Statement by Robert D. McTeer, Jr., President , Federal Reserve Bank of Dallas, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 10, 1993 - Statements to the Congress - Transcript

Federal Reserve Bulletin, May, 1993

Banking institutions in our region have been through very tough times. From 1982 through 1992, a total of 565 banks failed. A credit crunch and concerns about capital constraints on lending began in the Dallas District. The impact of the credit crunch on small businesses was long-lasting and severe. The dependence of small businesses on bank credit and the contraction of bank loans in recent years-partly as the unintended consequence of stricter regulatory oversight, increased deposit insurance premiums, and higher capital standards--may well explain some of the weak employment growth we have seen so far in this recovery.

Banking conditions improved slowly as insolvent institutions were closed, failing banks were resolved, and recapitalization occurred. While many factors have contributed to the credit crunch, it is clear that restoring capital to healthy levels is a necessary condition for bank lending to resume.

Regional Summary

Many of the same factors that are holding back employment growth in the nation during this recovery have had a similar effect in the Eleventh District. These factors include business restructuring and reduced defense spending. A stronger growth trend in the District than in the nation accounts for much of the region's stronger performance in creating jobs. For now, the disadvantages of having a higher concentration in the oil and gas industry than the national average are being partially offset by increasing trade with Mexico and an expanding construction sector.

The District's banks are healthier than the national average, but they have yet to become a factor contributing to stronger growth. Having sketched recent events in my region, I turn to the national economy and the appropriateness of monetary policy.

RECENT MONETARY POLICY

With regard to monetary policy, I believe that it has been accommodative over the past four years. Certainly, by conventional measures, monetary policy was not tight heading into the third quarter of 1990, when the Iraqi invasion triggered a recession. The federal funds rate had been declining for fifteen months and was down more than 150 basis points from its March 1989 peak. In mid-1990, the M2 money supply was growing at an annual rate of more than 5 percent, near the center of its 3 percent to 7 percent target range. Nominal aggregate demand was growing even more strongly, at an annual rate of more than 6 percent. The interest rate yield curve had been positively sloped for six months, and both the Commerce Department and National Bureau of Economic Research indexes of leading indicators were signaling continued economic expansion. Indeed, contemporaneous real-time data did not clearly signal that a recession had begun until the fourth quarter of 1990, at which point the Federal Reserve promptly initiated a new sequence of easing moves. In consequence, short-term interest rates declined an additional 100 basis points by the end of 1990, and monetary base growth surged to double-digit rates.

The oft-heard charge that the Federal Reserve's actions were "too little, too late" is not supported by the evidence. We cut the federal funds rate much more (17 percent) before the July 1990 business cycle peak than before any of the five previous business cycle peaks. Despite a pause in interest rate cuts during early 1990, the decline in the federal funds rate from April 1989 (when it began its descent) until March 1991 (at the business cycle trough) comes very close. to the average percentage decline in the federal funds rate over comparable periods during other recent business cycles. The decline in long-term interest rates that accompanied the March 1989--March 1991 easing moves was also well within the range of past experience.