Why don’t the goals of the Federal Reserve include helping a
region of the country that is in a recession?
That’s an excellent question for the Twelfth Federal Reserve District
in the year 2003. Since the onset of the most recent national recession
in the U.S. that began in March 2001, a number of regional and state
economies, including some in the Twelfth District, have experienced more
dramatic downturns than the rest of the nation. However, monetary policy
is implemented at the national level, in the nationwide financial market.
Therefore, the Federal Reserve’s policy tools are not effective
or intended to stimulate selected areas of the nation. Before I provide
more details, let’s take a closer look at what happened during
the 2001 recession.
Regional recessions in 2001
Regional recessions are not a new phenomenon—as residents of Southern
California in the early 1990s, New Englanders in the late 1980s, and
Texans in the mid-1980s can attest. The
2001 recession hit several areas of the Twelfth District especially
The San Francisco Bay Area, Oregon, and Washington, (see Chart
much more rapid payroll job losses than the nation during the 2001 recession.
The National Bureau of Economic Research (NBER) has announced that the
recession that began in March 2001 ended
in November 2001. The Bay Area, along with Oregon and Washington,
with their heavy concentrations of activity in the high-tech sector,
were hit especially hard when the dot-com bubble burst and the technology
sector took a sharp downturn. Moreover, in the 16-month period from November
2001 to March 2003, when the national economy was in a recovery, the
San Francisco Bay Area continued to experience job losses at a rapid
So, why doesn’t the Fed attempt to improve regional economic
conditions in these areas using monetary policy?
The short answer is that monetary policy in the United States is a “blunt
instrument” that can not be selectively used to stimulate the economies
of particular regions or industries. The Fed’s monetary policy
tools, primarily open market operations, are effective nationally because
in today’s environment financial markets are national—and
sometimes international—in scope.
The Federal Reserve Bank of San Francisco’s publication, U.S.
Monetary Policy: An Introduction, provides more details about open market
operations and insight into why
the Fed’s goals don’t include
helping regions of the country that are suffering from either a regional
recession or that suffer the most in a national
Often, some state or region is going through a recession of its own
while the national economy is humming along. But the Fed can't concentrate
its efforts to expand the weak region for two reasons:
First, monetary policy works through credit markets, and
since credit markets are linked nationally, the Fed simply has no way
stimulus to any
particular part of the country that needs help.
Second, if the Fed stimulated
whenever any state had economic hard times, it would be stimulating
much of the time, and this would result in excessive
for the overall country and higher inflation.
But this focus on
the well-being of the national economy doesn't mean that the Fed
ignores regional economic conditions. Extensive
regional data and
anecdotal information are used, along with statistics that directly
in regional economies, to fit together a picture of the national
economy's performance. This is one advantage to having regional
Federal Reserve Bank
Presidents sit on the FOMC: They are in close contact with economic
developments in their regions of the country.
As noted in U.S. Monetary Policy: An Introduction, each of the 12 Federal
Reserve Banks has a staff of regional economists who carefully analyze
economic conditions in their Districts as part of the briefing given to their
Reserve Bank presidents before they attend federal open market committee (FOMC)
Much of the research and analysis of the Reserve Bank staff is available
to the public through Bank publications and Websites. For example,
sources of information on the regional economy in the nine states served by
the Federal Reserve Bank of San Francisco—Alaska, Arizona, California,
Hawaii, Idaho, Nevada, Oregon, Utah, and Washington—may be found in:
Western Economic Developments: Analysis of current economic
conditions in Twelfth District states; published quarterly. http://www.frbsf.org/publications/economics/wed/index.html
Twelfth District Beige Book Summary: Summary of regional
economic conditions in the 12th District that is published about two
weeks before each of the
eight annual meetings. http://www.federalreserve.gov/FOMC/BeigeBook/2003/
FRBSF Economic Letter: A short essay on a current
regional subjects. Economic Letters are published most weeks of the
Cogley, Timothy and Desiree Schaan. 1994. "Should the Central Bank
Be Responsible for Regional Goals?" Federal Reserve Bank of San
Francisco, 1994-25, July 15, 1994.
Laderman, Liz. “Increased Stability in Twelfth District Employment
Growth.” Economic Letter, Federal Reserve Bank of San Francisco,
2003-02; January 31, 2003. http://www.frbsf.org/publications/economics/letter/2003/el2003-02.html
Lansing, Kevin J. “Growth in the Post-Bubble
Letter, Federal Reserve Bank of San Francisco, 2003-17; June 20,
Western Economic Developments, Federal Reserve Bank of San Francisco,
June 2003. http://www.frbsf.org/publications/economics/wed/2003/wed0306bk.pdf