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~BKS OF~~- RoBERI P. MAYO
PR~sirENT, rEIERAL REsERVE HANK.OF G-i1CA00
AT THE NATIONAL ~SOCIATIONJOF lwiK W<JIEN CONFERENCE
CHICAOO, U..IOOIS
ftlVEMBER 10, ~77
I AM PLEASED TO HAVE BEEN INVITED TO '1:ET WITI-1 YOU lHIS flORNING, IT
GIVES ME AN OPPOITTWITY TO DISCUSS SEVERAL ISSl.ES TI-IAT I THINK ft'AY BE INTERESTING TO BANKERS, ~ PERHAPS I CAN EVEN IEvt>NSTRATE lHAT I OON' T DI sCRIMI Nl\TE--1 'M Jl.ST AS PLEASED TO SEE THOSE OF YOU
11-l)SE
FR0\1
NON--r-&BER BANKS~
FR0\1 f'EMBER BANKS,
THERE
ARE Ar« NLMBER OF ISSLES
ITTIJ ACCOl.NTS AND RBIOTE TERMINALS
FR0\1
TO BANKING ETHICS IN WHI0-1 YOU MIG-IT BE INTERESTED, FORTI..NATELY FOR '1:,
1--KMEVER, YO~ PROGRA.M OiAIJWJ-1AN GAVE r-E SCJA.E GUIMNCE, SO l'u_ FOL.lJM HER
ADVICE AND TALK ~ur
S<M:
OF
1liE
e..eeITS OF SIGNIFICANCE IN ntE NATIONAL
Ec:or«J1IC PICTURE,
IT IS, I lHINK, FAIRLY a..EAR ™AT rvDRE CONCERN HAS BEEN EXPRESSED IN
RECENT WEEKS ABOUT lliE VIABILITY OF OUR CURRENTECONc.1IC ArNAtCE,
Tl-IE
NEGA-
TIVE OJM't:NTS HA.VE BEEN f',{)RE FREQUEITT, IN PARTICll.AR, SINCE lHE RELEASE OF
1HE 11-IIRD
Ql.WITER
DATA ON OUR COl.NrRV'S GROSS NATIONAL PRlll.JCT WHICH
SUGGESTED THAT 1l-lE ECX>NOMV ~y HAVE SHIFTED INTO A LCMER GEAR AFTER THE
U'JLSU\LLY
STATE
RAPID RISE OF lHE FIRST HALF OF 19T/, THIS PERCEPTION OF THE
OF TI-fE Ecora,,r( IS
ONE
OF 11-£ AAf..AS
I
WOll.D LIKE
TO DISCUSS, Ho4'
VALID IS 11-IE VIEW 11-iAT OLR NATION'S ECOJ\OMIC PERR)ffWJCE IS SLIPPING?
~MAT lYPE OF OIJrl.OOK APPEARS f/OST LIKELY FOR 1l-fE YEAR N:iEAD?
THE
r-oNETARY
OTI-IER AREA I WOLLD LI KE TO ADDRESS, IS M:>RE NARRCMLY FOCLBED ON
POLI CY. \1-tAT IS 11-IE IEBATE ON INTEREST RATES AND ~NEY GROtffii RATES
ALL ABOur? hHAT ARE ll-iE REAL IM'LICATIONS FOR IEVELDPMENTS IN 1HE ECCJr0'1Y?
LET'S TAKE A LOOK, FIRST, AT 11-iE Ct.RRENT ECOOOMIC PICTI.JRE, IN MY VIEW,
"4AfN OBSERVERS ARE FAR ftt)RE PESSIMISTIC ABOur 11-fE EeotffllC OtrrLOOK TiiAN IS
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Federal Reserve Bank of St. Louis
- 2WARRANTED,
Scf1E ARE ~CCNRlRTABLE BECALGE THE EC0f01IC EXPANSION IS
~
r-oRE
11-fAN 1m AND A HALF YEARS OLD AND TIEREFORE, ON AVERAGE, ~y OOT BE LIKELY
TO BE SUSTAINED Ml.Of LONGER,
THEY BUTTRESS n-ns POSITION Wl1H OBSERVATIONS
ON 11-E STICKINESS OF 11-fE lNEMPLOYMENT RATE AT
7 PERCENT,
~ T LESS RAPID
PERSONAL If'OJM: GRCWn-1, 11£ SlJJfER RATE OF REAL GNP GFUffli IN THE 'THIRD
Qt.ARTER, A FAILURE OF CAPITAL SPENDING ON INIXJSTRIAL PLANT AND EQUIPrlENT TO
GRCM RAPIIl..V AND AN ABVSM/\L PERFORMl\NCE BY 11£ STOCK ~KET.
Bur REPORTS OF TI-iE
DE'All-f OR THE SERIOUS Ill.NESS OF 11-fE CURRENT EC0f011C
EXPANSION ARE CLEARLY EXAGGERATED,
THERE IS REALLY 00 BMIS R>R ARGUING 11-IAT
WE ARE NEAR 'THE PEAK OF TI-IE EXPANSION STAGE OF THIS CYCLE, EVEN ~E, lHAT
WE ARE ALREADY IN TI-iE CONTRACTION PHASE, THE CURRENT I NFORit\TI ON FLCM OOESN 'T
CONFIRM IT, CERTAINLY 'THE PACE OF EXPANSION DID SLOW IN lHE lHIRD QU\RTER,
B1..rr FROv1 A vaN RAPID AND l.NSUSTAINABLE FIRST HALF PACE,
THE THIRD QUL\RTER
PERFOl?~NCE WA.S NOT ll4EXPECTED,
NATICJW.l..Y, THE CONDITIONS FOR Fum-tER EC0f01IC EXPANSION REM6.IN IN
Pl.ACE,
JNilJSTRIAL PRODLCTION OONTINLES 10 EXPAND, &PLDWENT HAS INCREASED
SLBSTANTIALLY, RETAIL SALES ARE <:00D, HoUSING Rl:Mt'\INS STRONG, LAPITAL
SPENDING PROSPECTS HAVE STRENGTI-iENED ~ T .
OUR MIO-WEST ECON<J-1Y SI-DIS A SQ\1~T SIMILAR PICTURE OF Ea>OOMIC
HEALTH,
THE EXCEPTION IS THE AGRIClLTIJRAL SECTOR, WHERE SQYE CAUTIOUSNESS
IS IN ORIER, AS SO'£ OF YOU Kf'DI, WITH LCM:R GRAIN PRICES BUT HIGHER PROCESS I NG COSTS, CASH FL.0-#8
IN AGRICLLTURE HAVE TAKEN A REAL BEATING, THE
NET RESlLT TO YOU MNKERS IS, OF (l)lJRSE, r,,t)RE RAPID LOAN GRCWn-1, SLOfER LOAN
REPAYMENTS, AND INCREASED LOAN RENEWALS,
Tl-l)SE
OF mu WllH AGRICll.TURAL
LOAN INVOLVEri:NT ~y HAVE SC1'1E CREDITS THAT WILL TAKE ~ORE 11-fAN l.SI.W. ATTENTION,
Bur MY BASIC OPTIMISM REMAINS
INTACT, MAJOR RETAILERS ARE REPORTING
SALES AT GOOD LEVELS. THEY APPEAR TO BE PLANNING FOR A STRONG 0-fRISWAS
SEASON, MLD-i OF 1l£ RETAIL STRENGTI-i IS IN HARD GCX)OO--REFRIGERATORS,
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Federal Reserve Bank of St. Louis
-3ELECTRIC RANGES, MICRCMAVE OVENS AND ffiVERS,
INSTALMENT CREDIT IS BEING USED
FREELY, INDICATING CDNSLM:R CONFIDENCE, AND 'THE IELIM'JLENCY EXPERIENCE TO
JY\TE IS GENERALLY CONSitERED TO BE EXCELLENT,
Ir
LOO~ AS TI-K>lliH 11-fE
1978 CARS
ARE BEING WEU.. RECEIVED,
Bur IT IS
DIFFIClLT SO FAR TO MAKE A VERY FIRM EVALU\TION SINCE 11-iE STRENGTI--1 OF THE
AUTO MI\RKET VARIES GREAn.Y BY ffiDEL,
So-1E
r.ooas ARE IN SHORT SUPPLY WHILE
THE STOCI< OF Oll-lERS fAAY BE CONTROLLED BY PERIODIC PLANT CLOSINGS,
THE
IMPACT OF lHE AUTO INilJSTRV 1 S PRJGRAM TO "OOrlNSIZE" CARS ON CAPITAL
INVESTMENT Srllll.D OOT BE IGtORED, ORDERS FROM 11-fE AUTO COM'ANIES ARE LARGELY
RESPONSIBLE FOR 1tE STRENGlH REPORTED IN MAOiINE TOOL OPJJERS, ESPECIALLY
PRESSES AND TRANSFER Ml\Q-fINES,
ORIGINALLY OONCENTRATED IN EQUIPMENT, ALITO
INDLGTRY CAPITAL SPENDING PROGRAMS NOH INCLl.DE A SUBSTANTIAL ~l11'ENT TO
NEW STRUCTLRES AND 1HE EXPANSION OF EXISTING BUILDINGS,
EVERYONE HERE KNOWS 11-fAT TI1E CAPITAL 000DS INDUSTRY HftS BEEN THE
LAGGARD IN ll-HS REO'JVERY,
BUT CAPAC.ITV trrILIZATION HAS BEEN INCREASING
STF.ADILY, PRESSURE IS BEGINNING TO BUILD IN MWf COM'ANIES
m START f()VING
IN TIE DIRECTION OF NB-4 PL.ANT, CAPITAL OlJTlAVS ARE STILL INCREASING AND WE
'THINK TiiAT TIE PACE r~Y HAVE QUICKENED IN RECENT 1"0NTI-iS,
f-bUSING STARTS HAVE BEEN STRONG ALL YEAR AND WE ARE SEEING NEW STRENGTH
IN 1HE PREVIOlf>LY JEPRESSED MlLTI-FAMILY SECTOR,
8'1ILDING PERMIT LEVELS
SUGGEST TI-IAT lHE STRENGTH OF HOL5ING WILL CO~ITINLE, HoLSING ANALYSTS, EXPECT 11iAT STARTS IN
1978 WI LL BE
ABOt.rr TiiE SAM: AS 1HI S YEAR WITH APARTMENTS
SCM:.WHAT HIG1ER AND ONE-FAMILY rnITS SOMetMAT L™ER,
RENTS ARE GRADLWJ...Y
RISING TO A POINT THAT IS ENCOURAGING PRJMlTERS OF NEW APARTIIENT BUILDINGS,
NoNRESIDENTIAL CONSTRI.CTION ACTIVITY IS IMPROVING, OFFICE BUILDINGS
LEAD 1l£ l.PTREND BUT INDUSTRIAL BUILDING IS ALSO PICKING l.P, Oun..AYS TO
BUILT) OR REPAIR HIGl,,~AYS AND HIG-WAY STROCTIJRES AND TO BUILD SEWER AND WATER
SVSTEM3 ARE RATHER STroNG,
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Federal Reserve Bank of St. Louis
-4THESE JEVELOPr1:NTS SHOlLD CONTINUE INTO THE r,t>N1HS IMYEDIATELY AHEAD,
W-fILE CDNSI.M:R CREDIT HAS GFOWN RAPlll..Y, AN ANALYSIS OF 1l£ BURDEN OOES f'OT
SLK;GEST lHAT IEBT BUIDENS ARE
CONTINUE TO RISE AND WHILE
SPENDING,
l
our
I 00
OF LINE.
REAL DISPOSABLE INCCM: St-OLLD
NOT THINK 11-iERE WILL BE A BOOv1 IN CONStJ,ER
00 EXPECT THE CDNSLM:R TO MAKE A POSITIVE a>NTRIBUT'ION TO FlRTI-fER
ECONOMIC GRCWTH,
THE ENTIRE CAPITAL GOODS AREA IS LIKELY TO OONTRIBlJfE A Lt\RGE SHARE TO
Sl.5TAINED EXPANSION,
F'10M MACHINE TOOLS THRJUGI HOLSING AND NONRESIDENTIAL
CDNSTRLCTION 11-iERE APPEARS TO BE A BASIS FOR EXPANSION,
AND
TIEN IF YOU ADD
1HE G1VERNMENT SECTOR, STATE AND LOCAL AS WELL AS FEJERAL, WE SHOULD SEE A
OJNTINUATION OF M:>IERATE EXPANSION ON WELL INTO
1978,
THE SCENARIO OF ~IERATE AND APPROPRIATE EXPANSION INTO
1978,
AT LEAST
TO THE EXTENT 1HAT WE ARE TALKING ABOITT THE FIRST HALF OF NEXT YEAR, IS roT
SIGNIFICANTLY DIFFERENT FROM n-tAT PRESENTED BY MJST OBSERVERS,
ibST EXECU-
TIVES AND ANALYSTS SHARE THE OPINION THAT ACTIVl1Y WILL CONTINlE TO GR0,1,1 AT
LEAST THROlm THE FIRST HALF OF
1978.
THE CONCERN IS Wlltf 11-fE CQt,ffINl.11\TION
OF 1HE EXPANSI~ BEYOND 11iAT TIME,
I TI-flNK lliAT
IT IS IMPORTANT TO STRESS 11-HS POINT TiiAT IT IS THE FlffiJRE
Sor.-E NINE TO "TWELVE mN1HS AHEAD lrfAT IS 11-E POCUS OF DISCUSSION,
FAR TOO
FWN OF 11£ PLBLIC OOMvlENTARIES HAVE IMPLIED 1HAT 11-IE EXPANSION IS ALREADY
ILL,
Btrr CLEARLY 1HAT IS OOT 1l-fE CASE, THERE IS 00 SET OF FIRM IEVELOP-
t'ENTS OR TRENDS lliAT PRE-ORDAIN A DECLINE IN TH: ECONOMIC ADVANCE,
CERTAINLY
11-fE NEAR-TE~~ AJruRE HAS BEEN LARGELY SET BY ECOt-OMIC FACTORS ALREADY IN
PLACE,
Bur
11-£ LONGER TERM ECOOOMI C FtJTURE DEPENIE ON EVENTS VET TO TAKE
PLACE-W.£11-ER THEY BE EXTERNAL S..OCKS St.CH AS FUR1HER OIL PRICE INCREASES
OR Ar{)TI-fER BOtrr OF SEVERE WEA11-ER OR I NTERNt\L DEVELOPr-ENTS St.CH
1
OF OUR OOVERNM:NT S EOO~IC POLICIES,
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Federal Reserve Bank of St. Louis
~
THE FO~
-5A SI~IFICANT
PART OF THE OlNCERN FOR 11-fE LONGER TE~ FlJTlRE Ml.ST RE-
FLECT 11-fE ELEMENTS OF l.J.ICERTAINlY lHAT HAVE BEEN SO WIIELV DISCLSSED,
BUSI-
NESS MJST Af.Jt,IAYS OPERATE TO SCJ1E IEGREE IN AN AlMJSPHERE OF ll'JCERTAIN1Y.
Bur
w-EN THAT LNCERTAINTY IS UNLSUALLY GREAT, IT TENrS TO DELAY EFFORTS TO t-'OVE
IN NEW DIRECTIONS AND TO SEIZE OPPORTll'JITIES, ENERGY, ENVIRON~ENTAL AND
TAYATION fNCERTAINTIES CLEARLY EXIST.
twn
WHILE WE Mi\Y I-OLD DIFFERENT VIEWS
ftS TO THE PROPER SOUJrIONS TO THESE AREAS OF CONCERN, 1HE ESSENTIAL ASPECT
IS riJT SO Mt.Of 1HE FOm1 OF THE SOLl.ITION AS THE KrCf.llEOOE OF WHAT n-E RULES
OF TiiE ECONOMIC GAME WILL BE,
IN SL(',GESTING nus,
I OON'T r•'EAN
TO IMPLY THAT THE DIRECTION IN ~IHIQ-1
WE r•'OVE IN f>DLVING 'TI-ESE SIGNIFICANT PRJBLEMS IS UNirvPORTANT,
rfJT TIE
~E. Bur
IN MAKING
OUR PROJECTIONS
FOR
THAT IS SURELY
THE FU1lRE WI:
MUST DIS-
TINGUISH BElWEEN lttE EFFECTS OF lf~CERTAINlY AND 11-iE LIKELY Ir,t>ACTS OF OUR
EOJ~01IC POLICIES,
I AM WONG TI-IOSE, FOR EXAMPLE, lHAT FEEL VERY STRONGLY ABOUT 11-fE NEED
TO DEVELOP EFFECTIVE EO)f'l)MIC POLICIES FOR THE STIMlLATION OF CAPITAL IN-
VES™ENT, As I OOTED EARLIER, TI-fERE HAS BEEN SCM: INCRfASE IN 11-iE PACE OF
CAPITAL SPENDING,
THE
l.DNGER-TERM ECOt()MIC FlJfURE, f-0/EVER, 11:PENDS CRITIC-
ALLY ON A CONTINUt\TION OF lHAT SPENDING AT A SOMEW-fAT fvt>RE EXPANSIVE PACE,
FoR ~ Yf:ARS r¥lW WE HAVE BEEN AIDING LESS TO OUR PRODtCTIVE PLANT HERE
lHAN HAVE OTHER INDlJ3TRIALIZED ECONCJ-1IES,
flHD WE CONTINlE AS A PEOPLE TO
ASK, INIEED EXPECT, EVER GREATER OlfTPlIT AND HIGIER LIVING STAtmRrn,
ATTEM'TS TO BRING ABOlIT A t'DRE EXTENSIVE UTILIZATION OF OUR LABOR FORCE
WILL NOT M:ET TI-()SE NEEDS WITI-OUf CAPITAL SPENDING PS WELL,
INIEED, THE
EXPANSION OF BUSINESS SPENDING CAN BE 11-iE EFFECTIVE IRIVING FORCE R>R TI£
f'{)RE EXTENSIVE USE OF OUR LABOR R)RCE,
J\Nn
IN n£ LONGER Rl.N, THE EXPANSION OF OUR PRODlCTIVE CAPACllY WILL
HAVE A SI GNI FI CANT BEARING ON OUR ABILITY TO REilJCE TI-fE RATE OF AfNAfa IN
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-6PRICES,
INFLATION IS OFTEN VIEWED LARGELY AS A t-ONETARY PHEl'OE~ BlJT IT
FLNIW1:NTALLY HAS AN IMPORTANT SUPPLY Dlr--ENSION PS WELL,
THESE EIDENTS OF Lt-lCERTAI N1Y AND THE SHAPE OF Ecor·OMI C POLI CI ES FOR
11-fE PERIOD AHFAD ARE INTF.:R1WINED, AS THE:V ALWAYS ARE,
11-iE FHW~I.AJ... ~~RKETS,
I WISH
wrrn
DEVELOPMENTS IN
TO STRESS THE INTER1WINING OF EOOrfflIC
FACTORS, THE INTER-RELATIONSHIP OF ALL THE IMPORTANT ELEM:NTS INlOlJR
ECOtl)MY, IN ORDER TO EMPHASIZE lHAT INTEREST RATES, f1JNETARY ~GGREGATE
GROtmt--INIEED IN A BROADER CONTEXT MJNETARY POLICY-ARE NOT INJEPENll:NT
ElDEtffS OF OUR ECO~.OMIC LIFE,
UNR'lR7U~TELY, MtO-f PtBLIC DISCl.SSION HAS
SET ~ETARY POLICY APART AS A LtHQlJE ELEr-ENT WHI0-1 SCMH)W WILL 1ETERMit£
11-fE mURSE OF lHE ECT)f\k)MV IN LATE
1978 AND ON
INTO
1979, Ir
IX>ES NOT AND
CAN NEVER HAVE THAT ROLE IN OUR Ecorav,v.
I HAVE
BEEN PARTJClLARLY DISMI\YED BY THE EFFORTS NOH SO NIIESPREAD
IN "rnE PRESS, Flf\11\NCIAL LETTERS AND ADVISORY SERVICES
m Pl,AY
lP A CONFRON-
TATION BElWEEN THE FEDEPAL RESERVE SvsTEM AND lHE l\av1INISTRATION,
ERENCE WAS TO ItlORE TI1E INITIAL SH)TS, FEELING THAT
~
rt.1 PREF-
Pl.13LIC BENEFIT WAS
SERVED BY FLRTHER DI SCLES ION, rbEVER, THE FREQUENCY OF THE REPORTS, TI£
~IRIGff SIU..Y IMPLICATIONS IR!\WN ON OCCASION Ml\KE IT HARD TO REFRAIN FROM
THE INTEREST RATE VS, ~,ONETARY GRO!ffii IE3ATE IS r-oT A CONFRONTATION
BE°n"JEEN 11-fE fur.1INISTRATION AND THE FEDERAL RESERVE SYSTEM,
THE QUESTION OF
HOM M..cH EMPHASI~ TO PLACE ON INTEREST RATES/.MJ HOW Ml.CH EMPHASIS TO GIVE
TO t'ONETARY AGGREGATES IN ll-lE CONDLCT OF ffiNETARY POLICY IS AN ECONOMIST'S
ARGl.11ENT, t1JT A POLI TI CAL ARGLM:NT,
THE ECOf\OMI C ProFESS ION AS A WrOLE ~
BEEN IEBATING 11--IIS ISSUE FOR fv1ANV YEARS,
AND
J SUSPECT WILL
IT IS IrnATINCi 11--tE ISStE T0IY\Y
STILl_ BE OOING SO MANY YEARS F~ NO.~.
THE OONCERN \iilO-f SOME ARE EXPRESSING f'.01 IS 11-fAT INTEREST RATES MAY
BE RISING
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Federal Reserve Bank of St. Louis
1t)
LEVELS 11-tAT MA.Y IMPEDE REAL Ecoro1IC GFOffif, THE ARGLM:ITT lliAT
- 7INTEREST RATES AFFECT ECOOOMIC ACTIVITY IS A REM0NABLE ONE,
TI-EV
ro. To
Or= COURSE
SAY TI-IAT INTEREST RATES ooN 'T MA.TIER Is AS FOOLISH A..9' SAVI NG
11-IAT MJNEY OOESN 1 T MATTER,
J SEE 00
FIRM EVIDENCE THAT 11-iE INTEREST PATE INCREASES WE HAVE SEEN
IN RECENT f'IONlHS HAVE HARMED ECOf'mIC GFn~fTH,
AMAJOR
REASON IS THAT MJST
As
OF THE IM"ACT ARISES FRCJl1 IEVEL0PMENTS IN TiiE LONGER TE~ Ml\RKETS,
~v BE
AWARE lrfE INCREASES IN LONGER TERM RATES HAVE BEEN M)Jl:ST.
YOU
Ar SOME
POINT, OF COURSE, ATTRACTIVE RATES ON SHORT-TERM INSTRtt1ENTS SUCH AS TREASURY
BlliS WILL RESULT IN 0UTFLO!IS OR REll.JCED INR.OtlS INTO OJ"'1:RCIAL BANKS AND
TiiRIFT INSTITUT'IONS,
h'HILE TlfvE AND SAVINGS FLO/IS HAVE SI..D'f'JED A BIT, TIERE
IS NO EVIJENCE OF SIGNIFICANT DISINTERMEDIATI0N OR ON THE ABILI1Y OF
MJRTGAGE INSTITIJTIONS TO PROVIIE NECESSARY FUID3, No ONE CAN BE CERTAIN
J THINK 11-fAT t·/E
AS TO THE "TRIGG:R" LEVEL OF HITEREST RATES BITT
CAN BE
REASONABLY CERTAIN THAT 11-IERE ARE f'O IM'1EDIATE PROBLEMS,
Bur
IN F~1ING t,ONETARV POLICY, THE tvUNETARY AGGREGATES--CURRE"CY
PLl.S lEPOSITS-c»mT BE IGNORED EITHER,
I AM
CERTAIN 11-iAT ALL OF YOU ARE
AWARE OF 1HE SOiIZOPfiRENIA OF TI-£ REPORTS ON 11-IE
Fen's
ACTIONS,
ON ONE
HAND, INCREASES IN SHORT-TERM RMr'ES ARE REPORTED AS "TIGITTENING" BY TiiE FED,
Bur REPORTING ON THE RAPID GRO',t,IJ1-1 OF TIE MJNETARY AGGREMTES, h'E ARE TOLD
TI-fAT THE
FED
ONLY SU3f£STS
IS PLRSUING AN EXCESSIVELY EASY fvONETARY POLICY,
J TiiINK 11--IAT
ALL OF \'MICH
TIHNGS 'l«>l.LD BE A LOT BETTER IF WE EITHER OOT
RID OF OUR SHJRT-1--fAND WAY OF DESCRIBING fvONETARY POLICY AS EAt;Y OR TIGHT
OR AT LEA.C,T IIE~ITIFIED CLE'ARLY \\HA.T WAS MEANT,
THE FACT IS THAT MJNETARY
POLICY IS ~OT CONDUCTED IN TEFM> OF EASE OR TIGmiJESS IN THIS OR "THAT VARIABLE BlJT IN TERM5 OF THE FINANCIAL CONDITIONS NECESSARY TO FOSTER lHE S0U'ID
EXPANSION OF THE ECOF·JavlV WHILE RETURNING AS FAR /lS WE CAN ltliARD REASONABLE
PRICE STABILITY,
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Federal Reserve Bank of St. Louis
-8THE Mlr£rARV AGGREGf\TES ARE lf¥PORTANT BECAtBE WE FUU..Y APPRECIATE
THAT THERE IS A LINK BE1WEEN roJEV CREATION AND INFLATION.
No'/ I AM
t-OT
ONE Wftl Will. SLAVISHLY FOl.1.™ A FIXED RATE OF rfflETARY GROffl-1 DAY IN-DAY
WEEK IN-WEEK Ot.rr OR EVEN mrrH IN-rnmf
WITH SUCH PRECISION,
our. Ir
IS IMPOSSIBLE
oor,
m OPERATE
flND IT ISN'T NECESSARY lHAT WE 00 SO TO AO-UEVE YOUR
GOALS FOR TI-£ EOlf()MY,
ftID
IF YOU TRIED YOU hOllD CREATE SERIOLS PRO~
FOR Fif'WCIAL ~KETS RA11iER 1l-fAN GAINS FOR 1HE REAL ECOOOMV,
Bur lliERE
IS
00 Ql£STION lHAT OVER LON<ER PERIQ:00 OF Tlr'E EXCESSIVE ,oJETARY GROffl-1
LEAlE TO TR>lBLE,
THE PACE OF t()NETARV EXPANSION HAS BEEN tJ.llBUALLY RAPID DURING RECENT
~.
THIS IS ESPECIALLY TRlE OF 1liE NARJUflLVIEFINED t1lNEY SlPPLV (M]_)--
CLRRENCY PLUS IEWm IEPOSITS ONLV--wHICH OVER THE P~T SIX M::>NlHS
INCREASED AT AN ANNtW_ RATE OF
9,5
PERCENT,
~
THIS RATE OF EXPANSION IS WEU.
ABOVE THE FEDERAL RESERVE'S STATED L.ONGER-RLN IESIRED PATI-1,
SINCE THE RECENT EXPANSION IN 1HE r-t>NETARV AGGREGf\TES HAS TENIED TO RLN
AP/JVE EXPECTATIOOS, SvSTEM OPEN Mt\RKET OPERATIONS HAVE BEEN DIRECTED TCMARD
.-OLDING ID4N ON TI£ PROVISION OF BANK RESERVES, JUST AS NN OTHER r-4ARKET,
11-IE r.oRE LIMITED AVAILABILITY OF RESERVE SUPPLIES RELATIVE TO I»1ANOO HAS
fvEANT lliAT 1l-lE PRICE OF t'ONEY-IN 11-HS CASE, THE RATE OF INTEREST-HAS GOOE
UP ON DAY-TO-MY BANK BORf\OWINGS FRlM 01HER BANKS ( H:IERAL FLNDS) AND OTHER
VERY Sf-l)Rf-TERM SOURCES OF FINANCING,
EYAMPLE, IS UP ABOur
2 PERCENTAGE
THE RATE PAID ON FEIERAL RJNI:S, R>R
POINTS FRlM 11-iE LOilS PREVAILING EARLY 11-iIS
YEAR, 0n£R St-ORT-TERM MARKET INTEREST RATES Al.SO HAVE BEEN MJVED lP COMPARABLY, BUT' ARE 00 HIGfER TOMV 1l-fAN TI-IE
Tit€, LONGER-TE~ INTEREST RATES, WHICH AS
1g75 AVERAGES, fwo
I
AT 11-iE SN-£
INDICATED EARLIER ARE OF t'00-1
GREATER SIGNIFICANCE 10 11iE REAL ECOOOMV, HAVE INCREASED VERY LITTLE ON
BALANCE,
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Federal Reserve Bank of St. Louis
-9&J1:
\«lULD
ARGLE lliAT THE FErERAL RESERVE SHOll.D HAVE
RESPONDED t'ORE
,ORCEFtllY TO n£ EARLIER BLLGES IN nfE fvONEV SLPPLY, INIEED, A FEW hOULD
SAY TI-IAT THE RESERVES NECESSARY TO SUPPORT lliE IEPOSIT EXPANSION SIMPLY
St-kJllD OOT HAVE BEEN PROVl!ED, LETTING FINANCIAL MARKETS AND 1HE Ecn.KJMY
SUFFER WHATEVER CONSEQUENCES MIGIT RESULT FROM \+IAT ~llD PRESllWlLY BE
A VERY SHARP RISE IN IN'TEREST RATES,
Bur I OONTINlE
TO BELIEVE TiiAT 11-iE
WISER COURSE IS TO LIMIT 1HE SPEED wrm WHIOi MJNEY ~KET OONDITIONS ARE
ADJUSTED TO OiANGING r.-ONETARY GRll'mt RATES,
I BELIEVE THIS PARTLY BECAUSE
n£ M1NETARY AGGREGATES-PARTICllARLY M]_-HAVE PROVED RATI£R COM:LUSIVELY
TO BE IrtERENll..Y ~STABLE IN TI-IE SI-ORT R~. f>RutENCE IN OUR ACTIONS IS
DICTATED ALSO BY
1l£
FACT THAT TIE RELATIOOSHIP BE"TWEEN THE VARIOUS
r-t=.A-
SrnES OF MJNETARY GROffl-1 AND THE PERFORl'W'4CE OF ll-fE Ec:oro1Y IS LOOSE AND
VtJN
t.r-JRELI ABLE IN THE SHORT Rl1'l,
You t'iAV
HAVE SEEN DE cn+1ENTS IN 11-IE FINANCIAL PRESS TO
11£
EFFECT
1HAT KJNETARV POLICY--11-fE FEIERAL RESERVE-IS CAUGiT IN A "BOX, 11 IT IS
ARGUED THAT ATTEMPTS TO RESTRAIN THE GRO-ITH OF THE t1JNETARY AGGREGATES WILL
RESll.T IN HIGIER INTEREST RATES WHICH, IN TURN, WILL STIFLE
EXPANSION,
~
1l-tE
ECONOMIC
1l£ OTHER HAND, IT IS ARGlED, Al..LOA/ING 11-fE AGGREGATES TO
CONTINUE TO GRCM AT EXCESSIVE RATES WILL LEAD TO INCREASED INFLATIONARY
PRESSURES,
rtlEN SET UP 2N
n-ns
WAY, 1liE a-tOICE SEEM> EXCEPTIONALLY DIFFIClLT
SINCE EI'lliER RESlLT IS l.MESIPABLE, Ho-EVER, 11-IESE EXfREfvES ARE NJT lliE
ONLY Q-K)ICES AVAILABLE-IN SPITE OF 11-IEIR APPEAL lO 11-tE MDEIA EXCITED
EITHER ABOUT OVER-SIMPLIFIED SOLUfIONS OR DESIRING TO STRESS CON~ATION,
THERE
IS NO St.CH THING AS A SIMPLE O-OICE BElWEEN t.t.Je-f>LOYMENT AND INFLATION,
ESPECIAU..Y SINCE GREATER INFLATION Al.M)ST INEVITABLY LEADS TO GREATER UtErf>LOYr"ENT I
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- iLO THE
EXCESSIVE RATE OF t{)NETARY EXPANSION tv'AY WELL BE t,ODERATED BY LESS
✓IGOROLS INTEREST RATE r-OVES THAN PRESUVED IN TI-11S EXTREME ARGUJENT,
IN
ADDITION, THE If"PACTS ON LONGER-TER-1 RATES MA.Y BE MINit-1AL BECAUSE INFLATIONARY EXPECTATIONS ARE REDUCED BY EFFORTS 1lJ KEEP TI-IE ~ONETARY AGGREC-ATES
ON MJRE r-t>IERATE GF«JWTH PAniS, FURTHER, 11-IERE ARE NO GOOD ECOf'OMIC REASONS
FOR TAKING EXCESSIVELY STERN MJVES lOIARD r1lNETARY RESTRAINT; ll-lAT IS, TO
ATTEMPT TO OFFSET IM"EDIATELY THE "OVERStroT" IN M:>NETARY
GFOITH,
Sor1:.wHAT
M)RE GRADlW.. OR JUDICIOUS EFFORTS WILL SERVE l6 FAR BETTER, NEITI-iER ADDING
TO INFLATION NOR CONTRIBUTING TO CONDITIONS IN THE CREDIT M'\RKETS TI-iAT
MIGHT HAA'1 PROSPECTS FOR Sl.6TAINED ECOrfflIC RECOVERY,
SLCH A CO~E FOR r-t>NETARV POLICf WOLLD BE COOSISTENT WITI-1 f'IODERATE
CDNTINlED Ecor«)MIC EXPANSION, HOWEVER, PS
I INDICATED MLCH EARLIER, K>NE-
TAfN POLICT OOES NOT STAND ALONE IN OUR ECOOOMIC POLICT MIX,
OFFSET lHE lNCERTAINTIES ARISING
FRCJvl
IT CANr.ITT
011iER AREAS, IT CArffiT SUBSTITtJTE
FOR SOll'JD ECOtO'\IC POLICIES ON ENERGY, TAXATION, ENVIRONM:NT AND REGllATION
OF EOOt01IC ACTIVITY, fvbNETARY POLICT IS AN IM'ORTANT TillL,
IT CAN SlPPORT,
IT CANt«>T ALONE CREATE Tf-E IIEAL ECCX'D1IC \«>RLD, THUS, IF WE ARE JUDICIOUS
IN SETTING SOlND Ea:>f\OMIC POLICY OUTSIIE THE MJNETARV SPHERE, WE SHOlU) BE
ABLE OVER THE YEARS AHEAD TO LET r,nNEfARV POLICf LEND ITS Flll WEIGIT TO
CONTINl£D PRJGRESS IN Ol.R FIGIT
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
m RE11JRN 10 ECOro1IC STABILilY,
@FedFRASER