBLB-1 THAT WE 00 Hl\VE WilH A

- 4SINGLE MEASURE Arm THE REASON ,w TiiE REU\TIONSHIP BETI\'EEN THAT $INGL£
MEASURE ArID INFU\TION rv'-AY NOT BE PRB)ICTABLE WITii TI"fE PRECISION ENVISAGED
fN 11-iOSE WI-D ARGUE lliAT lHE t'DNETARY DIAL SHOULD

BE SET AND LEFT ALOl'E,

THE SYSTEM IS, OF OOURSE, ATTEMPTING TO DEVELOP r-DRE APPROPRIATE
MJNETARY MEASURES FOR THE Cl.RRENT ENVIROf'l"'.E~IT.
TIONS HAVE BEEM r¾DE AND h'E ID<PECT

Bur W11LE THE NEW

PRoPOSALS FOR NEW DEFINI-

m PUBLISH 11-iE

NB\' MEASLRE NEXT MJNm,

DEFINITIONS HILL BE AN IMPROVEMENT OVER CURRENT DEFINI-

As

TIONS, WE MUST RECOGNIZE TI-IAT lHEY TOO MA.Y BEC<J,1E OBSOLETE,

OVER TiiE

COURSE OF HISTORY, THE QUESTION OF WHAT IS fvONEY CAN NEVER BE ANSWERED
WITH CERTAINTY-w-IAT SERVES AS ~'ONEY 0-W~GES OVER TIME,

IN A SENSE,

I SLPPOSE 11-IAT TI-fE DEFINITIONAL

PROBLEM MIGt-IT EE CONSIDERED

BY SOME AS A SIDE ISSUE FOR t.-ONETARY POLICY SINCE Ml\NY STILL 00 i'-DT BELIEVE
11-tl\T WE ARE REALLY FOCl.SING ON MJNETARY AGGREGATES AT ALI_, STILL PREFERING

TO LOOK AT HITEREST RATES AS A MEASLRE OF POLICY RESTRAINT OR EASE, THUS,
TI-fE RAPID ESCI\LATION OF INTEREST RATES FOLL0'1!ING OUR 0crOBER

6 ACTIONS,

11

WAS TAKEN AS THE EVIDENCE OF A TIG-ITENING'' OF M:>NETARY R:>LICY AND SIMILARLY

lHE SUBSEQUENT BACKING OFF OF INTEREST RATES WAS CONSIDERED TO BE RN EASING
OF f"ONETARY POLI CY,

UNFORTUNATELY, THIS REPRESENTS EITHER A MISU'IDERSTANDING OF 11-iE ACTIONS
TAKEN ON 0crOBER

6 OR

A REFUSAL TO BELIEVE THAT WE WERE OOING WHAT WE SAID

\~ WERE OOING, TI-11\T IS, TAKING A SERIES OF CO·1PLEMENTARY ACTIONS IBAT ~
11

ASSl.RE BETTER CONTROL OVER THE EXPANSION OF MJNEY AND CREDIT,"
WPJ\T WAS IDNE FOUJ)WING 0crOBER

6 WAS NJT TO "PUSH UP

IN1EREST RATES"

IN ORDER TO BRING ABOITT A REDUITION IN ECONOMIC ACTl!IlY AND ULTIM/\TELY A
REilJCTION IN THE RATE OF PRICE INCREASES--A FAIRLY TRADITIONAL VIEW OF I-ICM
MJNETARY POLICY SI-OULD W'JRK R>R ECONJMIC STABILl?ATION PURPOSES.

WHAT WAS

OONE WAS TO 0-JANGE OUR OPERATINC PROCEDURES SO AS TO ASSURE BETTER CONTROL

-IN RESTRAINING rvDf\'ETARY GROHlH,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

- 5THE ACTIONS WERE ~T AS SI-MP AS S0'1E SLK3GESTED, TI-1AT IS, lHI\T 'tJE
Will ffiVED FRa'1 c•W-JGING INTEREST RATES AS A MEANS OF AFFECTING 11-fE ECOrrnY

TO TARGETING fvONEY STOCK GRO'rnl-i,

FOR A NLMBER OF YEARS, WE HAVE BEEN FOOUS-

1NG ON LONG TERM MJNETARY GROWTI-f RATBS,

INDEED 11-fESE ARE REPORTED TO

WNGRESS, FORMERLY llIDER A CoNGRESSIONALR:SOLUTION FOUR TIMES A YEAR AND
t'lJ// UNDER TI-iE Hl.Mf'HREY-rlA'rlKINS /\c.T lWI CE A YEAR.

fbR ~JERE TI-iE ACTIONS AS

MINltW_ AS SCli: SLK;GESTED; vW STILL WERE S~E WE WERE STILI_ TARGETING ll~E
FED FUNDS RATE, ALBEIT Wlll11N SLIGfTLY WIDER RANGES,
THE a-tANGE IN OPERATING PROCEDLRES WAS VERY SIMPLE,

WE M)VED TO CON-

TROLLING MJNEY GROlffi-l BY MEANS OF RESlRAINI~ TI-IE VOUJ'E OF RESERVES AVAILABLE TO SUPPORT 11:POSITS IN TI-iE BANKING SYSTEM,

UNDER TI-IE OLD PROCEDURE WE

Hl\D FOCLJSB) ATTENTION IN OUR mILY OPERATIONS ON FED FUNDS RATES, IN TiiE

EXPECTATION 11-1AT C~GES IN 'THESE INTEREST RATES W'JlLD INFLUENCE TI-IE IEM~ND
FOR t'ONEY,

VARYING 11-iE FED FUNOO RATE CAN, IN PRlt-CIPLE, ~NGE t'ONEY

GRCWTH PATTERNS, Bur, IN RECENT YEARS, lliE STRUCTURAL AND FIN/\NCIAL OWJGES
TiiAT HAVE TAKEN PI.J\CE AS WELL AS ACCELERATING INA.ATION HAVE r-wE IT

INCREASINGLY DIFFICULlY TO PREDICT lliE 'RELATIONSHIP BElWEEN 1HIS INTEREST

RATE AND t'ONEY M~CES, OUR ERROR IN PREDICTION LEAD TO HIGHER RATES OF
MlNEY GRCMil-i

THAN WERE DESIRED,

UtfilER THE NE\~ PROCEDURES, 11-fE VOLlf.1E OF RESERVES (RATHER 11-iAN THEIR
PRICE) ARE crnITROU.£D DIRECll.Y TO AOHEVE OUR t'ONETARY GOALS,

Bv

NECESSllY

,I

11-11S APPROACH IMPLIES Ml.CH LESS DIRECT INR..tENCE ON M:>VEMENTS IN 11-fE FED
Fll'-IDS RATE AND, lliEREFORE, lliE POSSIBILllY OF WIIX:R SWINGS IN lHAT RATE,
I

THE RESLLT OF TIE OWtSE IN PROCEIJJRES INITIALLY RESll.TI:D IN SHARP UPWARD t'()VEMENTS IN INTEREST RATE.A AS TI-fE FINAIMIPJ.. M~RKETS STRU3GLED TO
An.JIBT TO THE NEW PROCEruRES,

As

EXPERIEOCE HAS BEEN GAINED BY ~KET

PAR7 ICIPANTS,INTEREST RATES HAVE MCKED OFF AND THE \OLATILITY OF THE FED

-FUNOO RATE HAS BEEN REDUCED,

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Federal Reserve Bank of St. Louis

- 6lJNFORTIJNATELY, Wll'H THE FIRST Il:CLINES IN M.\RKET IN1EREST PATES, IN TI-fE
FACE OF EVl!l:NCE OF cmffINUING RAPID PRICE INCREASES IN THE ECOtl1'1Y AND
ONLY MJDEST SLACKENING OF EOJfn'UC ACTIVI1Y, QUESTIONS WERE RAISED ABOUT THE
POSSIBILilY THAT

TI£

FED WAS

BACKING OFF

ITS

POLICY OF

RATES WERE VI EYJED AS TI-fE MEASURE OF fvDNEfAqY POLICY RESTRAIITT!
n-tA.T TIE FED

THE PROGRAM WAS TO C~NGE

PROCBJLRES TO GET BEITER CONTROL OVER 11-iE ~mITARY AGGREGATES.
SEEM.S TO BE hORKING,
SCt1E ADJUSTMENT FOR

So

FAR, IT

PATES OF GROWTI-f IN ALL OF 1liE AGGREGATES, EVEN AFTER

ATS,

f{lH ACCOltITS OR 011-fER CHANGES IN FINANCIAL INSlRU-

MEtITS, HAVE BEEN rODEPATING,

tb ONE IN THE SYSTEM WJLLD LAY CLAIM TO BEING

ABLE TO CXlf'.!TROL THE AGGREG\TES PRECISELY,
\i

IT WAS ARGUED

~ms ~DT STICKING WITH ITS PROGJW-1,

tbll--lING COlliJ BE FURll-ER FROM 11-iE TRlffii,

~v>- I

INTEREST

RESTRAINT,

WHETI-tER l1iE P£SERVES 00 TO BACK

• DEM/\ND DEPOSITS, TIME DEPOSITS, OR CURRB\JCY HAS A LDT TO 00 WITH EFFECT ON
MJNEY SUPPLY,

tbR

WJLLD WE ARGUE 11-Vff TI-IE RESlLTS SO FAR PROVE TI-V\T TIE

NEW PROCEilJRES CAN 00 AS WELL IN TI-fE FUTURE-TI-IE TEST

ft:wEVER

IS

STILL TO C<1'1E,

MEASURED BY MJNEfARY AGGREG'\TE GROWlli, ONE MUST (X)NCEDE TrlAT

TI-fEFFED'S RESTPAINT PROGRAM IS · STILL FIRM..Y INPPL.ACE,
AGGREC:ATE TARGETS IN

1979,

HE MET OUR MJNEfARY

SOMETIHNG WE MIGHT toT HAVE ACCOMPLISHED UIDER

OLR OLD OPERUING PROCEDURES,

hHAT I

I-OPE WILL BECQ\1E CLEARER TO ALL OF

YOU AS Tlf'IE PASSES IS THAT U\JDER OUR NB-1 OPERATING PROCEDURES, INTEREST RATES
CAN AND Wl(j_ RESPOND TO CREDIT ID'WIDS AND

m

ECOrffllC CONDITIONS

MN CHANGES IN THE PATHS SET FOR lHE fvONETARY AGGREGATES,

wrn-our

Assl.MING, FOR

EXt\MPLE TiiAT TI-IE CONSENSUS FORECAST OF DECLINING ECOt-Ov11C ACTIVllY IN

J.900

l-01..00, THEN SOfi: fvDDERATION OF INTEREST RATES WILL OCCUR EVEN Wint 00
OiANGE hHATSOEVER IN PLANNED MJNETARY C:ROWni,
r'bsT OF YOU WILL RECOGNIZE lr-fvEDIATELY lliAT \--HAT

I /!M

ESSENTIALLY SAY-

TNG IS lli\T lliE NEW PROCEDURES HAVE lliEPPOTENTIAL OF G8ITING LS PACK TO A


https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-7.CO~ITRA-CYCLICAL roNETARY POLICY,

THE RECORD, UJFORTil·lATELY, S1-OWS TI-IAT

FEDERAL RESERVE POLICY HAS THIDED TO BE PRO-CYCLICAL: TIV\T IS, IT HOtS HAD A
TENDENCY TO BE TOO RESTRICTIVE

mo

LONG IN 11-fE CYCLE, TO EASE TOO LATE IN

TI-IE CYCLE, AND THEN TO STAY EASY TOO LONG,
THE NEW PROCEDURES, EVEN IF FOl..l.OWED ASSIDl.OUSLY, 00 f'OT GUl\RANTEE TI-IAT
tvONETARY POLICY WILL BE TIMED RIGHT ON THE BUTTON,

AFltR ALL THERE ARE LAGS

BffilEEN fvt>NEY CHA."JGES AND THEIR IMPACT ON TI-fE ECONa\1Y AND TI-IESE CONTINUE TO
EXIST,

km lliERE

CERTAINLY ARE LAGS BETWEEN TI--fE TIME WE ACT ON RESERVES

AND THE IMRACT OCCURS ON M'JNEY GROWTI-1,

Bur

IT IS f'OT AT ALL DIFFICULT TO

M6.KE TI-fE CASE lHAT WITH THE NEW PRCx:EDlRES, TI-IE OPPORTlJHTIES FOR A ~RE
APPROPRIATE POLICY OVER TiiE CYCLE HAVE BEEN ENHANCED, ·

l

REALIZE, OF COURSE, 11-iAT TI-1E POSSIBILITY OF OUR ACTIONS BEING MIS-

aJNSffiUED ~ R MISU'IDERSTOOD IS GREAT, ! IN SPITE OF TI-IE INCREASED ATTENTION
GIVEN TO fv'ONEY SUPPLY BY TI-IE FINANCIAL MARKETS Pl.ACE, TiiE IDNGRAINED HABIT
OF lliE MARKET TO SINGLE MINDEDLY RX:US ON ItITEREST RATES AS A MEASURE OF

rONETPRY POLICY IS LIKELY m BE VERY HARB m BREAK, THE FIRST SUSTAINED
1

PERIOD IN WHla-t INTEREST RATES TRBID SIGNIFICAi\ffi..Y L~!ER lfID)lJBTEil..V WILL

BE ACCCM'ANIED BY PLBLIC EXPRESSION OF CONCERN AOOUf TI-IE FED "GIVING UP"
ON TrlE FIGHT ACAINST INFLATION,

SIMILARLY, TiiERE IS A PSSSIBILilY OF MIS-

UNDERSTANDING WHEN PRICE RESULTS IN TiiE ECONCl-1Y FAIL TO F0Ll.DW FAIRLY QUICKLY,

fum

IT IS t.J.U.:Il<ELY TI-iAT TI-IEY WILL, . THE STATISTICS ON PRICES ONLY GRADLW.1..Y

REFLECT l1iE COST AND PR I CE PRESSrnF.A ALREADY BUI LT INTO TiiE ECONC>rv1V • THE
PRICE RESLLTS WILL ID.I Af>PEAR TO REFLECT OUR INTENTIONS FOR QUITE A WHILE,
THESE POSSIBILITIES FOR MISU'IDERSTANDING ARE DIS'rumING SINCE 11-E lLTI~TE Sl.CCESS IN lliE INFLATIONARY BATTLE DEPENI~ OOT ONLY ON OUR SU::CESS IN
M'JDERATING MJNEV GROWTH OVER A PERIOD OF Tlr-E BUT ALSO 1HE PUBLIC CONFIIENCE
lW\T WE ARE CONTINUING

m

PURSUE N~ A.~I-INFLATIONI\RY POLICf,

IN 0TIER

-W:lRDS, TO BE strcr-::ssFtL IN 11-fE INFLATION FIGHT WE MUST ALSO· OWJGE: EXPECTATIONS,

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Federal Reserve Bank of St. Louis

lRFU\TIOiJ Hl\S GONE ON SO LONG n-lAT THERE IS AlJvOST A l.NIVERAAL

- 8EXPECTATION lHAT PRICES WILJ_ INEVITABLY f"OVE HIGHER AND ACTING ON 11-fE EXPECTATION Ml\KES IT TRUE,

J SUSPECT

Tl-OS EXPECTATIONS MUST BE BROKEN!

1H/ff Ml.CH OF WHAT

I

HAVE BEEN SAVING TO 1HIS POINT HAS BEEN

INTERPRETED AS ESSENTIALLY A TECHNICAL DISCUSSION OF SQ\1E PROBLEMS OF t'QNE-

Yorn RESPONSE MIG-IT WELL BE, IT MAY BE INTERESTING TO HEAR A

TARY POLICY.

FEW ll--lINGS ABOUT 1HE PROBLEMS OF DEFINING fvDNEY .AND TiiE PROCEIXJRES FOR
AO-II EVING A DES I RED LEVEL OF i"ONEY GROWl1i BlJf HE HASN'T TOLD US w-iAT l"ONETARY

I l'OTED IN TiiE

POLICT IS OR IS LIKELY lO BE IN EVEN TIE NEAR TEf?-1,
THAT

nus

Ir WAS

WAS TiiE GENERAL AEACTION TO PAUL VoLCKER 's REMl\RK.S BEFORE TI-IE

PREss

NATIONAL

PRESS

QUB, IN Wa-iICH HE COVERED MLX:1-f OF IBE SAME MATERIAL

I HAVE.

1

AAID OF PAlL S PffiFO~E 11-iAT IT WAS DISAPPOINTING BECAUSE HE DIIllT

TELL US ANYll-fING,
ro1''1ENT,

THAT IS AN INTERESTING

IS ll--lERE TO TELL BEYOND lliE lYPE

WHAT

I HAVE Al.READY SAID? / REMEMBER WE ARE l'O LONGER RJCUSING ON A
FEDERAL rums RATE CONSISTENT WITI-f A DESIRED PATI-1 FOR MJNEY ANYr1)RE, So
I OON'T EVEN ~VE A FED Fl.M:S TARGET RATE THAT I COULD HINT AT IF I SO

OF TI-IINGS

DESIRED,

~~T ffitRE IS. TO TELL \'OULD BE THE TARGETS FOR MJNETARY

GROWlli,

fllID

11-0SE HAVE BEEN TOLD,

AGGRE~TE

THE MEANINGFUL Nl.MBERS FOR rooETARY

GROrffif ARE THE LONGER TERM ONES: TiiAT lS, THE YEAR-TO-YEAR TARGETS I

FOURTI-f QUARTER

1978 TO BOURll-i

QLWrfER

1979

THE

TARGETS WERE FIRST PRESENTED

LAST FEBRUt\RY UNIER lliE FutL fM?LO)'MENT AND BALANcED GROm-1 kr-HLMPHREY
HAWKINS, NEw TARGETS WILL BE ANOOUCED

BEFORE

l9ffi IN

FEBR~Y

IN TESTlr1JNY

f.oNGRESS,

JAM WELL AWARE TI-IAT l.NflL
AOUEVED AND, TI-fEREFORE, HAD
TI-fRUST OF ffiNETARY POLICY,

1979 lliESE

fil>T

BEEN

TARGETS HAD OOT GENERALJ_Y BEEN

TAKEN SERIOUSLY

Bur 1-0PEFLLLY OUR

IF lHE LONG~ TARGETS ARE Kt-OWN,

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Federal Reserve Bank of St. Louis

FOR

AS

INDIC~TIONS

OF THE

CREDIBILllY WILL BE PEST0RED,

I FIND

IT PUZZLING

TO

I-EAR

ruAT

- 91
11
\IE OON'T Kr-n1 ~HAT rvr.>NETARY POLICY IS,
U:RTAINLY, 11-IE LONG TERM TARGETS
ARE REVIEWED AT EACH M:>NlHLY lv£ETING OF 11£ FEIERAL

m INSURE 11-t/ff THEY

ARE OONSISTENT

TAKEN PLACE IN 11-fE EOOtOMY,

Bur

wrn-t

0Pa~

f··tARKET UJ1'1ITIEE

SI~IFICANT CHANGES THL\T r-¾Y HAVE

SO FAR IT HAS NOT BEEN OUR PRACTICE TO

CHANGE TI-EM,
THE UlM"1ITTEE OOES, OF COURSE, ffiNSIDER AT EACH MEETING·WHERE 11-IE
AGGREGATES ARE IN RELATION TO 11-IE LONG RUN TARGETS AND htt\T IF ANYTI-HNG
IS NEEDED TO GET l11EM BACK ON PATH,

IN MA.KING TiiAT DECISION, lHE MEMBERS

\t/lLL BE LOOKING AT THE \WLE AARAY OF MEASURES, BOlH REAL AND FINANCIAL,
lHAT MIGHT P~Vlll: INFD~TION ON lHE DEVELOPMENTS LNDERLYING 11-iE PERFORMA.NCE OF THE fvn'\JETARY AGGREGATES,
G\TIONAL cornsE CORRECTIONS,

Bur

OBVIOUSLY

TI-ESE ARE IN THE NATURE OF NAVI-

I HAVE

00 WAY OF l<tO'HNG TOMY WHEN

OR IF ~IE WILL BE OFF OOURSE NEXT WEEK OR f-Of'ffif OR NHAT CORRECTIONS WILL BE
NECESSARY,

So,

AG'\IN,

I AM

PUZZLED AS TO hHAT FURTI-IER INRlRMATION CAN BE GIVEN ON

hHAT CLRRB'ff ('l()NETARY POLICY IS,

IT COULD BE THAT 11-iE IESIRE FOR f'IORE

I NFORr¾TION IS SIMPLY AN EXPRESS ION OF OONCERN ABOUT 11-fE CURRENT OOSlmE

0R

OF POLICY, HI-Vff IS, ffi.\T POLI CY IS TOO RESTRICTIVE,

IT COULD BE AN

EXPRESS ION OF COf\CERN WI TH HOW ~NETARY POLI CY MI GIT BE CHANGED,

Ct.RRENT POLICY, STILL FUNCTIONING WITI-UN AN EFFECTIVE (ADJUSTING FOR

ATS)

t'ONEY SlPPLY TARGET RANGE OF A 3 TO

6 PERCENT

RAlE OF GROffi-f RJR

M-1

IS CJil\RACTERIZED AS "RESTRAINT OF THE MJNEY SUPPLY, REDLCING ITS GROWlli
OVER TH-£ T01ARD LEVELS CONSISTEITT Willi PRICE STABILilY," THE EVIIENCE
Stx;GESTS TiiAT TI--tE RESTRAINT IMPOSED Hi\S l"OT BEEN EXCESSIVE,

FEDERAL RESERVE

EFFORTS 10 RESTRAIN M:>NEY GROwrn IN THE FACE OF Sm:>NG RREDIT DEMA.NOO
CARRIED INTEREST RATES TO LEVELS FAA HIG1ER 1HAN

AfN

~

THIS NATION HAS EX-

PERIENCED IN lliIS CENTI.RY, Btrr AL11-0LYlf EXPEmSIVE, CREDIT HAS Re¾INED
-GENERAlLY AVAILABLE IN fvDST SECTORS OF TiiE FINAtCIAL MARKETS,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

- il.O AND I

CERTAINLY CAN U'RERSTAND "THE CONCERN AS

POLICY MIG-IT BE Q-IANGED IN 11--fE cor11NG f"ONlliS,

I

m WHEN

OR ~I MJNETARY

REALIZE THAT FOR MANY lliE

aJNCERN MAY WEU.. BE 11-iAT IF EVIDENCES OF ECOl'011C WEAKNESS tvOUNT, MJNETARY
FOLICY COUJ) BECQ\1E EXCESSIVELY EASY,
BE LIKELY TO Hl\PPEN,

fJs I HAVE

THIS OOES f'OT APPEAR IN MY VIEW

TO

ALPJ:ADY NOTED, MJNETARY POLICY Hi\S FREQLENll..Y

TEr®ED TO BE TOO TIGHT TOO LONG RATiiER THAN TOO EASY AT lliIS STAGE OF l1iE
CYCLE,
IEMl\,~

INCREASED SLU3GISHNESS IN TI-IE ECOf'D'1Y US~LLY BRINGS WITI-f IT REilJCED
R)R MJNEY BAJ..At{:ES,

CoNSEQLENTLY, EFFORTS TO MAINTAIN ACCEPTABLE

RATES OF MJNEY GRO-ffii, ASSISTED BY 11-fE NB1 POOCEDURES SEa~ ll'JLIKELY TO
RESl.LT IN A RESlRGENCE OF EXCESSIVE RATES OF fvONETARY EXPAi'JSION,
THE TEST WILL mME WHEN IT BECOMES NECESSARY TO AGAIN RESTRAIN THE
RATES OF r·-UNETARY GRO'dn-f 'AS ECON<Jv1IC REOOVERY STARTS,

AT Tiit\T TIME, IT WILL

f'-OT BE OBVIOUS TO 11-iOSE STILL SEEING A POOR PERFORW\NCE IN 11-fE ECOl'Xl-1Y,
TI-iAT EFFORTS TO RESTRAIN riJNETARY GROWTii WILL PROBABLY RESULT IN INTEREST
RATES BEGINNING TO RISE EARLIER lHAN HA.5 BEEN THE CASE IN PAST CYCLES,

YET

IF HISTORY HAS TAlGiT US AN'ffiHNG, IT IS THI\T IT IS ESSENTIAL OOR OUR LONG
TERM EFR)RTS

ro

FIGIT INFLATION

m ATm'PT TO Ml\lNTAIN 11-iE

M)NETARY GR~ffii

RATES WITHIN OLR LONG TE~ TARGETS OORING THAT PERIOD,

I REALIZE, TOO, TI-IAT Ml.CH
RING TO IT,

IT DESCRIBES LARGELY ll-fE Flf,U)l\MEITTAL CONSIDERATIONS TH!\T GO INTO

TI-iE Mi\KING OF MJNETARY POLI CV.

----

IN A VACULM,

OF THIS DISCUSSION Hi\S AlJvOST A THEORETICAL

~ETARY POLI CY CANOOT AND 006S riJT \'ORK

-

l~VE-EEEN SAVING ABOUT 1HE IDl:Al:.-AND APPROPRIATE WAYS
.J.A-p.).:L

OF AP.-POOAatrNG THE DECISIONS WE MUST mKE ARE OBVIOUSLY AFFECTBD BY POLITICAL AND SOCIAL REALITIES,

EVEN IF WE HAD ALL THE INFORMATION AND TECHNICAL

EXPERTISE 1U CONrnOL r-ONEY SUPPLY GRO\>ffi-1 PERFECTI,,Y, THESE hUUJ) BE AN IMPORTANT PART OF TiiE STORY,
lNCOV~S AND PRICES, FOR EXAMPLE, HI\VE BECO"E INSTITIJfIONALIZED lHROl.Gi
-LEG ISLATI ON AND CONTRAC"ruAL NlRANGEMENTS,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

THEY 00 OOT FLOCTUATE FREaV IN

- ll PRECISE RESPONSE TO COMPETITIVE FORCES, WE 00 t-OT HAVE "-PERFECT' MARKETS,
PRICES AND INCXM:S HAVE BECQ\1E "smcKY." Arut.JSTivENTS ARE ONLY POSSIBLE
WITH FAIRLY LONG TIME LAGS,

BECAUSE OF 11-iESE RIGIDITIES AND LAGS, IT IS

DIFFICULT FOR TIE PLBLIC TO SEE THE YALU.EDF RESTRAINING t1.1NEY _Gfnffli Bl.IT
11-fEY 00 SEE lliE COSTS-SINCE JO~ AND INCXJM:S ARE AFFECTED LONG BEFORE

INR.ATION ClXlLS,

MJREOVER, lHE INITIAL IMPACT OF f'IONETARY POLICY IS VER'(·

ll'JEVEN, AFFECTING TI-OSE SECTORS flOST DEPENDENT ON CREDIT,
LIKE A GA!>£ OF ML£1CAL Q-IAIRS,
AND AGRICLLTIJRE IDID

m BE 11-fE

TIGff fvONEY IS

REsIIENTIAL CONSTROCflON, SM\LL BUSINESS,
FIRST TO FEEL 11-fE IMPACTS.

SINCE cos·TS ARE OBVIOUS \ELL AHEAD OF lliEIENEFITS ON TI-fE INFLATION
FRONT AND SCJ1E SECTORS ARE HARDER HIT AT TI1E OlITSET, EXTREME RIGIDllY IN
f'IONETARY DISCIPLINE t-Vl.Y BE SELF-DEFEATING,

THERE IS A ])AJ\IGER TI-IAT POLITICAL

FORCES Will.. ACT TO OFFSET w-lAT ARE VIEWED AS 11-fE UNll:SIPABLE rosTS.
THUS, ffiNETARY POLI CY CANNOT WIN 11-iE PJ\Tll.E ALONE, . THE SlIDNGER THE
ELEMENTS TI-fAT INffiEASE f/ONEY

~

IN RELATION TO TiiE Sl.PPLY OF G(X)DS AND

SERVICES-OOTABLY BUOOET DEFICITS, SOARING OIL PRICES AND DECLINING REAL
CAPITAL R)~TION, RESEARQ-f AND DEVELOPMENT AND, l1iEREFORE,PRODOCTIVITY1HE MJRE DIFFIClLT IT IS FOR l1iE FED TO RESTRAIN t'ONETARY GROtlrn Wlll-OUf
INClRRING COSTS 11-IAT ARE POLITICALLY AND SOCIALLY l.f.JACCEPTABLE,
V\HILE IT IS t.mEMISTIC TO .-OPE FOR A SITISOONG SOLUTION TO INFLATION
QUICKLY, ~TIC ACTIONS SLCH AS 11-DSE OF fkroBER
STEP,

6 WERE

A VITAL FIRST

W-iAT WE HAVE PUT IN PLACE IS A SET OF POLICIES IN 11-IE r.oNETARV

SPHERE lliAT ARE CONSISTENT WllH A SOLUTION TO AT LEAST 11-IE INR.ATIONARY
PROBLEM,
POLICY,

Bur

IT OOES REQUIRE TI-IE SlPPORT OF OUR OTiiER JlOOLS OF EOOtOMIC

IF TI-IAT OCCURS AND PEOPLE BECCM: eotNINCED 'THAT lHERE IS A FIRM

PUBLIC POLICY CDr-1'111M:NT 10 CONQLER INFLATION, WE CAN AWID PROGRESSIVELY
HIGHER INP ATION AND AN EVEN DEEPER RECESSIONI.AATER,
Ml\l<E THIS OM111MENT,

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

WE MUST,

I

HJPE 11-iAT WE CAN