Following is a summary of Gary Stern's March 10, 1993, testimony
before the Senate Committee on Banking, Housing and Urban Affairs.
Stern, along with the other 11 Federal Reserve bank presidents, was
called to testify on the state of the district economy and to share
his views on monetary policy.
Mr. Chairman and members of the Committee, I appreciate this opportunity to
discuss with you economic conditions in the Ninth Federal Reserve District
and my views on monetary policy. My task is somewhat easier today than it
would have been eight years ago, right after I first took office. Over this
period economic conditions generally have improved in the Ninth District,
and over this period I have had the opportunity to refine my views on the
role and conduct of monetary policy. Let me briefly address these two
topics in turn.
The Ninth District economy is doing well relative to the national
economy today, in large part because it did not participate as fully as
some of the regions of the nation in the expansion and excesses of the
middle and late 1980s. While the rest of the nation was affected by
unsustainable expansions and subsequent sharp contractions in some sectors
the Ninth District was more steady-as-you-go. Moreover, inflation appears
to have diminished in the district in recent years.
The Ninth District has a relatively small population, but it is large
geographically and contains a diverse industrial base. The Ninth District
includes the states of Montana, North Dakota, South Dakota, and Minnesota,
as well as western Wisconsin and the Upper Peninsula of Michigan. Important
in the district are the natural resource industries of agriculture, forest
products and mining; diverse manufacturing industries including modern
computer, electronic and medical technologies; and tourism.
In the middle and late 1980s the district economy was a bit weaker
than the national economy. The district did not benefit as much as others
from the defense build-up, the commercial construction spree, or the real
estate price run-up. Consequently, though, when these areas turned down,
the district economy was affected relatively less than the national
In addition, the district has been fortunate to have some growth
industries within its borders. The district economy has been supported by
growth in exports, medical instrument manufacturing, residential
construction, medical services and tourism. And, notably, agriculture has
for the most part recovered appreciably from the serious problems of the
However, I do not want to give the impression that all is well in the
Ninth District. Not all industries and not all regions are prospering. In
particular, some natural resource industries, commercial construction,
computer manufacturing and small-town retail stores all have been slumping
to some degree. Nevertheless, I think it is fair to say that as a whole the
district economy has improved.
The fortunes of the district's banks largely have reflected the ups
and downs of the district's economy. In 1986 the district's banking system
was far from healthy. The lagging effects of the 1981-82 recession,
difficulties in the agricultural sector and problems with loans to less
developed countries had combined to weaken banks' financial condition. But
since then, banking conditions have improved. Asset quality, earnings and
capital all have improved. In the first three quarters of 1992 only 2
percent of the district's banks reported losses, down from 20 percent in
Much of the information I get on the district economy comes first-hand
from District Dialogues with community and business leaders and from
meetings with the bank's directors and advisory council on small business,
agriculture and labor. Our involvement in district economic affairs has
served both the community and Federal Reserve policymaking well, I believe.
The state of, and prospects for, the regional economy are important
elements in my preparation for an approaching Federal Open Market Committee
meeting. But, of course, regional considerations must be balanced and
integrated with information about the national and international economy,
for ultimately the effects of monetary policy transcend regional
boundaries. Thus, a wide range of factors, combining regional economic and
financial information with additional perspectives, helps to shape my view
of the appropriate course of policy.
In the broadest sense, and taking a long-run perspective, the object
of monetary policy is, it seems to me, to attain the highest possible
living standards for our citizens over time. In order to give this goal
operational meaning, the Federal Reserve in my view should seek to achieve
over time maximum sustainable growth of real output.
My reading of the accumulated evidence on economic performance both
here and abroad is that in the long run the most significant contribution
monetary policy can make to achieving maximum sustainable growth in real
output is to foster price stability. That is, I am convinced that in the
long run, price stability goes hand-in-hand with sustained economic
prosperity. The two goals are not antithetical and, indeed, price stability
is best thought of as a means to the end of sustained prosperity.
In the short run, we in the Federal Reserve may indeed find it appropriate
to respond to incoming financial and economic information in order to
keep the economy on, or to return it to, its potential growth path. But,
it seems to me, our short-run response should in general be cautious because
of uncertainty both about the state of the economy and about the effects
of policy on the economy. Moreover, we need to avoid the problem of turning
long-run policy into a sequence of short-run decisions. If followed, such
an approach runs the risk of adopting a strategy that is persistently
inflationary or contractionary, depending on conditions prevailing when
it is adopted.