 The Federal Reserve is faced with many decisions. Some are made in Washington, where the Federal Open Market Committee meets, others are made at the Federal Reserve banks around the country. Computers help in the process, but in the end, the decisions about monetary policy, the banking system, and many other issues are made by real people. The following are a few hypothetical situations that could occur sometime in the future. The question is, what should the Fed do? Throughout the economy, prices are relatively stable. However, the price of sneakers has doubled in the past month. The reason? A worldwide shortage of rubber. What should the Fed do? The Fed should do nothing because the Fed's responsibility for price stability and the maintenance of the purchasing power of money has to do with a general level of prices, the average level of prices. And we should never confuse that with relative prices, or prices of specific things relative to other things. It's extremely important that we allow relative price changes to occur. We have no power or no intention to try to control relative price changes. And actually, the rise in the cost of rubber reflected in the increased price of sneakers is for people who will stop buying sneakers, which is what you want them to do until the supply of rubber and the sneakers recoup. Prices are going up on everything. CDs up 12% in the past year. Food up 14%. Gasoline up 8%. Overall inflation is at 9% and seems to be rising. What should the Fed do? If it's 9% already, you probably have been sitting on your fanny too long. You should have done something sooner. But if it's 9% rising in the context of the United States and given our history and the importance of the dollar, the indications are, I don't know what else is going on in your scenario, but you would want to restrict the growth in the money supply. That implies that people are spending money on things faster than we're able to produce things. That spending needs to be slowed down to match the capacity of the economy to produce. And the way the Fed would do that would be to make the money supply grow a little bit slower over time so that people's balance of money and goods will be corrected, and that would happen over time. The economy is in the dumps, growing less than 1% a year and seems on the verge of a recession. At the same time, inflation is extremely low. Overall prices are rising at less than 2% a year. What should the Fed do? The indications are, the Federal Reserve could relax a bit and perhaps the money supply might go up a little more rapidly than normally and certainly you would expect relatively low interest rates in that scenario. Low interest rates would encourage some people to borrow, build some more houses, go out and buy some more machinery, build some plants, maybe pep up the economy a little bit, make them more efficient. Inflation is on the rise. Prices are going up at an annual rate of 7%. At the same time, unemployment is also high. 8% of Americans are out of work. High inflation and high unemployment. What should the Fed do? Well, that situation is a Federal Reserve official's nightmare because of both high inflation and high unemployment. But I think on the basis of both practical experience and theory, the thing for the Federal Reserve to do is to bring the rate of inflation down by adopting a more restrictive policy, which would mean in the short run at least that money growth would slow and short-term interest rates would probably rise. But if we succeeded in reducing inflation, I think improved economic performance would follow and as that occurred, of course, the unemployment rate would come down. Citizens are protesting against Main Street Bank and Trust. They say the bank is closing too many branches and not lending in certain areas of town. What should the Fed do? Very much in the Fed tradition in this area is to be a mediator. The Fed has access to a great deal of information about potential solutions, about models that can be invoked to resolve the difficulty. So we will bring that information before the banks. The banks have to be the change agents here. Not the Fed, not the community groups certainly. The banks have to. The Fed's obligation is to provide that information to the banks. Broad Street Bank is in serious financial trouble. The bank has made hundreds of loans that may not be paid back. Bank examiners from the Federal Reserve discover the problems during their annual inspection. What should the Fed do? As an examiner, it would be my responsibility to bring problem credits to the attention of the bank's management if problems are not properly dealt with. It could result into financial strain on the bank. It may ultimately result in closure of the bank. But we really don't want to get to that point where you actually shut down and close the bank. Because the banks are very valuable to the community. First County Bank is about to go broke. The tiny bank has already borrowed millions from the Federal Reserve. Now it's asking for more. If the Fed says no, the bank will shut its doors. What should the Fed do? This institution isn't healthy. It's failing. It's insolvent. And so it seems to me that it's time to stop lending and if the bank closes, it closes. We should bear in mind that because of deposit insurance, of course most, if not all, depositors will be protected. And so they won't lose any money at all. And there's always the possibility that some other organization will come along and purchase this bank. But it seems to me that in any event we have fulfilled our role and there's nothing further to be gained by extending additional credit to the institution. A tornado has hit the town of Great Plains. The entire county is without power. Many local businesses won't accept checks or credit cards. And local banks are running short of cash. What should the Fed do? The Fed can and has on many occasions made arrangements to make that cash available at night and on weekends. And we will send it out and make sure that the public has plenty of cash to do business with. And we will do whatever we have to do to do that. Well the Fed would immediately get that cash there as fast as possible. That's an unambiguous response. No reserve bank would think of doing anything other than to supply that cash. Those are just some of the decisions the Fed has to make. Some are routine, others extremely complex. And there's not always one answer. Making policy means making choices. Choices that can often affect the entire national economy and the standard of living of all of us.