Regional President Speech

6 - ?-S'-- 7~ br<~ ~ ~ ~ IT IS A PLEASU RE JOIN YOU THIS MORNING TO R THE/ECONOMIC ~ A/tid ~Y-A4P!> Mtt. ~,.,,~ ;'Y&J't:!c.t;je. ~ AND FINANCIAL SITUATION-BOTH4DOMESTIC AND INTERNATIONAL-AND TO ASSESSATHE PERIOD AHEAD. MEETINGS SUCH AS THIS ARE IMPORTANT IN BRINGI NG ABOUT THE EXCHANGE OF NT ~ . C,u'r)""4t IDEAS AND OPINIONS ABOUTAECONOMIC DEVELOPMENTS 0 PLACE EVENTS IN THEIR PROPER 1 /9:J 'U~~ i 1I>IeS$ hI.~ ,v A If) J. 0 hi,.... I.4N ,..,...." t-~,q.ti (! Il. s PERSPECTIVES,SO THAT Y~CAN MAKE YOUR BUS INESS DECISIONS IN AN ATMOSPHERE OF UNDERSTANDING . THE CHAMBER OF COMMERCE IS TO BE COMMENDED FOR PROVIDING SUCH A USE FUL FORUM. As U. S. YOU KNOW" THE ECONOMY IS RECOVERING STRONGLY FROM THE DEEPEST AND c.. Se.fI~1! MOST RECESSION SINCE THE GREAT DEPRESSION OF THE 1930's. OUR OWN c::z.. TROUBLES ARE LARGELY A PART OF ... WORLD-WIDE ECONOMIC RECESSION. MOST OF THE ()P 7?1 e.- (..VC>A.{. ... MAJOR TRADING NATIONSAHAVE SUFFERED ALONG WITH US THE SIMULTANEOUS I LLS OF SER 10 US ,-", /1'9 ~ IlIlS'" UNEMPLOYMENT AND THE RAVAGES OF INFLATION. ECONOMIC ACTIVITY IN EUROPE SAGGEDA AND THE EXTREMELY SERI OUS NATURE OF THE WORLD-WIDE INFLATION PROBLEM DURING THIS PERIOD IS ILLUSTRATED IN THE CASE OF WEST GERMANY" WHERE EVEN THAT STRONG ECONOMY iO EXPERIENCED A PEAK INFLATION RATE OF ABOUT PER CENT/AT ONE POINT. INFLATION IN FRANCE ROSE TO A RATE AB OVE 15 PER CEN~AND PRICE INCREASES IN GREAT BRI TAIN AND IN JAPAN REACHED ANNUAL RATES OF 35 PER CENT AT TIMES DURING THE WORST OF U.S. THE INFLATIONARY PERIOD. IN A REAL SENSE" THEN" THE PROBLEMS OF THE I ;"'ca hAlla- h.. I ECONOMY WHI CH WE~WR ESTLED WITHjWEREAEXPERIENCED IN NATIONS ALL OVER THE WORLD. -2­ US~HETHER A RELATED INTERNATIONAL SITUATION IMPORTANT TO ALL OF yw OR NOT WE . _J lue hHvt!" £j(Pe/llel'J<:' __ DEAL DIRECTLY IN INTERNATIONAL MARKETS~S THE HI GH DEGREE OF FLUCTUATIONAIN THE /ic-roA.5 ~"t- hAve.. (!ollJr~")c....~ T. '/ I VALUE OF THE DOLLAR, AMONG THE SIGNIFICANT ~ THE DOLLAR'S VARIABILI TY ARE THES E, 1.1wORLD-WIDE ECONOMIC PROBLEMy.:-;,7RTl CULARLY THE STUBBORN I NFLATION EXPERIENCED BY MOST OF THE MAJOR INDUSTRIAL NATIONS, 2, THE GENERALLY UNFAVORABLE BALANCE IN THE UNITED STATES ' INTERNATIONAL PAYMENTS, DOLLA~/ONE ~ aeNt~AL 3, Two DEYALUATIONS OF THE T' IN 1971 AN ANOTHER IN 1Y73'A fJle U It-I m .."r_ J9 ~rW-"'t!"'" ,#II-I) 4. A FAILURE OF THE SYSTEM OF FIXED EXCHANGE RATES WHICH HAD BEEN MAINTAINED A lJ. p ::::-t \­ ~~~~~T..~ST OF THE POST-WORLD liAR II PER IODLUJ~~~L;~ 1970's, U'E". 7A:i WHEN~FLOATING EXCHANGE RATE REPLACED ~.. ~ ~ ~~ -3­ IN BRI EF; THE IMBALANCE THAT DEV7E"L OPED UNDER THE FIXED EXCHANGE SYSTEM­ . ~r /'1103 - U.S. CAPPED BY THE ENERGY CR ISE~AGGRAVATED THE PROBLEM OF BALANCE OF PAYMENTS DEFICITS WHICH HAD BEEN OCCURRING SINCE THE EARLY 1950's. IN THE MID-1~60 's! u· 5, . EVE N THE TRADE SURPLUS BEGAN TO DWINDLE UNTIL IT VANISHED TRADITION~RCHAND ISE U.S. INTO DEFICIT IN 1Y71. FOREIGN EXCHANGE CRISES AND ASSAULTS ON GOLD RESERVES FOLLOWEo/LEADING TO A U.S. DECIS ION TO NO LONGER EXCHANGE GOLD FOR DOLLARS AT ANY PRICE/ANr/TO THE COLLAPSE OF THE EXISTING FIXED EXCHANGE RATE SYSTEM, THE FIRST DEVALUATION FOLLOWED LATE IN 1971; BUT BECAUSE THE BASIC ECONOMIC FORCES 7/:.L; WERE NOT PERM ITTED TO CORRECT~PREVAILING IMBALANCESI'ANOTHER DEVALUATION FOLLOWED IN 1973, FROM ALL THIS TU MOIL; FLEXIBILITY IN EXCHANGE RATES EMERGED ...a_•• Q""'.I;- .-a....ay~. ~~~ ~~~R . ;;;: ~~:...- WITH THESE ADJUS TMENTS; THE STAGE WAS SET FOR THE DOLLAR TO~EVLECT THE PER­ cttiR. FOR~CE OF DOMESTIC ECONOMY, THE DOLLAR; IN ADDITION TO ACCOMMODATING THE STRON~~;MIC REC OVERY OF THE PAST YEARIALSO HAS STRENGTHENED AGAI NST FOREIGN CURRENCIES IN THE AGGREGATE. IN FACT; DURING THE PAST YEAR; THE DOLLAR -n• AI.l.. 0 .4­ 14 HAS INCREASED ROUGHLY PER CENT IN RELAT ION TOAFOREIGN CURRENCIES; THEREBY RE­ COVERING MUCH OF ITS EARLIER LOSSES "'@" IIf~T THESE CORRENCIES . FURTHERMORE; A SUBSTANTIAL REDUCTION IN THE RATE OF DOMESTIC INFLATION HA BEEN ACHIEVED. As A RESULT) THE DOLLAR AGAIN IS A HIGHLY RESPECTED CURRENCY BOTH INTERNATIONALLY AND DOMEST ICALLY. -4­ AT PRESENT~ WE ARE IN THE FORTUNATE POS ITION OF HAVING HAD RELATIVELY STABLE FINANCIAL MARKETS AND A MORE STABLE DOLLAR FOR SEVERAL MONTHS . THERE HAS BEEN ENOUGH LIQUIDITY IN THE ECO~OMY TO FINANCE THE HEAVY DEMANDS OF THE TREASURY a.ntt-e. SA""e -;; e- »'J DURI NG THE PAST YEAR AND ITO FINANCE THE RECOVERY IN OTHER SECTORS OF THE ECONOMY. ~&U"t- . " THIS LIQUIDITY HAS BEEN MAINTAINED} DESPITE CONSIDERABLE CONTRACTION~NTILARECENT~ IN THE GROWTH RATE S OF THE MONEY SUPP LY AS MEASU RED BY CURRENCY AND DEMAND DEPOSITS- f/<?uJtvtlt /'JI ..... ( W\' pIli S WH ICH WE CALL MI' ~I F ~~EASURED BY(\TIME AND SAVINGS DEPOSITSJ EXCLUSIVE OF LARGE . ~~ CD'SJ/V'IONEY SUPPLY GROWTH RATES HAVE BEEN RELATIVELY HIGH FOR SOME TIME. THERE ARE SEVERAL REASONS WHY THE RECOVERY HAS BEEN FINANCED SO WELLJ DESPITE rite ""onley S4 ~p '., A-.J mt?.. su,q,tJ by ~ , THE CONTRACTI ON I N THE GROWTH RATES OFl\eURRiW'1'( ,'I'll) 15IEIRulrsm T>EPIIS I~ • FIRST IT J SHOU LD BE POINTED OUT THAT DEMAND FOR BUSINESS LOANS HAS BEEN QUITE WEAK THROUGHOUT THE RECOVERY TO DATE. THUS J MANY OF THE FUNDS THAT NORMALLY WO ULD HAVE BEEN USED FOR FINANCING BUS INESS/AS IN PREVIOUS RECOVERIES/WERE AVAILABLE DURING THIS RECOVERY FOR FINANCING OTHER NEEDS SUCH AS TREASURY BORROWINGS. SECOND} WITH THE INCREAS ING New .(t ~PA,JdQd. Sl..fcA NOW USE OF~~ PAYMENT DEVICES~AS ACCOUNTS) TELEPHONE TRANSFERS~ OV~RDRAFT E/"t*"f'Ao-..·... r:..."'~.) ilLA"'(-.~ ~ PRIVILE GES} ~FTSJ AND CREDIT CARDSt'DEMAND DEPOSIT ACCOUNTS !~ErUSED MUCH MORE INTENSIVELY-MEANING THAT THE VELOC ITY OF CIRCULATION OF MONEYADEFINED IN THIS CON­ A h'~e.A. L~ve( CI F' eeONCPf it.. TEXT. INCREASES . IN SHORTJ FEWER DOLLARS CAN FINA~ ACTI VITY. -5­ r---'1("~ IN THIS ENVIRONMENT OF DIMI NISHED INFLAT,ION ANDlSTRON~CONOMIC RECOVERY IN I !l PROGRESS DOMESTICALLY THE UNITED STATES IN AN EXCELLENT POSITION TO J BENEFIT IN THE YEAR AHEAD FROM BOTH OUR STRENGTHENED INTERNATIONAL POSITION AND FROM E POSSIBLY FORTUITOUS TIMING OF THE DEVELOPING WORLD-WIDE ECONOMIC RECOVER~ EXPORT DEMAND FOR THE AGRICULTURAL PRODUCTS OF OUR AREA SHOULD REMAIN REAS ONAB LY STRONG ABSENT ANY ADDITIONAL GOVERNMENTAL INTERVENTION-AND COULD J of( i'..e~1 t:)&)ecL STRENGTHEN IF PRESENT RESTRICTIONS ARE REDUCE~ RESURGENT WORLD ECONOMIC ACTIVITY .Ir.~~ WILL UNDOUBTEDLY OPEN OR REOPEN MAR KETS FOR CERTAIN CAPITAL GOODSpFARM EQUI PMENT AND AIRCRAFT'7 FOR EXAMPL]lIN WICH WE ARE INTERESTED IN THIS AREA. -6­ VALUE OF ANY CURRENCY DEPENDS\ON WHAT IT WILL BUY dl'Ree'1-ll1 IN ITS HOME COUNTRY. ITS PURCHASI NG POWER~RELATED TO THE PRODUCTIVE CAPAC ITY AND EFFICIENCY OF THAT NATI ON AND TO THE RELATIVE PRI CE LEVEL OF GOODS AND SERVICES THERE . THUS~ THE RATE OF PRICE INFLATION-THE RATE AT WHICH THE CURRENCY LOSES ITS REAL VALUE-PLAYS A KEY ROLE IN DETERMI NING THE STABILITY OF ~ Cl; CURRENCY IN INTERNATIONAL TRADE. WHAT~ THEN~ HAS C SE TH~,~9~L_LA_R'S..l-RE.SURGENCE IN I NTE~~!ONA~l.! I, '"r ~~q.,........J iJI.... ~ ~ ~ ~ ~ ~ FINANCIAL MARKE TS ? ~TWO MAJOR DEVELOPMENTS: ~ - THE ECONOMIC RECOVERY IN THIS COUNTRY IS WEL~ Uf'iDER WAY AND~ ,I N FACT~ 4r:AL~~~ ~!URTHER ADVANCED IN THE RECOVERY CYCLE THANI\.s1ihFtIiT OTHER NATI ONS . ~ PERHAPS MO RE IMPORTANTLY~ THE U.S. INFLATION RATE HAS MODERATED SIGN I­ FICANTLY IN COMPARISON WITH THE RATES IN SOME OF OUR I NTERNATIONAL TRADING PARTNERS-PARTI CULARLY BRITAINJ FRANCE~ ITALY~ AND JAPAN­ ~ ALTHOUGH~ DOMESTIC INFLATION RATE STILL IS UNACCEPTABLY HIGH. -7- ~';1 ~~~ ~ 4t ~ 1;:14. ~ kJ aI ~ &:;;! 4 4 !~:'S.~IC ES,o;%8M;:l.·~ ;'~~aJ . .qE LITTLE MORE THAN A YEAR AGO} OUR ECONOMY WAS BOTTOMING OUT I PRODUCTION OF GOODS AND SERVICES-AS MEASURED BY REAL AND NOMINAL GNP-WAS DECLINING . UNEMPLOYMENT HAD REACHED A LEVEL OF NEARLY 9 PER CENT. INFLATION RATES REMAINED UNUSUALLY HIGH} DESPITE THE SHARP RECESS ION . INTEREST RATES} ALTHOUGH DOWN 1974, FROM THE VERY HIGH LEVELS OF REMAINED HIG;!PARTICULARLY FOR LONG-TERM FINANCING. QUART~R YEAR-/~~~-;I THE ECONOMY TURNED AROUND SHARPLY DURING THE SECOND OF LAST '/X:A.. ~,}1- / .... A REVERSAL WHICH HAS CONTINUED UNABATED. g JilS IS CONFIRMED By1RECENT FIRST QUARTER GNP DATA-SHOWING GROWTH AT A • - PER CENT ANNUAL RATE-AS WELL AS BY A NUMBER OF OTHER SPECIFIC INDICATORS OF ECONOMIC ACTIVITY. FOR EXAMPLE} INDUSTRY 12 Y~W PRODUCTION HAS RI SEN FOR CONSECUTIVE MONTHS AND, AS FROM DATA RELEASED 11 1975 LAST WEEK} WAS PER CENT ABOVE THE APRI L LOW POINT. HOUSING STARTS IN 1.4 THE FIRST QUARTER ROSE SHARPLY} AND} AT AN ANNUAL RATE OF MILLION UNITS} WERE ABOUT 50 PER CENT ABOVE THE EXTREMELY DEPRESSED LEVELS OF A YEAR EARLIER. -8­ REFLECTING THE CONTINUED STRENGTH FROM THE CONSUMER SECTOR} RETAIL SALES IN THE FIRST QUARTER AGAIN ROSE STRONGLY} WITH AUTO SALES SHOWING ESPECIALLY GOOD GAINS. THE EMPLOYMENT PICTURE IN APRIL SHOWED A LEVELING IN THE UNEMPLOYMENT RATE-AT 7.5 PER CENT-BUT TOTAL EMPLOYMENT CONTINUED TO ~TER AL E HIGHS. ~.~ tf(~,., ~. 1.2 EMPLOYMENT~ROSE NEARLY MILLION PERSONS IN TH{ FIRST QUARTE DURING THE SAME PERIOD) BOTH THE CONSUMER PRICE INDEX AND WHOLESALE P. CE INDEX HAVE CONTINUED TO REFLECT THE MODERATING PACE OF PRICE INF TION . -9­ IN MANY RESPECTS~ THE GOOD ECONOMIC NEWS FROM THROUGHOUT THE NAT ION IN RECENT MONTHS HAS BEEN EQUALED OR EXCEEDED IN OUR OWN TENTH FEDERAL RESERVE DISTRICT. THE AREA SE RV ED BY THE KANS AS CITY FEDE RAL RES ERVE BANK STRETCHES FROM WESTERN MISSOURI THROUGH KANSAS~ NEBRASKA~ OKLAHOMA~ COLORADO~ WYOMING~ AND VAST~ DIVERSE~ WHfcH~~"Vt;;:~ NEW MEXICO. THIS RE GION IS A AND PRODUCTIVE AREA ~EVERE MANY OF TH6 EFF ECTS OF THE RECENT RECESS IO N. IT IS AN AREA WHICH IS POSITIONED NOW TO TAKE FULL ADVANTAGE OF THE ECONOMIC RECOVERY. FOR EXAMPLE~ EMPLOYMENT DATA FROM STATES IN OUR DISTRICT CONTINUE TO BE BETTER THAN FOR THE NATION AS A WHOLE. CONSTRUCTION CONTRACTS AND HOUSING PE RM ITS IN THIS REGION ARE UP SHARPLY OVER 1975~ AND DISTRICT GROWTH IN BOTH CATEGORIES IS MUCH BETTER ~SHOULD THAN IN THE NATI ON AS A WHOLE. ALSO POINT OUT THAT PERSONAL INCOME IN 12 6.8 DISTRICT STATES INCREASED AT A PER CENT RATE DURING 1975~ EXCEEDING THE PER CENT INCREASE IN THE CONSUMER PR ICE INDEX, BUT MORE IMPORTANT THAN THESE SHORT-TERM DEVELOPMENT~ I BELIEVE~ IS THE FACT THAT THIS HEARTLAND OF OUR NAT ION WIL L BENEFIT IN THE INCRE ASI NG DE FO R THE AGRICULTURA L PR ODUC ­ FUTURE~FROM ~ND ~~ . TION AND ENERGY RESOURCElVLWE HAVE IN SUCH AB NDANCE. I AM CONFIDENT THAT THE PRODUCTS AND RESOURCES OF OUR THE KNOWLED GE AND ENE RGY REG ION~ OF OUR ARE GO ING TO NATION'S FUTU RE ECONOMIC PEOPLE~ PROGRESS . -10­ DESPITE THESE GOOD ECONOMIC PROSPECTS~ I AM STILL CONCERNED ABOUT THE .. NATIONAL ECONOMY. UNEMPLOYMENT REMAINS TOO HI GH. AND~ WITHOUT SOME EVIDENCE OF FURTHE R STRENGTH FROM EITHER INVENTORY CAPI TAL OR MULTI­ INVESTMENT~ OUTLAYS~ FAMILY HOUSING IN THE MONTHS SIGNIFICANT ADDI TIONAL REDUCTI ONS IN AHEAD~ UNEMPLOYMENT WILL BE HARD TO COME BY . ADDI TIONALLY~ THE FAVORABLE PERFORMANCE OF THE PRICE INDEXES HAS RESULTED LARGELY FROM DECLINES IN FOOD AND ENERGY PR ICES~ DECLINES NOT LIKELY TO CONTINUE. IN FACT~ UPWARD ADJWSTMENTS IN WHOLESALE FARM . ~~~ ~ PRICES ALREADY~AVE BEEN NOTED~ AND II IS~ THAT CAPACITY LI MITS I~BASIC .. ~Q4 ,4&J6 1~fQ~t~ MATERIAL~MAY SOON IMPACT PRICES OF COMMODI TI ES. THUS~ THE DANGER OF INFLATION IS STILL WITH US~ AS SERVI CE AND INDUSTRIAL COSTS CO~~~.JO~C~~.~~~R~~ SHARP RATES. THE ECONOMIC PROBLEM FOR POLICYMAKE~C01TINUES TO BE THAT OF SUSTAINING THE RECOVE RY IN ORDE R TO PUT RESOURCES BACK TO WORK'~WHILE AVOIDING A REKINDLING OF INFLATIONARY PRESSURES, -11­ WE IN THE FEDERAL RESERVE ARE DEDICATED TO THE TASK OF PROMOTING THE '1'2: ECONOM I C RE COVE!ll- NOW ~ OUR POll CY OBJ ECTI VE/I N THE PER I OD AHEAD/ I S PROV~~~~~R~~ ~~THE TO B NKING SYSTEM IN SUCH A WAY AS TO STIMULATE BUSINESS ACTIVITY WITHOUT REKINDLING INFLATION. MORE SPECIFICALLY~ WE HAVE BEEN SEEKING TO ,ACHIEVE MODERATE GROWTH RATES IN VARIOUS MEASURES OF THE MONEY SUCH AS SUPPLY~ Ml M2. AND HOW~S APPARENT THAT AS WE MOVE THROUGH THE R~~~~E AND EXPERIENCE THE INCREASE IN THE DEMANDS FOR ONE COULDAEXPEC FUNDS~ ~~ ~ /( INTEREST INCREASE IN THE PERIOD AHEAD. RAT~TO IN SUMMARY~ I AM OPTIMISTIC ABOUT THE FUTURE. THE ECONOMY IS HEADED IN THE RIGHT AND ALL INDICATIONS POINT TOWARD CONTINUED IMPROVEMENT IN DIRECTION~ ECONOMIC ACTIVITY. THE MAJOR DANGER NOW IS THE REEMERGENCE OF ACCELERATING INFLATION~ES. MANY COSTS AGAIN ARE INCREASING MORE RA PIDLY THAN PRODUCTIVITY~ AND IT THAT FOOD AND ENERGY CONTINUE TO MODE RATE THE ISA~LIKELY P~::LL SHARP RATES OF PRICE INCREASE SHOWING UP lNAOTHER SECTORS OF THE PRICE INDEXES. nCirt ~t!>j,/~ T IS DIFFICULT FOR MONETARY POLICY ALONE TO COPE WITH KI OFSITION ~ tAr 4,"' . o-"t COOPERATIVE FISCAL POLICIE • ~ ~, EXPERIENCE OF GREAT BRITAIN AND ITALY SHOULD PROVIDE ALL OF OTH THE PRICE LEVEL AND THE DOLLAR. STABLE DOLLAR DOMESTICALLY crL Of INTERNATIO FULLY EMPLOYED AND NONINFLATIONA EFFICIENT~

J. Roger Guffey (1976, May 24). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19760525_j_roger_guffey

@misc{wtfs_regional_speeche_19760525_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1976},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19760525_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}