The Federal Reserve’s structure is complicated, but that contributes to good policy making. Here’s why.
In late March, the Federal Open Market Committee decided to increase short-term interest rates by 0.25 percent to restrict money growth.
Later that week, while pondering the Fed’s cautious approach, I traveled to Grand Rapids, Mich., for a family funeral. Two days in this industrial area of Michigan impressed upon me how sharply economic performance can vary between regions only 400 miles apart.
The Twin Cities metro area is doing quite well. Michigan, a 70-minute flight to the east, is in the tank. People in Minnesota business and government largely are upbeat. Their colleagues in Michigan are gloomy.
How should the Fed weigh such regional differences, if at all, in shaping monetary policy? By looking at the numbers, certainly. The unemployment rate for the Grand Rapids Metropolitan Statistical Area in January was 7.4 percent. For the Twin Cities MSA, it was 4.6 percent.
But numbers are not everything, especially when they show a mixed picture, or when the national economy may be near a turning point.
This is where the 12 Fed district banks come in. They bring important nonquantitative information to FOMC meetings in two ways.
The first is through the Beige Book, a report on economic conditions of the 12 Federal Reserve districts that is compiled for each FOMC meeting. Each district submits three pages detailing miscellaneous or subjective indicators of economic conditions not contained in statistical reports.
The second is the participation of the 12 district presidents in FOMC deliberations. Only five of the 12 vote in any given year, but all participate in the “go-around” or narrative assessment of economic conditions that is the heart of FOMC meetings.
Each president brings information gleaned from contacts with businesspeople in her or his own district. Moreover, each meets at least once a month with the district’s board of directors. Chicago directors include the CEO of Land’s End Inc., a union official from Lansing, Mich., and a banker from Waverly, Iowa. Minneapolis’s directors include two small-town bankers, the managers of a Sioux Falls insurance agency and a small medical manufacturer in Sault St. Marie, Mich. Its chairwoman is the CEO of MinuteClinic, a local health-care firm.
Just how will such regional input affect decisions when the strength of the economy varies greatly across the country? It is not simply a matter of the president of the Minneapolis Fed calling for tighter money because the economy he sees is good and the Chicago Fed president wanting interest rates to stay low because parts of that district are in the doldrums. Both are sophisticated economists who know that many factors must be weighed in forming national policies. But their regional focus brings a richer, more nuanced perspective to the discussion than would be available from numbers alone.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.