Regional President Speech

NOTE: Mr. Guffey used same speech for Puerto Rico as he did for Wichita Rotary on Feb. 28, 1983. (With the exception of cover sheet and first page) This copy is marked speech after Wichita as Mr. Guffey used (and before he marked for Puerto Rico) SUSTAINING ECONOMIC RECOVERY: REMOVING THE OBSTACLES Remarks by Roger Guffey President, Federal Reserve Bank of Kansas City Harvard Graduate ·School of Business Administration 68th AMP 6th Continuing Education and Reunion Meeting May 5-8, 1983 Dorado, Puerto Rico Against the backdrop of historically high inflation and a stubborn recession in these recent months, we have seen quite a varied me nu of economic developments. On the one hand there have been continuing declines in production and high levels of unemgloyment, which contributed to a 2 percent decline in GNP for last year. On the other hand, we've seen vigorous upsurges in stock and bond markets, and a major lessening of inflationary pressures. (Good News - Bad News) To be sure, the economic headlines in 1982 made disappointing reading, tracing as they did the economy's dismal performance. As you know, high interest rates brought on by years of inflation affected many key sectors of the economy. The bellwether housing and auto industries declined f urther, and business capital spending was extremely weak as the second recession in three years rippled through the economy. -2­ The human dimensions of the business downturn were reflected in the rise in unemployment throughout the year. Even 7h /1 {,,' (// l. t//'" ,,{~ .f" 4 (, .;> i ¥ / / ;. ~ __ i ,,{, communities like Wichit~~ tra~tions of stable d.iverse - 'I!.)c:. . r;:~ .' , '/.<" <c' I .) economies, were not spared. l'le were paying a high f~ to wring inflation from the economy. Yet, in the face of such a deep recession, some long-awaited t,N f~ 4 ·"1 • .J.~, indications of economic recovery have recently become appar~t. Among these welcome signs are the so-called leading economic ~--- indicat6rs--including the stock market--which have been positive nearly every month since mid-1982. Underlying trends suggested by these indicators were confirmed when declining inflation, together with weakness i~.-e.usi.!'_~:?:s.._ as.ii.yi~y, prompted a general decline in interest rates during the second half of 1982. .b X;L .o1 O Declininq~rates, in turn, have encouraged a rebound in housing ~~~f and auto sales,(two of the most interest-sensitive the economy. January housing starts were up 36 per cent and auto sales have remained fairly strong. Furthermore, industrial production grew last month, retail sales were positive, stronql~ ./let" , -;;r­ and the unemployment rat!:/! declined. Although these favorable economic developments certainly brighten the prosoe cts for business recovery, many peop le are understLlndably~qun-shy n-o:w'. ~any question the e conomy's ability (L. to sus tain r e covery throuah 198 3 and into future years. Give n ~ the critical imoortance of su s tained economlC growth to the nation, I ~t to discuss this question with you briefly today from two . Fir st, I want to considc:~r the near-t(~rm outlook, / , . 9~rspectives -3­ and second, I want to for sustaining U.S. examine~prospects 17'..f0 5 economic health over the longer term. - ~U!--7/';' ffi In assessing the economy's staying power in 1983, I believe one of the most encouraging trends-is the substantial progress - ----'.-- ---------- --. that has been made in restraining inflation. As you know, the C'~~~ --;;7u~-~ -~ M -: .. 3.9 per cent rise in the CPI in 1982 was {he smallest annual ~ increase in a decade. In January, the producer price index - - -- actually declined, and in real terms, the price of oil--a most '. u.J..,.#" important economic declining. ingredient--ha~been These welcome tre nds on the price front also are having a -"-~__t± "~~_'''''''''''~,. favorable effect on cost structures throughout the eco nomy. We have seen lately that a significant byproduct of slower inflation- is a slower rise in labor costs and an increase In labor productivity. These price and productivity trends, in my judgement, are helPin~establish thyt~a~~~«;:;{f98;~~nomy. a heal So, too, is the generally lower level of interest rates. Reflecting these lower rates~nterest-sensitive industries like homebuilding and automobiles and other durable goods, are likely to show additional gains this year. ~Hth increasing sales'; businesse s are like~y to rebui ld inventories ';spurring production leve l s !.., ~ ,"" (I. . /,' /. ,...... I ' an~emploYment. Additional stimulus also will t±ow from Fede ral government spendinq, particularly for defense goods. While these factors certainly will work in favor o f sustaining the economic r ecovery in 1983, there are indeed, some f' / t'( j ," . ,1,_ /'". ,, ' que stion marks. Some obse rver s sugqest that continued hiqh -4­ unemployment and weak personal income pros?ects cloud the outlook ui;:;:-i:l;--- "--------.. 0- ~ -.-.~ for~sustained recovery. IAagr~hat consumer spending may not be overly strong under these circumstances. Another concern is that business capital investment may continue to be weak and provide little economic stimulus in 1983. .C. , .a/' 1?~ exports~~he Another problem area for 1983 is). U. S. worldwide rece ssion and a strong dollar resulted in a major deterioration i;.­ ,I'1/CP--.~/ t.. in the nation's &eSt eX.£..Qx.ts~during 1982. Given the current weakne;s in foreign economies, and the still high value of the dOllar;l~xport demand is not likely to turn around quickly. Many of you undoubtedly have been concerned about the health of the int_ e.......~. n~tA~~alfina-ncial system. Widespread public .' " " .' . attention has been focused in recent months on the deteriorating financial positions of many international borrowers--particularly ~~; developinq countries. Slowinq worldwide economic growth left ' ;= many of these borrowers exposed/and raised questions about their ability to repay/debt. Despite the hiqh visibility of this problem, I belie ve thut official e fforts now under way are servlng to ease this problem considerably. Through responsible cooperation with the International Monetary Fund, a number of countries are taking/ necessary steps to put their affairs in order. As a res ult, major international lenders are developing confidence that orderly economic adjustments will occur. Moreover, lower worldwide interest rat es and improvlnq economic conditions should e ase pressures on both lenders and -5­ ./' . y" r";'" /'. v ·. ........ "·L:'-1. . uA.~.e..l..-" /' / /i ' I borrowers. In my judgement, the now,A0n stream are programs~ likely to bring needed confidence to international financial -0'ld/~*- ~-' affn;ro and diminish the effects of international financial o { ... ' (.~ problems on domestic economy 1n 1983. '~ A key ingredient in the 1983 outlook and for the sustainability of economic recovery through the year is Federal Reserve monetary What are the Federal Reserve's ~olicy. intentions in 1983? Should the public be concerned that--as one former Fed chairman put it--the Federal Reserve will take away the punch bowl just as the party really gets going? <' As background for understanding the Federal Reserve's policy intentions, you should know that the Federal Open Market Committee looks for about 4 cent real economic growth this year. ~er Moreover, we believe, as a that the 1983 inflation rate qr­o~, ... ~- will be below the 5.6 per cent rate in the GNP deflator anticipated 7 by the Administration. The Federal Reserve's intentions for 1983 were set forth in mid-February when Paul Volcker met with the Congress to discuss the FOMC's agreed-upon targets for money and growth. He cr~dit .--rI ­ :(~ reaffirmed the Federal Reserve's objectives~Ato maintain .progre:.:' toward price stability while providing the money and liquidity necessary to support continued economic growth. To achieve the objective of moderate .noninflationary expansion in 1983, it is clear that the Federal Reserve be ~ bound by r i n id rules of mo n etary growth, hut l-a thl'r must jJll l~SU _ t' I " Such a po 1 i cy "! i.ll ~ )(Jmi t us to -6­ look beyond the varied impact of financial deregulation on money growth, for example~and to deal more realistically with unusual or unanticipated financial developments. The 1983 monetary target ranges established in connection with such a flexible policy are in some cases wider and~iqher than in 1982 ~4eb5, ~articularly for the widely followed and distortion-prone aggregrtte,-M-l. -, In my view, the Federal Reserve's intended approach to monetary policy in 1983 will help to insure that an appropriate level of money 'and credit will be available to sup~ort moderate noninflationar~~ in business activity. On balance, then, after weighing the most significant economi~_ya~iaQJ.~~s, I believe that the economy's forward momentum can and will be sustained through 1983. Against the background of these optimistic assumptions for - ---- ---- -- _.­ .. 198~_, I want to turn now to consider the economic outlook over the longer-term ~-peGt·i-v<c. What can be done to insure that the current favorable developments in the economy can be translated into sustainable economic performance over the longer run? I believe the answer to that question miqht read like this: __ The chances for s-us . t ... ain .- e .- d exp ... a . n . - si-o. n are certainly good ". i .. f . we ::­ remember the painful lessons ~f inflation and also addre ss the 7~_~s. m jor obstacle to long-term economic proqrcst the m ssive def icit oositi on for years to come in the federal qovernment's budqet. I am convinced that we have the opportunity now to the ~ake current turnaround a long-lustina period of expansion because the .' -7­ harsh lessons of inflation have become apparent to the American ~;J/(.; ' j-t, I (:" '~ pUblic. ~ all understand 5 now that the inflationary excesses of the past two decades distorted our economic decisions and led to recurring recessions. Even worse,-lost jobs and lost production undermined faith in our system and weakened confidence /t. ~/ ' :<' u in the future. Some repairs to~confidence have been made recently, but there is much more to do. Thus, as we consider the sustainability of long-term expansion, we can draw strength from recent evidence of fundamental lesse ning of inflationary pressures. This development is extremely important because diminshed inflation a necessary precondition for ~s - ­ ~ -~ ---" '" permanent recovery. Precisely because the nation has come so far ~he w~th p;?bf~. ?f in battle inflationjresolving the the large '1 O .,!/"<. t.. J , 7j . and growing federal budget deficits has becomeAcritical. In my judgement, this is the most serious obstacle to our nation's long-term economic health. The dimensions of the prospective deficits for 1983 Qnd beyond are staggerir:,q and ~J_!2..~t be fully understood by Lile American public. As you may know, the Office of Management and Budget now is forecasting a $208 billion d e ficit this fiscal year. Eve n greater deficits may occur in future years unless significant adjustments are made . A major portion of the deficit this ye ar " / will be related to rcccssion-c3used shor tfa lls i n rev nuc 'or' ./ 4 ~---===---- J ' . 1/' ) - i n - c r - e c s e s in s.pg n_cli.nCJ • But a s i CJ' n i f ie C1 n t T) art /, 0 r t I h r d f 1 C . 1 .. 1 t 0.- · . , . .., . / / ~ i.~ ni3.t,ure; ~~wOLl lJ eve~ '".~ , j., j.,, ", this year will be structura l e x i st i f the economy were op _rating at full employment. What di s turbs -8­ me most is that the structural deficit is expected to grow In future years, given existing spending and revenue laws now on the books. This will happen even if the economy recovers and the r cession-related part of the deficit narrows. Not only are the prospective deficits large by absolute standards, they are growing larger relative to GNP. To illustrate, back in the Eisenhower years, the deficits--when they occurred-­ averaged about 1/3 of one per cent of GNP. Twenty years later, during the Carter administration, the deficit averaged abou--t- -_2.­ per cent of GNP. Current administration projections show deficits C" t}? , :' ,... ­ at 6-7 per cent of GNP, o~-~l{gH~iy less with a stronq economic recovery. But it lS not simply the scale of the prospective deficits C;;t:­ which is ~ issue , but rather the potentially ~~ ative impacts on business growth, the financial markets, nd the public psychology. Because budqet deficits must be financed by borrowing in credit markets, massive ongoing deficits pose ..a serious threat .' {/J j, -.; .. T . . ­ to prospects for sustained economic expansion~l As business expands, private sector credit demands from businesses, farmers, home buyers may well collide with the government's financing ( a~ needs , raising again the specter of "crowding out." Moreover, as both public and private credit de mand qrows, the likelihood of r~9 inte rest rates increase s , as well. Although credit appear manageable his ye.:1r, rising interest rate s l.:1te r > d~mands ( '" . - ... ( ~ , ,/ _ d /, I .­ ?n might discourage theLLborrowing need~(to finance a continulny r e covery. Another vcry importa nt negative factor relat ed to -9­ financing the deficit is that potential "crowding out" problems and rising interest rates--if~y occur--would raise public -~ fears about renewed inflation. Such rising inflationa~y expectations would surely weaken the foundation for recovery which has been laid. As we all know, fundamental solutions to the deficit dilemma are developing very slowly in Washington because of sincere differences about the nation's priorities. Until those '. differences are resolved, the deficit issue will remain front LLf. •. : C) page news. 'fee, so long as the stalemate persists, we probably -,1- ;1~. --r ··'r' r'.£/..~,d 4t/ (J/--/ 6..; ~ :::. i will hear ideas ; r ,,,smokescreen andAdelay the decisions which~~ which must be made. For example, some observers have suggested that the Federal Reserve could solve the deicit financing p~oblem--and help ~he economy sidestep possible "crowdin.g . ..out"--by simply creating more money. This solution, whiGh is tantamount to ~onetizing government debt, will only·add to public concern about future ~he inflation and rising interest rates. It is quite clear to me that excessive expansion of money is not the answer to massive federal deficits--or to any economic problem, for that matter. ----------~--~ While excessive moneY,rgfo~t~may bring temporary short ter~~ be nefits, such as lower!: interest rates, such action will a--l:-mest ~~ contribute to higher inflationary pressures and higher interest rates ove r the long run. We in the Federal Reserve believe that t he economy has come -too far in the fight aqa inst inflation, and has pa id such a high '~ -10­ price to reach this point, that it would be irresponsible for the Federal Reserve to fore sake such important gains in order to /1), v~,;-r;:;" ':.,,J '[/...'­ budget deficits. to-v~~~federal This view does not signify Federal Reserve insensitivity to broad public needs. Rather, I mean to emphasize and reinforce the Federal Reserve's long standing commitment to a credible ftf"· d e4,,.d.:. ' . course of 1llQo". • • te growth in money and credit which will support _T-~L .q ~ 6 a continuing noninflationary economic expan~~on. As for making the difficult but absolutely critical decisions that will resolve the budget stalemate, I have no easy answers, ~h~ alternatives seem clear. We can cut spending or we -- ----- ~ can increase reve~ues, or we can do some of both. Deciding . un;I.---," where to cut spending or how to increase revenues is notfthe province of the Federal Reserve. Such decisions are political in both the partisan sense and as related to the will of all Americans. At its heart, it seems to me, the budget deficit issue j)~(' ~ -t ""I '..;(.., ;r/:RJ is a referendum on the~role of government in our society. And the sooner this issue is resolved , the clearer will be the economic outlook. In closing, I am encouraged about the sincerity and intensity of the public debate over the budget deficits. Given this debate, I am very hopeful that our political processes will soon produce the appropriate solution--one which will enable our economy to move forward with renewed confidence on a path of A:/.. r ' s u s tain :-- a -:: b ::: l = e :: ::::: _ r o -. w -.--- t -- h ..r . ­ ,£c; . ~L~-d '--J. ./~ L~. q!wl~ l. • - I I ,I • '/ ;; , .c "r. ; (, / r:: 11 ..

J. Roger Guffey (1983, February 27). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19830228_j_roger_guffey

@misc{wtfs_regional_speeche_19830228_j_roger_guffey,
  author = {J. Roger Guffey},
  title = {Regional President Speech},
  year = {1983},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19830228_j_roger_guffey},
  note = {Retrieved via When the Fed Speaks corpus}
}