Herein lies the tale of the recent long-term policy and strategy statement issued by the FOMC at the conclusion of its meetings last week. The recent pronouncements of the FOMC Many of you may have read that the FOMC did three things after its two-day meeting Tuesday and Wednesday a week ago. First, the committee issued the usual policy statement, stating that it “currently anticipates that economic conditions … are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”5 There are presently 17 participants in FOMC meetings: the 12 Federal Reserve Bank presidents and the five current governors. Ten out of the 17 people get to vote in any given year, with the governors and the Federal Reserve Bank of New York always having a vote. I voted last year, and you may recall that together with Mr. [Charles] Plosser of the Federal Reserve Bank of Philadelphia and Mr. [Narayana] Kocherlakota of the Minneapolis Fed, I resisted the notion of a need for a statement indicating that monetary accommodation be tied to a specific date, be it in mid-2013, late 2014 or any other. Instead, I feel that the key should be to calibrate monetary policy according to the state or condition of the economy.
The citizens of Texas and the Eleventh Federal Reserve District operate under the same monetary policy as do the rest of our fellow Americans. We have the same mortgage rates, pay the same rate of interest on commercial and consumer loans, and earn returns and borrow at the same interest rates as do our brethren in the rest of the country. Which raises an important question: If monetary policy is the same here as everywhere else in the United States, why does Texas outperform the rest? The answer is no doubt complicated by the fact that we are blessed with a comparatively great amount of nature’s gifts, a high concentration of military installations and other “unfair” advantages. But one cannot avoid the conclusion that one of those “unfair” advantages is that we have a Legislature, based here in Austin, that under both Democrat and Republican governors has over time crafted laws and regulations that encourage business expansion and job creation. They have conducted the fiscal affairs of the state so as to maintain confidence in the future. One might draw two lessons here: first, that Germany’s finance minister, Wolfgang Schäuble, is right when he says, “If you want more private demand, you have to take people’s angst away” by having responsible and disciplined fiscal policy;4 and second, that fiscal policy either complements monetary policy or retards its effectiveness as a propellant for job creation.