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 networkconsisting of boards of directors, advisory councils,
formal and informal surveys and ad hoc meetings with business and community
leadersis 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 tripa 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
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.