Chairman D'Amato, Members of the Committee, I am pleased to appear before you today as one of President Clinton's nominees to serve on the Board of Governors of the Federal Reserve System. I am honored that the President has nominated me to serve as a Member of the Board
I am mindful that the decisions of the Federal Reserve influence the economic well-being of all Americans through their impact on output growth, job creation, inflation, interest rates, and the value of the dollar. The Fed also has important supervisory and regulatory responsibilities for the safety and soundness of the banking system, for the integrity of the payments mechanism, and for the enforcement of the fair lending and other consumer laws, including the Community Reinvestment Act. Finally, the Federal Reserve Board has general oversight for the functioning of the 12 Federal Reserve Banks.
If I am confirmed, I pledge to work with other Members of the Board to craft a monetary policy geared toward stable prices, maximum employment, and moderate long-term interest rates, the goals established in the Federal Reserve Act, and to faithfully execute the regulatory enforcement and oversight responsibilities entrusted by Congress to the Federal Reserve Board. These are challenging and important tasks and I will devote my full energies to carrying out these duties to the best of my ability.
Before commenting on some of the issues confronting the Federal Reserve, let me briefly describe my background and qualifications for the position as Governor. I was born and raised in a moderate income neighborhood of Washington, D.C. I spent 12 years going to school in Cambridge, Massachusetts. My College and graduate education were received at Harvard University. I received my undergraduate degree in economics in 1973, my law degree in 1979 and my Ph.D. in economics in 1981. I also studied for one year at Cambridge University in England.
My interest in the Federal Reserve is long-standing. It dates from the late 1960's. At that time, President Lyndon Johnson nominated Andrew Brimmer to be the first black Governor of the Federal Reserve System. As my interest in economics was emerging then, the nomination of Dr. Brimmer caught my attention and captured my imagination. I am therefore particularly pleased to follow Andrew Brimmer and Emmett Rice as the third black nominee for the Board of Governors.
I started my professional career as a securities and banking lawyer, representing major investment banks in their securities underwriting and merger activities, and commercial banks in their syndicated loan origination and project financing. In 1984, I left the law and went to McKinsey & Company as a consultant to banks and other financial institutions. As a consultant, I have worked on a broad range of strategic and operational issues relating to financial institutions.
Furthermore, since 1991 I have served as the Director of Research and Information Systems for McKinsey. In that role, I am responsible for nearly 400 professionals and have been immersed in the problems of attracting and developing a research staff similar to the staff in the Federal Reserve System. I have also had responsibility for some of our Firm's technology investments.
I hope that my broad background and range of experiences have equipped me with the analytical tools, the general problem-solving skills and the exposure to particular problems needed to comprehend emerging trends in the domestic economy and banking industry and to help in the formulation of monetary policy, bank supervision and regulatory policies and oversight procedures for the Federal Reserve System.
Let me turn now to some of the issues confronting the Federal Reserve.
Price stability should be a central goal of monetary policy. There are many reasons for according high priority to this objective. Inflation undermines ,social equity and harmony in our diverse nation. As interest rates rise to compensate for inflation, many families will find it increasingly difficult to qualify for and service loans for homes and cars. The wages and salaries of some workers do not keep up with inflation and their standard of living falls. Inflation erodes the wealth of any small investors whose assets are denominated in fixed dollar terms. Times of inflation often become stressful to the least advantaged among us. In addition, with high and unstable inflation, managerial efforts emphasize, and corporate profits derive disproportionately from, taking advantage of rapid increases in the general level of prices rather than from producing and selling the products that consumers need. job creation eventually slows as businesses focus on the financial rather than productive aspects of their operations. Inflation creates uncertainty and distorts price signals, complicating business and household planning. Higher inflation diminishes the incentives to save and invest in productive real and financial assets and increases the incentive to invest in assets thought to be good "hedges" for inflation.
Many factors, including fiscal policy, exchange rates, external shocks and productivity shifts, affect the behavior of prices in the short run, but in the long run, inflation on a sustained basis cannot occur unless monetary policy accommodates it. The Federal Reserve controls the nation's money supply, and thus the FOMC effectively determines the level of inflation over the longer run. The Fed's responsibility is to be ever vigilant for early signs of inflation and to choose policies that are designed to maintain a noninflationary environment that allows sustainable growth and job creation.
This is a challenging task. The effect of Federal Reserve policies on the economy occurs with a substantial lag. Uncertainties concerning the strength of key economic linkages make accurate predictions difficult. Therefore, I agree with the Fed's historic approach to reduce monetary stimulus before the emergence of obvious and strong inflationary pressure. Unfortunately, the timing and appropriate amount of a change in monetary policy involve some guesswork and some risk taking.
The second objective of the Federal Reserve is to keep the economy growing as close as possible to its maximum potential output. The Federal Reserve is to seek the lowest rate of unemployment that can be achieved without risking accelerating inflation. My goal, as a Governor of the Federal Reserve Board, would be to create an environment conducive to achieving and sustaining this low level of unemployment. There are many reasons to avoid unemployment. Just as with inflation, unemployment has real human and economic costs. A rough rule of thumb is that each percentage point of unemployment, in excess of the natural rate, costs the economy about 2 percent of GDP, roughly $140 billion. The toll of high unemployment, like that of a regressive tax, falls most heavily on groups in the work force that are least able to bear the burden. There is a phrase that you may be aware of, "last hired, first fired," which describes the experience of some of our least advantaged citizens in the labor markets. Additionally, full employment gives more of our citizenry an opportunity to gain useful skills and work-related disciplines. This opportunity is lost in periods of high unemployment.
In the short run, the Federal Reserve often faces a tradeoff between the goals of low inflation and high employment. But ultimately price stability underpins sustainable output growth and job creation. A monetary policy which pushes the economy beyond its potential for the sake of current job gains is shortsighted and ultimately unfair to American workers. The recession of the early 1980's illustrates the enormous price that workers and businesses might pay to bring inflation under control after it builds up.
If I am confirmed, I will join the Federal Reserve at a time when the macroeconomic fundamentals are exceptionally sound, but there is some uncertainty as to how long this is sustainable. Underlying inflation is the lowest it has been in more than 30 years, and the unemployment rate has declined to under 5%, also the lowest in a generation. Similarly, growth in the output of goods and services over the past year has been approximately 3.5%. Many economists are searching for an explanation for this splendid performance of high employment, low inflation and rapid growth. Explanations include productivity increases spurred by technology investments, the globalization of production and deregulation in a number of industries.
Unfortunately, even in today's strong economy there are segments of society in which jobs are not plentiful, and income distribution remains skewed.
The role of a Fed Governor now, as always, is to monitor every available economic indicator in order to update and refine judgments of economic performance and to make needed policy readjustments. This is a role that requires pragmatism and balance, not adherence to an immutable set of preconceived notions. With current uncertainties, Federal Reserve Governors should be open to the possibility that underlying dynamics of the economy might be changing, but they should seek evidence for such developments and not act on the presumption of change. The evidence of basic improvements in the longer-term efficiency of the economy is suggestive now. I hope that it becomes clearer in the future.
The Federal Reserve is, and should be, an active supervisor and regulator of bank holding companies and state member banks. In this, the Federal Reserve, in cooperation with other agencies, is responsible to preserve the safety and soundness of the entire banking system for the benefit of society. We are living in an era of consolidation in the banking industry, the gradual blurring of distinctions between banks and other financial institutions, and ongoing globalization of the financial sector. The role of the Federal Reserve Governor with respect to banking supervision is to execute prudent judgments to impose regulations on banks that ensure the safety and soundness of the banking system, that mirror the operation of a well functioning market, that allow a reasonable pace of financial modernization and that assure a full range of financial services for our citizens, our communities and our businesses. The basic framework for banking regulation is set by the Congress.
We cannot and should not attempt to substitute the judgments of regulators for the judgments of individual bank management. Nor can we protect every bank from the competitive forces that are part of our free-market economy; some banks will make bad strategic decisions or have bad luck. However, the Federal Reserve must ensure that the misfortunes of individual banks do not become a contagion that spreads to the rest of the banking system. To execute the assigned role fully, Federal Reserve Governors should continue to have a voice in the current lively discussion on the pace and direction of deregulation. Similarly, the Federal Reserve should speak clearly if and when it sees trends in the banking industry that, if left unchecked, can create the risk of eroding the stability of a large number of depository institutions. Finally, the role of supervisor should be exercised so as to minimize the burden of regulation, maximize the flow of valuable information to the Federal Reserve Board and, if possible, accelerate the spread of sound practices throughout the banking industry.
I am a strong believer in the independence of the Federal Reserve. A policy regimen geared toward long-term economic health must avoid the temptation to conduct policies that overheat the economy for short-term gains. Occasionally, the FOMC will have to undertake unpopular actions in order for the economy to maintain sustainable growth. Congress wisely devised a system which enables the Federal Reserve to take the long view free from undue influence. I believe that this system best serves the interests of the American people and ultimately enhances economic performance. I also appreciate the necessity for accountability on the part of the Fed to Congress and ultimately to the American people. Appropriate reports to the Congress's oversight committees are an important part of the Federal Reserve's functioning in a democracy. Additionally, the entire Federal Reserve System must be good stewards of its resources. There should be no question that resources are used carefully. Federal Reserve independence comes with the expectation that the leaders of the System will husband its resources and be prepared to provide the proper accountings when called for. If I am confirmed, I pledge my full cooperation in this process.
In conclusion, I would like to thank you and the Committee for
considering my nomination. I would be pleased to respond to any questions you
may have.
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