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Beyond Statistics

Top of the Ninth

September 1, 1995


Frequently, when I give a speech about the Federal Reserve, I describe it in part as a large information-gathering system. While not the catchiest of phrases, the description is apt because each Reserve Bank devotes considerable resources to acquiring timely, first-hand knowledge of business conditions and prospects in its district. In many cases, an extensive network—consisting of boards of directors, advisory councils, formal and informal surveys and ad hoc meetings with business and community leaders—is engaged in developing the information which ultimately is fed into the monetary policy process.

A good example of information gathering and, equally important, an opportunity for direct communication with leaders in our district is the annual Minneapolis directors tour. For two days each summer, our bank's board of directors and several senior officers travel a part of the district, visiting businesses en route and hosting luncheons in two communities at which I have an opportunity to discuss public policy issues.

The tour this year was in western Wisconsin, focusing on the cities of La Crosse and Chippewa Falls. We visited a wide range of firms on this trip—a yacht manufacturer, a dairy, a manufacturer of fire engines and a brewery. All displayed great pride in their products and reported that business was good, although the boat builder indicated that activity had been slow until recently, when the effects of lower interest rates took hold. Somewhat surprisingly, there were few if any complaints about the economic environment or about prospects; a sense of confidence was almost palpable.

Such a trip may seem frivolous, but in fact it has significant value. Not only do directors and staff have the opportunity to observe operations and processes and to gauge business conditions first hand, but we also talk informally with a diverse group of people at the luncheons and in the factories, and through such conversations gain a sense of expectations, aspirations and concerns. I used the luncheon speeches this year as an opportunity to discuss two policy issues, namely: the rationale for the Federal Reserve's commitment to price stability and the factors contributing to long-term economic growth.

As has been the case for years, most of the audience's questions and concerns addressed the federal budget rather than monetary policy. With regard to the latter, the most notable comment was an isolated criticism of the last two increases in the federal funds rate: November 1994 and February of this year. There was a view that those actions were unnecessary, and perhaps destabilizing.

This column is not the place to defend those actions although, given the prevailing circumstances, it is easy to do so. However, what was equally striking about the reaction to those funds rate increases was a belief in the prescience of the Federal Reserve. The criticism implied that we knew at the time that such actions weren't necessary but went ahead anyway, for reasons of our own.

While it is nice to find one's analytical skills highly regarded, such prescience should not be attributed to us. Although considerable resources are devoted to economic forecasting and to predicting the effects of policy actions, the results of such efforts are accurate only within very wide limits. In fact, a principal reason we devote resources and time to the directors tour as well as to other informal approaches to measuring business activity is to help us understand if our forecast of the economy is on track and if policy is appropriate.

Next year we will set out for Montana on our directors tour. No doubt that trip will take on a personality of its own, just as have all its predecessors. We'll come away a little smarter about the Ninth District, and feeling good about a fine, well-established tradition of the Federal Reserve Bank of Minneapolis.