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

Research at the Dallas Fed indicates that redefining M2 to include bond funds held outside Individual Retirement Accounts and Keogh accounts by households would result in a monetary aggregate more closely related to its opportunity cost (that is, competitive interest rates) and nominal GDP than is M2 as currently defined. Indeed, such an expanded aggregate has grown about 2 percentage points faster than M2 in recent years--very much in line with recent growth in nominal GDP. Furthermore, the expanded aggregate has stayed near the middle of the growth cones implied by the Federal Reserve's M2 target growth ranges. This research suggests, then, that current monetary policy is appropriately expansionary.

For some time now, I have been warning that, in today's financial environment, disintermediation from the banking system is as likely to be caused by low short-term interest rates as by high short-term interest rates. In the past, a steepening of the yield curve brought about by a decline in short-term interest rates stimulated the growth of bank deposits--as bank deposit rates, tied to interest rates on relatively long-term loans, tended not to fall as much as the rates on short-term marketable securities. Over the past two and one-half years, however, households have responded to lower deposit rates and a steepening yield curve not by shifting away from short-term securities into bank deposits but by shifting away from short-term securities and deposits into bond market mutual funds and other investment vehicles, as well as by reducing consumer debt. These effects have been so strong that it is possible that further cuts in short-term interest rates would actually shrink the M2 money supply as that supply is currently measured.

FACTORS CONTRIBUTING TO THE SLUGGISHNESS OF THE RECOVERY

Output growth during 1992 now appears to have been stronger than had been anticipated, GDP having increased at better than 3 percent. Growth during the second half of the year, at more than 4 percent, was particulary strong. Continued healthy output growth would be welcomed, particularly if accompanied by a more rapid expansion of employment. Unfortunately, as some members of this committee have noted, we have been in an output recovery but a jobs recession. My colleagues and I within the Federal Reserve System share your concern with this problem. Recent declines in initial claims for unemployment insurance and the lengthening average workweek provide reason to hope that employment growth will accelerate soon, and the unemployment rate will continue to fall.

The recovery was so slow to gain momentum, in part, because of the unusual composition of the declines in output and employment during this past recession. The overall percentage decreases in output and employment during the 1990 recession roughly match the average declines observed during other post-World War II recessions. For the industrial sector, however, the 1990 recession was the mildest downturn in more than 100 years. (Rapid growth in U.S. exports, particularly to Latin America, played an important role in moderating the downturn in manufacturing.) Research at the Federal Reserve Bank of Dallas suggests that mild downturns in industrial output are followed by weak recoveries. The weak growth in output and employment that we observed in the industrial sector during 1991 and the first half of 1992 is consistent with these findings.