The Region

Interview with Roger W. Ferguson Jr.

The Federal Reserve Board Vice Chairman shares his thoughts on the economic forecasting tools available to Fed policymakers and public policy issues facing the nation's retail payments system.

David Levy - Vice President

Published June 1, 2000  |  June 2000 issue

Roger W. Ferguson Jr.

Federal Reserve Board Vice Chairman Roger Ferguson, with past experience in the legal and financial worlds, is exceptionally well suited to the work of the Fed. He spearheaded the Joint Year 2000 Council, an international group formed by the global financial supervisory community to address issues associated with the year 2000 computer challenge.

Photo of Roger Ferguson Jr. Now he has tackled another big project as co-chair of the Fed's Payments System Development Committee with Cathy Minehan, Boston Fed president. In the following interview Ferguson talks of the committee's plans to address public policy issues facing the nation's retail payments system in light of new technology, the changing structure of the U.S. financial system and continuing industry pressures to reduce costs and increase productivity.

Ferguson also discusses monetary policymaking and cautions against relying principally on economic models. "... [W]hen there's some uncertainty about the economy we need to weight a little more heavily the incoming data, we need to weight the judgmental components of policymaking perhaps a bit more heavily. We should not ignore the model results and forecasts but recognize that the models have to be downplayed a little bit because they tend to have built into them historical relationships that may well be changing."

But, as you read on you'll learn that Roger Ferguson's life is not all Federal Reserve business.

REGION: The newly established Payments System Development Committee has been working with the private sector and in government to help stimulate improvements in the payments system. Of their efforts, what looks most promising?

FERGUSON: Let me first give you a little background. The committee, as you know, will focus on the key issues affecting the future development of the payments system in order to facilitate smooth and efficient transactions for the consumer and government in low-value payment transactions. I hope the committee serves as a forum for the analysis of technology trends and provides a mechanism for consulting with the payments system's providers and users. We will use what we learn to advise the Board and the System on the need to take action.

Now to answer your question. The committee has four major initiatives for the year 2000. First, it will hold a workshop on electronic check presentment and truncation that will bring together senior private sector and System representatives to share lessons from the various experiments that are now going on, both in the System and in the private sector, in electronic check presentment. Second, we want to assess the gaps that exist in standards, not at a high level—where we know the market will determine standards—but at a relatively operational level, if you will, where such gaps may in some cases inhibit payments system improvements. Third, we want to identify some steps to address both legal and regulatory issues that are associated with the emerging payments and e-commerce technologies. In particular, we are working with some informed participants to review the legal underpinnings for turning paper checks into electronic format, since that seems to be an area of some ongoing concern. The fourth initiative is to focus on the clearing and settlement infrastructure for electronic retail payments, which is a multiyear effort.

I go through all that to say that while we continue to work in all of these areas, it's a little hard to know which one is going to bear the greatest fruit. Therefore, I think it's important to have this multipronged interaction between us and the private sector. It's important to have a number of flowers blooming, because in a rapidly changing technology environment it's hard to know which ones are going to be of greatest benefit. If we do three or four different things, probing here and there, I think we'll discover, as we learn and as the market evolves, which of our initiatives will have the highest impact and which ones, frankly, we will downplay.

REGION: Do you have any hunches at this point?

FERGUSON: Well, I have a strong sense that the work that we're doing in electronic check presentment is going to pay off. I sense that with 68 billion checks being written currently we will have to live with a retail payment system that has a check base for some time to come. A strategy that includes working from a paper check but getting it into an electronic form as soon as possible in the payment process will end up being very important. It's not the only thing that's going to be important, and there will be newer payments systems that will emerge over time that will also be important, but, as I said, I sense that the check will be with us for some time. Working in the world of checks, which is where we are a service provider as well as regulator, should be one of the areas that will pay off.

REGION: Generally speaking, when should the Fed intervene in the private sector and when should the Fed let the market take over? Should we be thinking about an exit strategy, since private sector new technology will be offering all sorts of options?

FERGUSON: This question hinges in large part on the extent to which the Federal Reserve's participation is needed to ensure the smooth functioning of the payments system. As I have said in speeches, the payments system of the United States needs to achieve four goals—support economic growth, manage risk well, remain resilient in the face of crisis and continue to evolve to keep pace with the needs of an evolving economy. The question is whether the Federal Reserve's operational involvement in retail payment services would foster or impede competition and progress as the market for these payment services evolves.

As market conditions change, we should reassess the ability of the private marketplace to foster the efficiency and integrity of new retail payment services without the Federal Reserve's operational involvement. If there appear to be market failures—by which I mean some imperfection in markets, not a judgment about lack of demand—that make the private sector unwilling or unable to provide these newer services, then, I believe, the Federal Reserve System could not rule out becoming a provider.

I do not believe that the market for new retail electronic payment services at this stage reflects the existence of market failures that would suggest a need for direct Federal Reserve operational involvement. These products appear to be evolving adequately on their own, just as the credit card, debit card and ATM networks evolved without a Federal Reserve operational presence.

Overall, with respect to the Federal Reserve as a service provider, I think we have a role as provider and enhancer in traditional payment services, check and ACH [automated clearinghouse], but probably will not be a provider of newer retail services. Let me add that we do not need an exit strategy for the current payment services, at this time, as they are not under intermediate-term threat of extinction. Indeed, our current services are likely to have ongoing demand. We need an enhancement strategy. With respect to new payment systems, right now I have confidence that the private-sector marketplace can provide the combination of new products, services and service providers to meet the needs of consumers and businesses. Our goal is to determine how we can best aid the process of moving to these new instruments without preempting private sector creativity and problem solving.

REGION: Another effort of the Payments System Development Committee has been to identify and address specific barriers to improving the retail payments system. What are the obstacles?

FERGUSON: There appear to be various kinds of obstacles. As we've talked to industry participants, they talk about lack of consistent standards, some consumer concerns and questionable legal status of electronic representation of paper documents, such as digital images of checks. As I hear about those barriers, I think some of them are more real than others. One that strikes me as quite important is consumer concerns. Consumers will need to be reminded of the benefits of some of these newer payments mechanisms. I think the providers of those mechanisms are going to have to speak to consumer concerns about security and privacy, for example. We know that's a very important issue. I think those concerns are real.

Another barrier that is quite real from the standpoint of the private sector is the fact that there are limited resources. While making the investments required to maintain the existing payments systems, which are expensive to maintain and upgrade, businesses are also making the investments to enter into the newer areas. The need to invest in the existing and the new creates a bit of a strain on limited dollars in the private sector and, frankly, on limited managerial attention.

The barrier with respect to standards, I suspect, is one that will evolve over time. We should not attempt to determine the standard for major things too soon. From an effectiveness standpoint, we need to have market testing of different alternatives to determine which one of the market standards that might emerge responds best to private-sector needs—both consumer needs and producer needs.

Some of the questions raised by the private sector are legal and regulatory. I suspect some of that is cautious interpretation of rules on the part of the private sector. But even in that arena if there are things that we can do, in terms of staff commentary on regulations, for example, to help the private sector better understand the rules and regulations, then I think we should do them.

REGION: As we move into the 21st century, checks seem to become more inefficient. Is the Federal Reserve convinced that electronic payments for safety and security reasons are the best way to proceed?

FERGUSON: Let me start by disagreeing with the premise of the question. I'm not sure that checks are becoming more inefficient in the eyes of consumers. I think they enjoy a continued popularity with both consumers and businesses because they respond to consumer needs. As I said earlier, in the long run, even as we move toward a greater use of electronics, there may be an ongoing need for checks. I suspect that at the retail counter, for example, low-value transactions will still have an important component of checks as well as cash and credit cards. If anything, our economy is continuing to invest in ways to optimize checks to make them less inefficient, recognizing that the check is a large and well-established mechanism for payments.

Now, having said that, I do think that businesses and consumers already have a wider range of different kinds of payment mechanisms—there's cash, there's credit cards, there's debit cards, electronic funds transfer, direct deposit, etc. All of those clear and settle quite reliably. So the concern is one of perception, of explaining the safety and security features that exist in the current payment systems that will also exist in the new payment systems. Recognizing the basic safety of newer payment systems, we should also be mindful that there have been a few high-visibility cases where an institution found that its systems had been compromised by hackers and confidential information had been retrieved and potentially used. We know that in these areas of new technology, new approaches will likely be taken to try to compromise them. I am convinced that success hinges on responding to these safety and security issues. I believe that the manufacturers of these products and services-the banks that offer them, the other payments system providers that offer them-will step up and respond to the safety and security challenges. They will have to respond to these challenges if they are to survive. I'm convinced that newer systems can be, and the market will force them to be, as safe and secure as cash and check, credit card and debit card are today.

REGION: How aggressive should the Federal Reserve be in support of electronic payments?

FERGUSON: We should be aggressive in making sure that our rules and regulations don't stand in the way of reasonable progress and experimentation. We should also be a very active participant in discussions with the private sector so that we learn what is going on. I think in the area where we are providers, such as in check, we should be quite willing to experiment—as we are in imaging and in electronic check presentment and truncation and other things-so that we are as technically sophisticated as any other part of the payments system. In many different ways we can be aggressive in support of electronic payments without necessarily precluding any form of private sector experimentation.

REGION: Does leadership come mainly from the private sector or does the Federal Reserve provide most of the leadership?

FERGUSON: I think it's joint leadership. We provide leadership in areas that are naturally in our bailiwick, which may have to do with regulation and legislation, for example. We are leaders in determining how we operate our systems. We provide that leadership through the experimentation that we are undertaking, which allows us to be part of the conversation about newer payment systems. The private sector provides leadership in determining what seems to be viable in the mix of investments and services that they want to provide. There's more than enough room for joint leadership.

REGION: Some argue the Internet is the gateway to future electronic payments. What do you think? In an Internet-based approach what might be the Fed's role?

FERGUSON: I see the Internet having one clear purpose, and perhaps others might evolve. The Internet is clearly, at this stage, a strong communication tool. It is probably getting stronger. Already many of our Reserve banks are using the Internet as a vehicle for carrying information or allowing information to be exchanged between us and depository institutions. In addition, in many private-sector industries the Internet is changing the way business is conducted. The emergence of e-exchanges is one example of this trend. However, we have to recognize that payments systems include more than communication networks. They include all the legal rules and the protocols involved in creating and delivering a genuine and secure payment, as well as clearing and settling the payment. I have observed that while communication works very smoothly across the Internet, when it comes to making payments and clearing and settlement, consumers and businesses tend to fall back to established payment systems.

I could imagine that the Internet will continue to be married to the existing payments systems and bring together the best of both worlds, if you will. However, in the private sector, some businesses are also experimenting with new forms of payments that are Internet-only, so-called e-money. Whether those succeed will depend very much on the ability of the providers to offer a value proposition that is at least as good as the credit card in terms of broad understanding of how it works, its security features and certainty with respect to clearing and settlement. That's a fairly high hurdle. Therefore, I would be not at all surprised to see the Internet continue to grow as a communication vehicle, but whether it grows by having its own form of payment and settlement is open to question.

Now, again, our role is to consult with the private sector to understand any barriers that we may have inadvertently put into place that stifle experimentation, and to see if it's appropriate for us to reconsider any of the rules and regulations that we have in place so we can allow greater experimentation. But we have to recognize that our role also has a safety and soundness and consumer protection component. We cannot lower the standards with respect to safety and soundness or consumer protection in these new technology areas, just as we wouldn't do it in the older payments system areas.

REGION: The Phillips curve suggests that there's a trade-off between inflation and unemployment, but with recent inflation and unemployment at consistently low levels, the curve's usefulness has been called to question. Is the Phillips curve still meaningful, on empirical or theoretical grounds?

FERGUSON: I don't think there's a long-run trade-off between inflation and unemployment. The experience of the last several years indicates that low and stable inflation is the underpinning for sustainable growth. Sustainable growth allows the creation of jobs.

I am comfortable with the idea that demand and supply imbalances affect prices and inflation in the short run. What we may have seen recently is that the point at which that trade-off starts to come into play might have moved from an unemployment rate that was up to 6 percent to an unemployment rate that is maybe somewhat lower. Some people argue that the so-called NAIRU [the nonaccelerating inflation rate of unemployment], which is an element of the Phillips curve, may have moved down to 5 percent or even lower.

I must say that anyone who has focused on the NAIRU recognizes that you can't get a point estimate that is immutable over time because the nature of the economy does change. Even now as we talk about imbalances, there is an implicit short-run Phillips curve concept embedded in the discussion without necessarily saying that the unemployment rate at which inflation starts to pick up is exactly 4.5 percent, or 4.9 percent, or 5.2 percent or 5.5 percent. So I'm a bit of, how can I describe myself, in the middle in believing that there is a short-term trade-off between resource utilization and inflation, but not necessarily being wed to a specific point estimate on the short-run Phillips curve where inflation is likely to accelerate.

REGION: You say that you believe in the concept of a short-run trade-off between unemployment and inflation. Do you think that relationship would exist if that inflation were anticipated?

FERGUSON: As you know, this is a matter of some debate. Some economists believe that markets are completely frictionless. In that world, fully anticipated inflation would be immediately reflected in relative prices and there would be no short-run trade-off between inflation and unemployment. Economists out of other traditions believe that markets do not always operate without friction, and therefore do not adjust quickly to even fully anticipated inflation. For example, labor contracts might be established for a period of years. That model of markets would give a short-run trade-off. I tend to have more sympathy for that view, having come to this role with more of a real-world background and recognizing that pricing arrangements in reality do not change instantaneously.

REGION: How effective are Federal Reserve models—which are based on the Phillips curve—in predicting inflation?

FERGUSON: I think we should be mindful that a broad range of models is in use around the System. Almost all of them have the Phillips curve built into them; a few of them do not. Some of them are very forward looking in that they have expectations built into them, some do not. We have a number of Reserve banks using models that are less heavily driven by any particular theoretical framework.

It is important to recognize that in policymaking there's a strong judgmental component as well as reliance on forecasting models. The judgmental components are particularly important now given that some of the econometric models have for a couple of years overestimated inflation and underestimated growth. The way I think about this, broadly speaking, is that when there's some uncertainty about the economy we need to weight a little more heavily the incoming data, we need to weight the judgmental components of policymaking perhaps a bit more heavily. We should not ignore the model results and forecasts, but recognize that the models have to be downplayed a little bit because they tend to have built into them historical relationships that may well be changing. While modeling continues to be important, and the effort and the energy that goes into doing it well will continue to pay dividends, I do think that we're at a stage where the judgmental side and the incoming data perhaps play a slightly heavier role in policymaking.

REGION: What would be a recent example of the dividends you mentioned?

FERGUSON: The overarching benefit of econometric models is that they embody an organized, systematic and defensible view of the way economic actors interact. They tend to have a theoretical underpinning. Models therefore can be very helpful in allowing economists to test various scenarios and change assumptions, and I have seen different scenarios modeled quite effectively. As long as the U.S. economy operates with basically a free market orientation, econometric models can be adjusted to reflect a broad range of relationships.

In general, I think that the problem the econometric models have faced in forecasting is the same we all face. Neither modelers nor most other economists predicted the productivity surprise that we are experiencing, and therefore the model-based forecasts were inaccurate. As the models are adjusted to take account of higher trend productivity growth, once the rate of productivity growth stabilizes, the results of the econometric forecasting should become more accurate. Indeed, my understanding is that if one puts the higher productivity growth of the past few years into the econometric models, they give results that fairly accurately reflect our recent experience of low unemployment and relatively low inflation. This is particularly true if allowance is also made for the effects of oil price savings and exchange rate movements.

REGION: Don't you need to somehow integrate the information that you are receiving in the form of a model? Doesn't it take a model to beat a model?

FERGUSON: Yes, one does have to integrate the information into the econometric models. The models have built into them specifications of the form of economic interactions, such as trend productivity growth. The model coefficients that specify the exact relationships may be changing, and with new data, new coefficients can be estimated where needed. Until the large changes in the economy stabilize, for example, trend productivity growth becomes more certain, you have to move away somewhat from the model forecast per se, in the narrow technical econometric sense, in policymaking. Eventually, the forecast from econometric models and more judgmental forecasts will again achieve greater accuracy, so that we need them. Having to wait for the models to again predict with greater accuracy does not mean that you jettison the basic economic rules of supply and demand.

REGION: Recent rates in accelerated productivity growth are generally praised, and rightly so, but is there reason for caution amid these stellar reports?

FERGUSON: We should generally praise the acceleration in productivity growth. The United States went through a period starting in 1973 when productivity growth was anemic, at best. We should celebrate the fact that it appears as though trend productivity growth seems to be picking up. That's a good thing. It's a good thing because it allows for the creation of jobs, the creation of income, creation of wealth, creation of goods and services at a more efficient pace. Those are all positives.

Now, having said that, I think we also recognize that in a high productivity economy there are some short-term stresses and imbalances that might emerge. Chairman Greenspan is talking about some of them and I agree with him. There are two components to this challenge. One, there is a tendency to extrapolate current growth, current good fortune, out indefinitely and to bring that back into the short-term consumption behavior. So you end up having the risk of some—a phrase we've been using—imbalances, between aggregate supply and aggregate demand that arise because demand ratchets up even faster than the increase in supply.

The second thing that we have to be mindful of is that we had an unexpected drop-off in productivity growth back in 1973 for reasons that economists still debate. The current pickup was also unpredicted and is subject to differing interpretations. Two alternatives are possible. One is that some of this uptick that we've seen in productivity growth may simply reflect a strong economy and may not be a change of trend. The other alternative is that trend productivity growth is higher than in the recent past. Furthermore, even if the growth in trend productivity has accelerated, we will not know for sure until years from now how much further is left. Are we at the beginning of this uptick in trend productivity growth, are we in the middle, are we at the end? While being hopeful that this pickup will go on for quite a while, we must be careful; in other words, we shouldn't necessarily assume that this will go on indefinitely. Just as we didn't predict that this pickup in productivity growth would start, it's hard for us to predict where we are in this trend. Am I being optimistic? While being pleased to see this apparent uptick in trend productivity growth, we should recognize there still are some questions about how much of it is trend vs. cyclical, how much further does this have to go and what kinds of imbalances come along with an economy that seems to be growing at a trend rate of productivity that is higher than we've experienced for the last 25 years or so.

REGION: You mention that imbalances occur even in an era of high productivity. By looking at the data, how would we know when an imbalance exists?

FERGUSON: The most obvious indication of an imbalance between demand and supply is in the current account deficit. A current account deficit which is both large and growing, in the current environment, is an indication of an imbalance. It means that we are financing investment with savings from overseas. The other indicator of an imbalance between demand and supply growth is the gradual decline in the unemployment rate over the past few years. It may be that this imbalance has only served to bring the unemployment rate to a new and lower sustainable rate, but it is also true that the wedge between demand and supply growth can't continue indefinitely, because once demands for labor can't be met inflation will start to pick up.

REGION: Much has been said about the presence of a new economy, and how the U.S. economy is no longer governed by so-called old notions having to deal with business cycles and so forth. What is your take on the new economy and—if there's any merit to the idea—how should monetary policy consider its implications?

FERGUSON: As I said earlier, I think the performance of the economy has certainly been remarkable and we should be pleased with that. There are some reasons to hope that this will continue for some time. We should not, however, assume that the basic notions of business cycles have been repealed. The forces that drive business cycles, including internal imbalances, external shocks, changes in expectations, can always arise in any market economy regardless of whether productivity is growing at a 1 percent or 2 percent or 3 percent annual rate. So I don't believe that the business cycle has been repealed. I don't think these basic market rules change that quickly.

As to the role of monetary policy, I believe a couple of things. One, and I've said this before in other places, it's important to be open to the possibility of favorable changes in the economy, such as a change in the short-term trade-off between unemployment and inflation. I think it's important for us to recognize that the economy is dynamic and might be changing because the Fed's mandate is for achieving maximum sustainable growth. At the same time, I don't believe that policymakers should necessarily be swept up in the most euphoric views of the potential in the economy. We also have an important responsibility to remain vigilant with regard to inflationary pressures. Since in the long run there's no trade-off between unemployment and inflation, we know that keeping inflation low and stable and maintaining an obvious stance of vigilance vis a vis inflation, so that inflation expectations are also relatively low, is the main value that a central bank can add to this equation. We've got to be mindful of that ongoing responsibility.

REGION: The Minneapolis Fed has long argued that supervision and regulation are not enough when it comes to ensuring the safety and soundness of the financial system; rather, market discipline needs to be added to the mix. This is especially true among big banks, those known as too-big-to-fail, where creditors can operate under the assumption that, because of its size, government will always come to a big bank's rescue. Is there a place for more market discipline in the financial system? Are deposit insurance reforms necessary?

FERGUSON: I know this is an area that's of great importance to the Minneapolis Fed because Gary Stern, your bank's president, has spoken quite articulately on this. I agree with much of what he has to say. To answer your specific question: I think there is an important place for market discipline in the financial system—especially for our large and more complex organizations. As you know, the Fed has worked with the Basle Supervisors Committee, and the proposed new capital standards from that committee include three pillars, one of which is greater market discipline. We support that. Yesterday [the interview was conducted April 7], a report came out from the Fed staff, picked up in the American Banker, looking at various ways that we can bring greater market discipline to bear in the United States, and I support looking at those options. [After the interview, the Board announced the formation of a private-sector working group to develop options for improving the public disclosure of financial information by banking and securities organizations. The OCC and SEC will participate with the Board.] Market discipline is very important, particularly for the large institutions because they are quite complex. Even those that have the best management intentions and the best risk management systems can benefit from market interaction—with the market telling management how it, the market, judges their company's risk profile, the risks that they're undertaking and their ability to manage those risks.

I also think that we as supervisors dealing with these large and complex institutions need as much help as we can possibly get. Our examiners are extremely good at what they do, but any good examiner recognizes that data should come from a variety of different sources, including the signals that come from the market. Therefore, market discipline can be an important adjunct to the supervisory process.

I should also say that market discipline in the financial sector is already important. There are a number of institutions—securities firms, insurance companies and finance companies, just to mention the obvious—that already live in a world of heavy market discipline, and the same thing should be true for the large and complex banking organizations.

REGION: What is your general impression of the Financial Services Modernization Act of 1999? In particular, are there any issues in which the bill missed the mark? Do you foresee corrective legislation down the road? [See the special issue of The Region dedicated to financial modernization.]

FERGUSON: Well, a few things. First, the Financial Modernization Act reflects a very large amount of difficult work, and some tough compromises that had to be made. Second, as you know, the System was very supportive of the notion of having many of these newer activities undertaken in a holding company structure, and the law reflects that, which I think is a positive. So, in general, I support the legislation. Third, I think it is far too early to know whether there will be a need for prompt changes. Since we know that markets are dynamic and continue to evolve, and that's certainly true of the financial industry, I would imagine that at some point we would obviously have to go back and take a look at this legislation and change it. No specific statute is immutable and good for the entire sweep of history. But I don't see at this stage a specific element of this legislation that cries out for immediate attention. The main thing at this stage is for all of us to work very hard, as the staff here at the Board and throughout the entire System have been doing, to put out the rules and regulations that implement the law. It's important for us to understand how the private sector is going to deal in this new environment in which there's room for both consolidation within banking and increasing breadth across the industries—securities, banking, insurance. We need to learn more about how all this is going to work.

REGION: You mentioned that we might see further consolidation and broadening. Do you have any further thoughts on that?

FERGUSON: I did give a speech yesterday (April 6) in which I talked about this a little bit. I supported the expanded authorities of the new legislation but tried to remind institutions that caution is still required. We have discovered, for example, that the post-merger integration skills of consolidating banks sometimes were found wanting. The ability to bring together back office activities and branch networks in a way that was seamless and kept high customer confidence has not worked for all institutions. We've also seen recently that banks that get into new financial services may discover that some of those services have market dynamics that lead to disappointing financial results.

No institution should look at this new law and assume that the risk has been driven out of banking or financial services, or that being larger is necessarily better. I think there will still be room for small- and medium-size institutions. I think there will be room for institutions that specialize, and there will be room for large institutions that are conglomerates. In all of these segments of financial services there will be three challenges. One is the ability to manage risk. Another is the ability to maintain client confidence, because financial service is all about confidence. And the third is the ability of managers in general to manage complexity. How all that gets sorted out I don't know, but we will learn.

REGION: As vice chairman of the Federal Reserve Board, do you share the steadfast commitment to low inflation that seems to be the underlying philosophy of the Board?

FERGUSON: I can only imagine one answer and that, obviously, is yes. I couldn't imagine being a member of the Board and not sharing that steadfast commitment.

REGION: A good monetarist would say that inflation is a monetary phenomenon, and a good case could be made for that approach in the past. But it seems today that there is a diminishing amount of attention paid to the money supply, generally speaking, and the monetarist approach in particular. What do you think about the current state of the monetarist approach to monetary policy?

FERGUSON: Your question implies two components to a monetarist approach, and I would like to talk about them separately. First, I think there is a general understanding that over the long run inflation and the general level of prices are heavily tied to monetary policy. In some sense I think the monetarist approach is quite alive and well in almost all central banks because there's a strong recognition among central banks that we have a unique responsibility in the long run to maintain low and stable inflation, as I said, and hopefully low inflation expectations as well. That element of the monetarist's view of the world is well embedded in all central banks.

Now there's a more technical element of that, to which you also alluded. The more technical side has to do with the monetary aggregates, and the linkages between monetary aggregates and general price levels. We've seen in this institution over history that the focus on monetary aggregates waxes and wanes. I think you cannot be a central bank without having a basic level of interest in money supply and changes in money supply. On the other hand, in the late 1970s and early 1980s monetary aggregates were much more of a focus of the FOMC [Federal Open Market Committee] as they were battling hard to keep inflation under control. Then the correlation between growth in the aggregates and inflation was perceived to be really quite high. More recently, I think the FOMC has been in a position where, without ignoring the aggregates, we've downweighted them in our considerations for one major reason. The velocity, the ratio of nominal GDP [gross domestic product] growth to money growth, has become quite unpredictable. And given that the relationship is unpredictable, then obviously I think the intelligent reaction is to recognize that and to put less weight on money aggregates in policy deliberations.

The velocities have varied, I believe, because of very rapid changes in the financial sector. I do think that it's important for us to keep monitoring money growth and the aggregates because, at some point, the velocities could become more predictable, relations could become more stable, and we might start to put greater emphasis on them again. When that's going to happen I don't know. But I wouldn't be a good central banker if I didn't always keep at least one eye focused on the money aggregates as well.

REGION: What's important to you personally, as a hobby or as a special interest?

FERGUSON: The things that are personally important to me at this stage of my life have to do primarily with the family. I've got two small children—a son who is 8 and a daughter who is 5. And as anyone with small kids knows, that thing that you call free time is really primarily focused on them, which is great. I spend a lot of my free time doing things that any father would do—ranging from homework to soccer games to ballet recitals to baseball practice, whatever it may be.

In addition to that, I've got a long-standing interest, going back to my graduate school days, in modern art. My wife and I have a very modest collection of modern art prints, not high-level paintings but prints, which we've put together over the last 15 years or so. I don't get as much time to do that as I'd like because small kids and long, thoughtful trips to art galleries don't necessarily go together. But that's one of the things I'm interested in. Before I came on the Board I was on a Trustees' Committee of the Museum of Modern Art, which meshed with that interest. Finally, like a lot of other people around here, I tend to be very interested in reading economic history and biographies of some major economic actors. I'm now working my way, a few pages at a time, through a very thick biography of John Rockefeller, which is interesting.

REGION: Thank you, Mr. Ferguson.


More About Roger W. Ferguson Jr.

  • Took office in October 1999 as vice chairman of the Board of Governors of the Federal Reserve System for a four-year term.

  • Originally joined the Board in November 1997, to fill an unexpired term.

  • Co-Chair of the Federal Reserve's Payments System Development Committee.

  • Chairman of the Joint Year 2000 Council, supported by the Bank for International Settlements.

  • Partner at McKinsey & Co. Inc., an international management consulting firm. Also served as director of research and information systems, overseeing a staff of 400 research professionals and managing the firm's investments in knowledge management technologies.

  • Attorney at the New York City Office of Davis Polk & Wardwell, where he worked with commercial banks, investment banks and Fortune 500 corporations on syndicated loans, public offerings, mergers and acquisitions, and new product development.

  • Bachelor's degree in economics (magna cum laude) in 1973, a J.D. in law (cum laude) in 1979 and a doctorate in economics in 1981, all from Harvard University.

  • Frank Knox Fellow at Pembroke College, Cambridge University.

  • Native of Washington D.C.

  • Formerly, an elected member of the Board of Directors of the Harvard Alumni Association and a member of a Trustees' Committee of the Museum of Modern Art, New York City.


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