Regional President Speech

SILAS KEEHN REMARKS ANNUAL MANAGEMENT SEMINAR FOR SMALL BUSINESSES UNIVERSITY OF ILLINOIS AT CHICAGO FEBRUARY 13, 1984 I. INTRODUCTION AND SUMMARY A. PLEASED TO BE INVITED TO SPEAK AT THE OPENING MEETING 1. AND OPPORTUNITY TO MEET WITH YOU -.,,. o_t;L., A. ROLE OF SMALL BUSINESS IN ECONOMY (1) MISUNDERSTOOD; UNDER-APPRECIATED B. BUT A FACT THAT THE MAJOR SOURCE OF GROWTH IN JOBS IN OUR ECONOMY IS THE SMALLER BUSINESSES NOT THE LARGE, MATURE CORPORATIONS C. SO, IN VERY REAL AND IMPORTANT WAY, THE ECONOMIC FUTURE DEPENDS ON YOU D. AND GIVEN THE LARGE ATTENDANCE FOR THIS MANAGEMENT PROGRAM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 2 (1) WOULD SUGGEST THAT FUTURE LOOKS BRIGHTER AND MORE SECURE B. AS YOU KNOW, THE GENERAL TITLE FOR TONIGHT'S SESSION IS "LOOKING INTO A CRYSTAL BALL" 1. FOR MY PORTION "WHAT IS THE BUSINESS OUTLOOK" A. I COULD GIVE YOU THE RESPONSE I GET FROM SOME OF MY ECONOMISTS B. "MY CRYSTAL BALL IS CLOUDY" C. HOWEVER, THAT, IN MY VIEW, ISN'T A GOOD CHARACTERIZATION OF THE CURRENT BUSINESS OUTLOOK D. THE CRYSTAL BALL IS REASONABLY CLEAR E. THE OUTLOOK FOR 1984 IS BRIGHT C. CURRENT TRENDS ARE FAVORABLE 1. IN SPITE OF RECENT INDICATIONS/MINI-PAUSES A. IN HOUSING B. IN RETAIL SALES C. IN SLACKENING INDUSTRIAL PRODUCTION 2. IN SPITE OF IMBALANCES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/Slt PAGE 3 A. GEOGRAPHICALLY (1) SLOWER MIDWEST PACE B. INDUSTRIALLY (1) RELATIVELY SLOWER EXPANSION IN HEAVY INDUSTRIAL GOODS dZl 9ROBL!NS -CF f kl'O:B.!_ MARIEETS ARISING FP'iil HIC:I l''I UE SE DOLL.AR 3. NONETHELESS -- THE OUTLOOK IS GOOD D. THIS EVENING WANT TO DISCUSS 1. WHY I FEEL 198Lt OUTLOOK QUilE GOOD -- BUT CAVEATS 2. WHAT RISKS ARE TO EXPANSION A. THERE ARE SOME VERY SIGNIFICANT RISKS (1) OF A NATURE/MAGNITUDE -- VERY SERIOUS (2) FROM EXTERNAL EVENTS -- OVER WHICH ALMOST NO CONTROL I I. CURRENT TRENDS START WITH QUICK REVIEW OF WHERE WE'VE BEEN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 . . PAGE 4 A. YEAR ENDED ON POSITIVE NOTE 1. RECOVERY WELL IN PLACE -- OVER ONE YEAR OLD A. SHIFTED TO EXPANSION PHASE 2. REAL GAIN IN GNP +3.311982-83 3. INDUSTRIAL PRODUCTION 6.51 GAIN IN 1983 AFTER 81 DECLINE IN 1982 A. VERY SIGNIFICANT SHIFT 4. ALL THE BASIC AND IMPORTANT INDICATORS LAST YEAR SHOWED GOOD IMPROVEMENT A. SURPRISINGLY SO -- WE ALL UNDERESTIMATED THE STRENGTH OF THE RECOVERY LAST YEAR 5. THE REALLY GOOD NEWS~- INFLATION A. IN 1983 CPI ROSE ONLY 3.21 -- MAJOR ACCOMPLISHMENT (1) INSTEAD OF THE 7.6, 11.3 AND 13.51 OF '78, '79, '80 (A) ON A QUARTERLY BASIS AS HIGH AS 191 (B) EXPECTATION -- EVEN MORE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 5 (I) UNIVERSALLY AGREED OUR COMMON PROBLEM (II) MAJOR CHANGE IN ATTITUDE COULD BE WRONG BUT WON'T RETURN TO FORMER INFLATIONARY ATTITUDE 6. THEREFORE, WE'RE EXPERIENCING MORE THAN JUST A RECOVERY FROM A. ANOTHER POSTWAR RECESSION (1) EXPERIENCED SOME VERY FUNDAMENTAL CHANGES B. OTHER POSTWAR RECESSIONS ESPECIALLY SINCE MID-1960S (1) TEMPORARY CORRECTIONS IN AN EVER INCREASING INFLATIONARY ENVIRONMENT (2) NEITHER PUBLIC NOR PRIVATE POLICIES FUNDAMENTALLY ALTERED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 6 (3) MEANING EVER HIGHER UNEMPLOYMENT AND INFLATION COMING OUT OF EACH DOWNTURN (A) WE WERE ON A STAIRSTEP (B) BUT WE'VE BROKEN THE PATTERN (4) AND THIS BODES WELL FOR THE SUSTAINABILITY OF THE RECOVERY B. THOUGH UNEMPLOYMENT RATE STILL HIGH BY HISTORICAL STANDARDS -- THERE IS GOOD NEWS 1. EMPLOYMENT CONTINUES TO GROW A. ANOTHER 800,000 WORKERS ADDED IN 4TH QUARTER B. EMPLOYMENT ROSE BY 250,000 IN JANUARY 2. AND THE UNEMPLOYMENT RATE DECLINED {A) TO 7.9% IN JANUARY (1) LOWEST SINCE OCTOBER 81 1 (2) VERY FAVORABLE TREND %IX[ EfONOMIC PICTURE LO~GOOD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 7 A. NO SPECULATIVE EXCESSES THE BALANCE AMONG SECTORS IS GOOD B. WHAT SEEMS TO BE SLOWER PACE 1. LOWER 4Q GNP VS. 3Q 2. NOT NECESSARILY A BAD THING 3. OVEREXUBERANCE CAN LEAD TO WRONG DECISIONS AND EXCESSES (1) PARTICULARLY WITH REGARD TO WAGE/PRICE DECISIONS IV. OUTLOOK FAVORABLE FOR 1984 A. ELEMENTS FOR SUSTAINABILITY IN PLACE 1. -IMPORTANT CHANGE IN ENVIRONMENT MENTIONED EARLIER 2. INTERNAL BALANCE JUST DISCUSSED A. ALLOWS MOMENTUM TO CONTINUE 3. THERE ARE SOME PARTICULARLY STRONG POSITIVE ELEMENTS A. IN INVENTORY POSITION/CAPITAL SPENDING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 8 B. AND IN WHAT ALSO HAS ITS "DARK SIDE" IN THE FORM OF DEFICITS, GOVERNMENT SPENDING (1) HIGHLY STIMULATIVE FISCAL POLICY IN PLACE B. INVENTORY/SALES RATIOS 1. HISTORICALLY LOW 2. INVENTORY LIQUIDATION COMPLETED BUT A. ACCUMULATION MODEST 3. WILL TEND TO BUILD ALONG WITH SALES A. ALTHOUGH AT LESS RAPID PACE ~ (1) REFLECTING CAUTIOUSNESS (2) HIGH CARRYING COSTS 4. UNLIKELY TO SOURCE OF PROBLEM A. BUT CONTINUED PLUS FOR ACTIVITY (1) PROVIDE A BASIS FOR CONTINUED GROWTH B. IN A SUSTAINABLE NOT EXCESSIVE WAY C. FUTURE BUSINESS SPENDING A STRONG PLUS 1. PLANNED PLANT AND EQUIPMENT SPENDING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 9 A. UP ALMOST 101 IN 1984 B. WITH LITTLE PRICE INCREASE EXPECTED UP 9.51 IN REAL TERMS C. USUALLY ON UPSIDE, SPENDING EXCEEDS EARLY ESTIMATES 2. PARTICULARLY GOOD NEWS FOR MIDWEST A. GIVEN ITS INDUSTRIAL COMPOSITION B. DURABLES MANUFACTURING UP 161 C. MOTOR VEHICLES AND PARTS UP 341 3. ESTIMATES ON OTHER PARTICULAR INDUSTRIES IMPORTANT TO MIDWEST ENCOURAGING -- THOUGH STILL OPERATING AT RATES UNDER PEAKS OF 1979-'80 -- GOOD IMPROVEMENTS OVER 1983 A. CONSTRUCTION EQUIPMENT UP 101 B. FARM EQUIPMENT UP 101 C. MACHINE TOOLS UP 151 D. HEAVY DUTY TRUCKS UP SOX E. TRUCK TRAILERS UP 501 4. ADDING TO CONFIDENCE OF INCREASED SPENDING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 10 A. SURGE OF PROFitABILITY B. RESULT OF TAX RESTRUCTURING, REDUCED INFLATION, SIGNIFICANT EFFICIENCY IMPROVEMENT C. SOME ESTIMATE BUSINESS RETURNED CASH FLOW AS HIGHEST PERCENT OF CURRENT INVESTMENT SPENDING IN 20 YEARS! 5. UNFORTUNATELY, NOT ALL INCREASED BUSINESS SPENDING A. WILL BENEFIT DOMESTIC PRODUCERS B. FIGURES HARD TO COME_ BY BUT MACHINE TOOL INDUSTRY INDICATIVE (1) IN 1982, 271 OF MACHINE TOOLS WERE IMPORTS (2) IN 1983, 361 WERE IMPORTS C. UNDERSTANDABLE WHY INTERNATIONAL TRADE POSITION A MAJOR CONCERN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 11 D. BUT, AS A NOTE OF CAUTION, NOT ALL OF THE SECTORS IN ECONOMY WILL CONTINUE AT SAME STRONG PACE AS IN 1983 -- BECAUSE OF GOOD RESULTS LAST YEAR, WE'RE . COMPARING FROM HIGHER BASES 1. SOME REDUCTION IN GROWTH RATES TO BE EXPECTED 2. TAKE, FOR EXAMPLE, iNVENTORY AREA A. SHARP SWING FROM INVENTORY LIQUIDATION TO ACCUMULATION CAN'T BE REPEATED -- WE'RE ALREADY THERE B. MOVED FROM LIQUIDATION AT S56 BILLION ANNUAL RATE IN 4TH QUARTER 1982 TO ALMOST Sl8 BILLION ACCUMULATION IN 4TH QAUARTER 1983 C. THAT IS ALMOST A S75 BILLION SWING THAT ACCOUNTED FOR 23% OF THE INCREASE IN NOMINAL GNP OVER THE PERIOD D. CAN'T HAVE THE SAME CONTRIBUTION IN THE 2ND YEAR OF RECOVERY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 12 (1) ESPECIALLY SINCE CONTINUED DESIRE TO MAINTAIN LOWER LEVELS 3. NOR CAN WE AGAIN DOUBLE HOUSING STARTS A. WENT FROM 900,000 STARTS IN 1ST QUARTER 1982 TO 1.8 IN 3RD AND 1.7 IN 4TH QUARTER B. THAT KIND OF INCREASE WITH ATTENDANT IMPACT ON ECONOMY SIMPLY NOT POSSIBLE C. EVEN WITH SIGNIFICANT MORTGAGE RATE DECLINES THAT ARE SIMPLY NOT GOING TO OCCUR 4. AND THE INITIAL FIRST YEAR CONSUMPTION SPURT A. CAN BE EXPECTED TO SLOW B. HAD BEEN A PENT-UP DEMAND FOR AUTOS, HOUSING, APPLIANCES AND OTHER DURABLE GOODS C. WITH JOBS, REDUCED INFLATION, LOW DEBT (1) CONSUMER DISCRETIONARY SPENDING OPPORTUNITIES SOME GAIN FROM MID-YEAR TAX CUT ~~ e ; - ( ~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 13 D. CREDIT (1) NOT LACKEN OFF V. BUT AGAINST ALL THIS GOOD NEWS -- LET ME ADD SOME CAUTIONARY NOTES A. BUT THERE ARE SOME VERY SIGNIFICANT RISKS -- THE FISCAL ISSUE IS THE MAJOR ONE 1. DEFICIT GROWING CAUSE OF CONCERN A. IN TERMS OF INTEREST RATE IMPACTS HAS TO BE FINANCED OR MONETIZED B. IN 1983 TOOK ALMOST 40% OF NET BORROWING IN CREDIT MARKETS C. EXPECTED TO BE ONLY MARGINALLY LESS IN 1984 2. SOME VIEW THAT 1984 DEFICIT CAN BE FINANCED A. WITHOUT SIGNIFICANT PRESSURE ON INTEREST RATES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 14 B. REASONS (1) PACE OF ECONOMY LESS RAPID THAN IN 1983 THEREFORE INCREASE IN CREDIT DEMANDS WON'T BOOM (2) HIGH CASH FLOWS -- AS MENTIONED EARLIER (3) STATE AND LOCAL GOVERNMENTS BETTER POSITION (4) HIGHER SAVINGS RATES (5) BUT RATES ARE ALREADY VERY HIGH CROWDING OUT COULD ALREADY BE OCCURRING • 3. HOWEVER, MAY BE ARGUED THAT VIRTUALLY IRREVERSIBLE FISCAL POLICY ERROR HAS ALREADY BEEN MADE A. IN ALLOWING DEFICIT TO REACH S200 BILLION LEVEL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 15 (1) AND SCANT HOPE FOR ANYTHING LESS THAN $175-185 BILLION OVER NEXT FEW YEARS (A) COMPOUND INTEREST B. WITH CONTINUED DISCUSSION OF DEFICITS OVER LAST FEW YEARS (1) RECENT RELEASE OF FY'85 BUDGET PROPOSAL (2) POLITICAL POSTURING AND WRANGLING (3) HAVE PROBABLY HEARD MORE THAN YOU WANT ABOUT DEFICIT C. BUT SIGNIFICANCE CANNOT BE SWEPT AWAY (1) SOME ARGUE, DEFICITS DON'T MAKE ANY DIFFERENCE (2) FINANCIAL MARKETS CLEARLY DON'T AGREE D. EXPECTATION OF A CONTINUATION OF A LARGE CONTINUING STRUCTURAL DEFICIT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 16 (1) HAS ALREADY CONTRIBUTED TO HIGHER INTEREST RATES ~~-----------------:::;:-------- RELATIVE HIGH INTEREST COMPOSITION OF -...,_ I~Y INTEREST-S~E AREAS MOST AFFECTED VI. I'VE ALREADY COMMENTED ON THE BIG RISK -- BUT THERE ARE OTHERS A. INTERNATIONAL POLITICAL RISKS 1. MIDEAST CRISES, POLITICAL DISRUPTIONS ELSEWHERE IN WORLD A. WHICH WOULD AFFECT OUR ECONOMY B. IMPOSSIBLE TO FORECAST 2. HAVE INTERNATIONAL ECONOMIC RISKS OF TWO TYPES A. RE-EMERGENCE OF AN INTERNATIONAL DEBT CRISIS B. RAPID CORRECTION IN THE VALUE OF THE DOLLAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 17 D. INTERNATIONAL DEBT SITUATION -~a-~ ,v.,.,,. t..A.... ~ 1. WIDELY REPORTED AND DISCUSSED A. IN CONJUNCTION WITH IMF QUOTA INCREASE LAST YEAR 2. WHILE NOT SOLVED A. CERTAINLY BEING MANAGED 8. TENSIONS FROM THIS AREA SIGNIFICANTLY REDUCED 3. DEBTS ARE OR ARE BEING RESCHEDULED IN MAJOR "HOT SPOTS" A. MEXICO'S POSITION SIGNIFICANTLY IMPROVED (1) RESTRUCTURING AGREEMENTS SIGNED LAST YEAR (2) FINANCING PACKAGE FOR 1984 GOING TOGETHER WELL -- COMPETITIVE RATES (3) ECONOMIC IMPROVEMENT (A) IMPORTS/EXPORTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 18 B. BRAZIL'S RESCHEDULING WILL BE A LITTLE LATER THAN ORIGINALLY EXPECTED -- ON TRACK (1) SOME S6.5 BILLION NEW MONEY ARRANGED -- VERY IMPRESSIVE C. PROGRESS IN VENEZUELA AND ARGENTINA D. DIMENSIONS OF PROBLEMS CLEARER IN PHILIPPINES, PERU ~·r«a- 4. CONTINUED,...$-etse=ESS IN MANAGING THESE PROBLEMS DEPENDENT A. ON COUNTRIES' ABILITY TO MAKE NECESSARY INTERNAL ECONOMIC ADJUSTMENTS B. ON CONTINUATION OF A WORLDWIDE RECOVERY 5. CAN'T IGNORE, HOWEVER, A. POLITICAL TENSIONS IN THESE COUNTRIES WHERE NECESSARY ADJUSTMENTS (1) BEAR HEAVILY ON A POPULATION WITH ALREADY LOW PER CAPITA INCOMES (A) HIGH POPULATION GROWTH RATES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 19 (8) NEED TO PROVIDE MEANS OF LIVING B. THAT ADJUSTMENTS RELY HEAVILY ON REDUCING IMPORTS AND RAISING EXPORTS (1) SINCE GREAT DEAL OF TRADE AMONG THESE COUNTRIES (2) DIFFICULT FOR EVERYONE TO REDUCE IMPORTS AND EXPAND EXPORTS AT SAME TIME C. CONSEQUENTLY, REST OF WORLD GROWTH IMPORTANT (1) AND SOME COUNTRIES RUNNING TRADE DEFICITS D. RUSH TO WORLDWIDE PROTECTIONISM (1) WOULD BE COUNTERPRODUCTIVE TO LONG TERM WORLD EXPANSION 6. RISK, THEREFORE, ONE OF SERIOUS DAMAGE TO A. INTERNATIONAL TRADE B. INTERNATIONAL FINANCIAL SYSTEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 20 7. FROM WHICH U.S. ECONOMY CANNOT BE INSULATED A. A SEVERE INTERNAL ADJUSTMENT PROBLEM 8. BUT WHILE POSSIBILITIES OF PROBLEMS EXIST A. PROBABILITIES OF HAPPENING LESS B. GIVEN SUCCESS SO FAR -- MANAGED ON A ONE-BY-ONE BASIS C. THE WORLDWIDE RECOGNITION OF THE NEED TO MANAGE THE SITUATION VERY CAREFULLY E. EXCHANGE VALUE OF THE DOLLAR 1. NOT BY ANY MEANS UNRELATED TO INTERNATIONAL DEBT SITUATION -= 2. - =BUTiiA&--"CATCH 22" ASPECTS---1>N BOt-H-JHE IN~ ~ !ONMHL'Olt PbJIQ)1.f:::_S I DE 3. ON INTERNATIONAL SIDE A. HIGH DOLLAR VALUE HAS COMPOUNDED PROBLEM OF DEBT SERVICE BY LDCS (1) OIL IMPORTS EXPRESSED IN DOLLARS B. YET HAS ALSO MADE U.S. GOODS LESS COMPETITIVE IN WORLD MARKETS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 21 (1) ASSISTING LDC EFFORTS TO EXPAND EXPORTS C. A LOWER DOLLAR EXCHANGE VALUE (1) REDUCE COSTS OF DEBT SERVICE (2) BUT TEND TO REDUCE ADVANTAGE IN EXPORT MARKETS CERTAINLY IN U.S. MARKETS 4. ON DOMESTIC SIDE, DOLLAR VALUE A. SIGNIFICANT HURDLE FOR AMERICAN FIRMS ATTEMPTING TO SELL ABROAD (1) ENORMOUS IMPACT TO FIRMS IN THE MIDWEST (2) "PRICED" OUT OF MARKETS NOT BECAUSE OF LESS EFFICIENT PRODUCERS, LOWER QUALITY (3) BUT BY EXCHANGE RATE 8. BUT ON OTHER SIDE, LESS EXPENSIVE IMPORTS HAVE (1) BENEFITED U.S. CONSUMERS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 22 (2) INFLATION RATE ESTIMATED TO 1-1/2 TO 21 POINTS LOWER BECAUSE OF LOWER IMPORT COSTS C. A LOWER DOLLAR VALUE (1) WOULD CLEARLY BENEFIT AMERICAN PRODUCERS IN EXPORT MARKETS (2) BUT RAISE DOMESTIC PRICE LEVELS (3) VERY DIFFICULT BALANCE 5. DECLINE IN DOLLAR VALUE PREDICTED FOR SOME TIME A. EVERYONE SEEMS TO AGREE OVER-VALUED (1) BUT INTEREST RATE DIFFERENTIALS, SAFE HAVEN ASPECTS, STRENGTH OF RECOVERY (2) ALL HAVE ACTED TO MAINTAIN DOLLAR STRENGTH -t-ni ~ • B. OUR LARGE TRADE DEFICIT (1) BEING FINANCED BY FOREIGNERS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 23 (A) WILLINGNESS TO HOLD DOLLAR DENOMINATED ASSETS C. AT SOME POINT, LESS WILLINGNESS TO HOLD DOLLAR ASSETS (1) VALUE OF DOLLAR DROPS (2) EXPECTATION IS THAT DROP WOULD BE SHARP D. IF SHARP DROP (1) U.S. INTEREST RATES WOULD TEND TO RISE {A) INCREASED PROPORTION OF DEFICIT FINANCED DOMESTICALLY (2) TEND TO SLOWDOWN U.S. EXPANSION 6. NO ONE KNOWS WHEN THE DOLLAR DROP WILL OCCUR A. OR IF IT WILL BE SHARP 8. IF LATER IN YEAR, IMPACT LARGELY SHOW UP ON U.S. ECONOMY IN 1985 8. LET ME EMPHASIZE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 24 A. NOT A FOREGONE CONCLUSION THAT THERE WILL BE A CRISIS B. BUT THE SITUATION DOES PRESENT A RISK TO A SUSTAINABLE EXPANSION Vfi. MONETARY POLICY ROLE A. SOMETIME IMPLIED THAT ALL THESE PROBLEMS INTERNATIONAL AND DOMESTIC POLICIES 1. CAN BE OFFSET WITH THE RIGHT MONETARY POLICY 2. THAT IS AN EXTREME EXAGGERATION OF THE POWER OF MONETARY POLICY A. IT CANNOT OFFSET ALL OF THE ECONOMIC PROBLEMS OF THE ~ORLD 3. EXPECTING TOO MUCH TO THINK THAT MONETARY POLICY CAN RESOLVE THE ISSUES B. LAST WEEK, CHAIRMAN VOLCKER TESTIFIED BEFORE CONGRESS 1. ON THE PATH THAT MONETARY POLICY WILL TAKE THIS YEAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/Sq PAGE 25 2. ESSENTIAL MESSAGE WAS THE NEED FOR MONETARY POLICY TO MAINTAIN A COURSE TOWARD LONG TERM PRICE STABILITY A. THAT COURSE PROVIDES THE BEST OPPORTUNITIES (1) FOR CONTINUED IMPROVEMENT IN LABOR MARKETS AND FOR ECONOMIC GROWTH (2) FOR SUSTAINABLY LOWER INTEREST RATES (3) FOR OPPORTUNITIES FOR RISK TAKING. BUSINESS DEVELOPMENT AND ECONOMIC EXPANSION,-- IMPORTANT TO SMALL BUSINESS ENTERPRISE 3. AT THE VERY CENTER OF MONETARY POLICY A. IS THE PRINCIPLE THAT ECONOMIC POLICIES MUST BE LONG TERM (1) MUST HAVE A LONG TERM HORIZON q_ TRANSLATED INTO WHAT THIS MEANS FOR MONETARY POLICY ACTIONS IN THE CURRENT SETTING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 26 A. NOT IGNORING CURRENT ECONOMIC SITUATION B. BUT REACTING ONLY IN THE CONTEXT OF WHAT THE ACTIONS MEAN fOR LONG TERM ECONOMIC DEVELOPMENT 5. FOR HYPOTHETICAL EXAMPLE, SHOULD THE CURRENT RECOVERY BEGIN TO FALTER A. UNDER PRESSURE OF HIGHER INTEREST RATES (1 WITH IS CORRECT MONElARY POLICY POSTURE ONE OF TRYING TO HOLD INTEREST RATES DOWN BY INCREASED MONETARY EXPANSION? C. NOT IF THAT EXCESSIVE MONETARY GROWTH WILL LEAD TO INCREASED INFLATIONARY PRESSURES NEXT YEAR D. IF INFLATION MOUNTS (1) SO WILL INTEREST RATES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 27 (2) WE'VE BEEN DOWN THAT ROAD BEFORE E. THE SHORT TERM GAIN WILL BE PAID FOR BY LONG TERM LOSSES THROUGH INFLATION 6. CONDUCT OF MONETARY POLICY INTERRELATED TO APPROPRIATE FISCAL POLICY A. WE DON'T HAVE THAT BALANCE -- QUITE THE OPPOSITE B. CONSIDERABLY NARROWS OUR OPTIONS AND MANEUVERING ROOM C. VASTLY COMPLICATES OUR JOB (1) AGGRESSIVE EASING OR TIGHTENING (2) NOT APPROPRIATE IN AN ECONOMIC ENVIRONMENT LIKE TODAY'S (3) BUT FORTUNATELY. THE INTERNAL BALANCE OF THE RECOVERY IS GOOD (A) MOMENTUM AND DYNAMICS OF ECONOMIC SYSTEM (8) CAN CARRY THE EXPANSION FORWARD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 28 (4) WE ARE SiMPLY NOT IN A SITUATION IN WHICH THE COURSE OR THE TREND OF ECONOMY NEEDS TO BE REVERSED 7. THE RESULTS MAY NOT BE IDEAL A. PROBABLY ALL PREFER LOWER INTEREST RATES 8. PROBABLY ALL PREFER MORE RAPID PICK-UP IN HEAVY INDUSTRY OF MIDWEST 8. BUT IN AN ENVIRONMENT OF HIGH GOVERNMENT DEFICITS A. MONETARY POLICY CANNOT ACHIEVE B. WITHOUT SACRIFICING THE LONGER RUN PRICE STABILITY -GOAL SO IMPORTANT (1) TO A SUSTAINABLE EXPANSION Vlrf., CONCLUSION A. THE OUTLOOK FOR 1984 IS REALLY VERY GOOD 1. EVERY EXPECTATION THAT AS YEAR UNFOLDS, RESULTS WILL BE GOOD B. THERE ARE SOME VERY SERIOUS RISKS TO CONTINUED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2/13/84 PAGE 29 C. BUT POSSIBLE TO STEER A COURSE BETWEEN 1. HAVE LAID BASE FOR DOING SO 2. ECONOMIC EXPANSION IS ON TRACK 3. AS CHAIRMAN VOLCKER HAS SO FREQUENTLY SAID A. WE HAVE A UNIQUE OPPORTUNITY TO ACHIEVE SUSTAINABLE GROWTH WITH PRICE STABILITY D. CLEARLY MORE WORK STILL NEEDS TO BE DONE TO ACHIEVE THAT GOAL 1. IF WE SERIOUSLY MAKE THAT EFFORT 2. THEN 1985 AND BEYOND CAN BE AS BRIGHT AS 1984 NOW PROMISES TO BE • • • • • Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1984, February 12). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19840213_silas_keehn

@misc{wtfs_regional_speeche_19840213_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1984},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19840213_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}