Regional President Speech

- - ~O.;-l<M.J- - ~._it:_~ ~ L - ~ ~~~~ T1tle S11de /~- ~-~ ~ + MONETARY POLICY OBJ{CTIVES C,.cJ"'\'•~. . / ~ When one reads news reports, one could get the m1staken 1mpress1on that keeping Ml or some other measure of money or cred1t between X and Y percent 1s the object1ve of monetary pol1cymakers. But, the object1ves of pol1cymakers -- be they monetary pol1cymakers or f1scal pol1cymakers -- relate to desired economic performance. ECONOMIC FORUM -- 3/6/84 -- PEORIA, IL. 3/7/84 -- DAVENPORT, IA. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 S11de #1 ECONOMIC OBJECTIVES OF POLICY "Econom1c stab111ty and growth "H1gh level of employment "Stab111ty 1n purchas1ng power of dollar "Reasonable balance 1n transact1ons w1th fore1gn countr\es The four broad econom1c object1ves of pol1cy usually 1dent1f1ed -- 1ndeed those formally spelled out almost four decades ago 1n the employment Act of :: 1946 -- are 1. Econom1c stab111ty and growth 2. H1gh level of employment 3. Stab111ty 1n purchas1ng power of dollar .t:·. 4. Reasonable balance 11\transactfons with fore1gn countr1es Aga1nst background of econom1c performance 1n 1983 and the outlook of 1984. I th1nk pol1cymakers can be fa1rly well pleased w1th progress made towards ach1ev1ng these broad economic goals of pol1cy. ~:!::4:;;J k~~ l/~ ~ - ~ ~ ~~~;.,Lt Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Slide #2 ACHIEVEMENTS "Economic growth resumed "Unemployment rate declined dramatically "Inflation moved to lowest in years BUT "Reasonable international trade balance not seen Economic growth resumed in 1983 and is expected to continue 1n 1984 at a more sustainable pace. The unemployment rate dec11ned dramat1cally 1n 1983 and further dec11nes are expected 1n 1984. Inflat1on moderated further 1n 1983: PPI December-to-December +0.6% lowest s1nce 1964; CPI December-to-December +3.8% lowest s1nce 1972; and modest accelerat1on expected 1n 1984 pr1mar11y reflects cyc11cal rather than < t na : &c P.I I/ '/1,..- (3 /'- secular forces. I -r . "" Q. fl'-'> . ('1 ,~ ~~I But, a reasonable balance 1n 1nternat1onal trade has not been ach1eved, nor 1s 1mprovement expected soon. In add1t1on, desp1te progress made, unemployment rate st111 h1gh and 1nflat1onary pressures more d1ff1cult to res1st as ectlnomic expans1on progress~. So, while policymakers can take satisfaction 1n the progress that has been made, the fact remains that many challenges st111 11e before us on the road to achieving our broad economic goals. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 Slide #3 CHALLENGES FACING MONETARY POLICYMAKERS {l) Internal: How monetary pol1cy contr1butes to ach1ev1ng econom1c goals (2) External: How f1scal pol1cy and other econom1c forces contr1bute to ach1ev1ng econom1c goals By 1nternal I mean those challenges {or r1sks) that relate to how monetary pol1cy contr1butes to or affects ach1evement of econom1c object1ves. By external I mean those challenges {or r1sks) that relate to how f1scal pol1cy and other econom1c forces contr1bute to or affect ach1evement of econom1c object1ves. From a monetary pol1cymakers' perspective, these challenges might be \ \ class1f1ed into two categories: {l) Internal challenges, and (2) External challenges. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 S11de #4 Internal Challenges--Some Examples (1) What Gu1depost to Use (Intermed1ate Target Problem) Money? Credit? Interest Rates? GNP? Exchange Rate? ??? (2) How to 1mplement pol1cy (Operat1onal Problems) Fed funds rate target1ng? Reserves target1ng? Lagged vs. contemporaneous reserves? 01scount Rate? ??? Among the 1nternal challenges fac1ng monetary pol1cymakers are 1ssues that are largely techn1cal 1n nature, but that have a d1rect bear1ng on how monetary pol1cy 1s formulated and 1mplemented. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 Slide #4 (Continued - 1) For example, monetary policymakers continually wresf~1I"; w1th the challenge of which guidepost to use in formulating policy. This challenge arises because monetary policy actions affect econom1c object1ves such as real GNP and 1nflat1on only 1nd1rectly and w1th t1me lags that are var1able and often long. So we look for some measure that 1s related to econom1c object1ves but 1s more closely influenced by monetary policy act1ons. The list of potential cand1dates_ is quite long, includ1ng guideposts such as money, credit, inter"i2s.. t rates, GNP, and the ,exchange rate. And, within each possible category 1s often the add1t1onal challenge of def1ning the appropriate measure to use -- a narrow or broad measure of money? -- a narrow or broad measure of credit? -- a short-or long-term interest rate? n:rn,,, ••-\ .:_,.,; a -mH»ma+ or real inte~st rate? -- 1f real, how do you measure inflationary expectations? Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 7 Slide #4 (Continued - 2) Another inter~~a l challenge faced is how to implement policy This challenge arises because monetarty policymakers have direct control only over open market operations, reserve requirements, and the discount rate. Actions taken to affect these policy variables in turn affect or influence the various guideposts, which in turn affect or influence our economic objectives. So, we need to consider operational issues such as --whether open market operations should be guided by a federal funds rate target or some reserve target --whether the reserve requirement accounting system should be lagged or contemporaneous --whether changes in the discount rate should be made at the discretion of policymakers or tied to some index of market rates. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 S11de #5 Changes 1n Monetary Pol1cy Procedures--Some Examples May 1975 F1rst report to Congress on monetary and cred1t aggregate growth plans. October 1979 Operat1ng procedures changed from federal funds rate to reserves targeting. February 1984 Contemporaneous reserve requ1rements implemented Over the past several years the Fed has made changes 1n some of these areas For example, the Fed started to focus more on the monetarty aggregates as ·~ gu1deposts 1n the early 197Os. In March 1975, 5oncurrent Resolut1on 133 was passed and in May 1975 the Fed began reporting to Congress on its plans w1th respect to monetary and credit aggregate growth for the coming year. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 Slide #5 (Continued) In October 1979, with inflation continu1ng at an exceptionally high rate and monetary growth exceeding ranges deemed consistent with reduc1ng inflationary expectations, the Fed adopted a change in 1ts operating procedures so that open market operations were gu1ded more by the supply of reserves than fluctuations in the federal funds rate. Another change, prompted by a desire to t1ghten the link between reserves and -- money, was the Fed's deciss1on 1n the summer of 1982 to move to a more contemporaneous reserve accounting system. This system -- known as contemporaneous reserve requirementsf-- was i~y'Yp\ lemented last month (February 1984). What needs to be emphasized is that changes such as these.,,a dopted on the c.:-: .. r' e, r"'. . ~; .... ,'- except 1-on that they will help in ach1eving the broad econom1c goals of pol ky Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis JC -H' Sl1de #6 Chart 1984 Growth Ranges vs. 1983 Growth Ranges The Fed has been report1ng to Congress on 1ts monetary and cred1t aggregate growth plans for almost a decade. As ment1oned earl1er, th1s process began under Concurrent Resolut1on 133 and subsequently was made a requ1rement under the Humphrey-Hawk1ns Act of 1978. The latest of these reports was early 1n February when 1984 growth ranges for three measures of money and a broad cred1t measure were 1dent1f1ed. W1th the except1on of M2, wh1ch was mod1f1ed for techn1cal reasons, all growth ranges set for 1984 were the same as tentat1ve ranges 1dent1f1ed last July. In all cases the ranges adopted for 1984 are lower than ranges used 1n 1983. And, g1ven that monetary and cred1t aggregate growth 1n 1983 was generally 1n 11ne w1th 1983 ranges, growth th1s year near m1dpo1nts of 1984 ranges would represent a moderation 1n money and cred1t growth trends. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #6 (Continued) The actual 1983 growth rates shown are based on recently revised money supply data. Pr1or to the rev1s1on, all of the monetary aggregates were within the1r 1983 ranges. The recent revision, which is an annual event, incorporated a benchmark adjustment for deposits at institutions that report infrequently that raised 1983 growth rates in all of the money measures. In addition, M3 was redefined to include term Eurodollar~~ another factor working to raise M3 growth in 1983 v· from just below 1ts upper lim1t to just above., ~ The recent rev1sion also incorporated new seasonal factors and ~new procedure for seasonally adjusting the nontransactions components of M2 and M3. For Ml, the new seasaonal factors led to to a sh1ft1ng of growth from the first half of 1983 to the second lhalf. For the first half, Ml growth was 13.3 percent based on old data versus 12.4 percent based on revised data. For the second half, Ml growth was 5.5 percent based on old data versus 7.2 percent based on revised data. The basic pattern of rapid first half growth ;~ followed by a relatively sharp slowdown lb the second half still appears. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Slide #7 Growth Ranges Adopted "Consistent with achieving economic goals "Assume "normal" relationships to economic activity Since the 1984 growth ranges adopted envision a moderation in money and credit growth~they are viewed as being consistent with the basic policy objective of , ,__ - achieving long lastihng economic expansion in a context of continuing control of inflationary pressures. The growth ranges adopted also assume that relationships between monetary and credit growth and economic activity and inflation will be broadly consistent with past trends and cyclical developments. Now this is a fairly important assumption since it relates directly to one of the important internal challenges facing monetary policymakers, namely what guidepost to use in formulating and implementing policy. A major reason why money, and in particular Ml, has been used as a guidepost is that historically a stable and predictable relationship to economic activity and inflation was observed. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sl1de #8 Chart Ml Growth and Real GNP One Quarter Later In the short-run, changes 1n Ml growth translated 1nto changes in real economic activity with a 4 to 6 month lag. Because of the averaging process this can be shown quarterly with a one quarter lag. While the relat1onship 1s not perfect, and the lags vary,a slowdown 1n Ml growth usually has been followed some 4 to 6 months later by a slowdown 1n real GNP. S1m1larly, an accelerat1on 1n Ml growth generally has been followed some 4 to 6 months later by an accelerat1on 1n real GNP growth. - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 14 ~1'5 rtr-,,r-~ ;t-<Yf ~j t--:,~~~·•l ~ ~ ~ 'rb~"- S11de #9 Chart of Ml growth and Inflation two years later ------- - --- ---- - -- - -· -- --- l)l the longer-run, however, changes 1n Ml growth tend to translate into changes in inflation with a lag of about 2 years. Again, the relationship is not perfect and the lags vary. But, on average, unless a change in Ml growth •'""-~a~,~ is revised fairly quickly as appears to be the case 1n 1966-67, or unless the changes in Ml stem largely from major financial innovations such as nationwide NOWs in 1981 and perhaps Super NOWs 1n 1983, history suggests that an acceleration in Ml growth leads to higher 1nflat1on two years later while a slowdown 1n Ml growth leads to lower 1nflat1on two years later. Coinciding with these observed relationships, which I should add are supported by economic theory, is the view that monetary policy contributes most to achieving inflat1on goals of policy; any impact on real economic growth 1s short-lived. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #10 Chart Ml Veloc1ty Relat1ve to Trend But, as you probably know, the Fed has not been plac1ng as much we1ght on Ml as 1t used to, and, 1n general, monetary and cred1t growth g~fdeposts have been used more caut1ously s1nce late 1982. The reason--expected relat1onsh1ps between money-and cred1t growth and 1ncome growth were not observed dur1ng the 1981-82 receis1on or 1n 1983, the f1rst year of the current expans1on. The ~roblem was most ·ser1ous for Ml, and can be seen by observ1ng the behav1or of Ml veloc1ty over the past two and ~ne-half years. Ml veloc1ty, or the turnover rate of Ml relat1ve to GNP, has been on an upward trend, averag1ng about a 3 percent annual rate of growth over the 1959 to 1980 per1od. Th1s upward trend essent1ally reflects an econom1zat1on of transact1ons balances relat1ve to 1ncome as generally r1s1ng 1nterest rates and 1nflat1on 1ncreased the opportunity cost of hold1ng assets ·1n Ml-type balances. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Slide #10 (Continued) In addition, a growing number of highly liquid and interst-bearing financial instruments have become available over the past decade or so. But, Ml velocity growth typically displays a cyclical pattern, in part due to the lags between money and income we talked about earlier, and also due to cyclical patterns in inter~~ t rates and inflation that affect the opportunity cost of holding Ml-type balances. Over the past two and one-half years, Ml velocity g~owth deviated from its expected cyclical pattern. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #11 Ml Velocity Growth During Recessions During recessions, Ml velocity typically declines ~r grows below its trend rate. For example, Ml velocity declined 1.4 percent, on average, in the seven recessions prior to 1981-82. During recessions, GNP growth generally slows throughout the period. Ml generally begins ascelerating before the through as interest rates fall and the opportunity cost of holding Ml balances is - - reduced.- As a result, Ml ve_locHy growth 1s below trend. During the 1981-82 recession, Ml velocity declined 4.3 percent, a sharper drop -GNP than in any of the previous post-World War II recessions. It now appears that the sharp drop in intet,st rates in the second half of " 1982 and the:aster-than expected fall in inflation that lowered inflationary expectations contributed to this Ml velocity behavior. In addition, NOW accounts became available in 1981 and boosted Ml growth relativ·e to GNP. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #12 Chart Ml Veloc1ty Growth 1n F1rst Year of Recovery Ml veloc1ty growth typically bounces back 1n the f1rst year of recovery as GNP growth tends to be more rap1d than -Hl growth. In the f1rst l!f}.ar of recovery p__e_ r1ods pr1or to 1983, Ml velocity growth averaged 6.9_ percentJor more than &#45;&#45;&#45; double 1ts trend-rate . .. :,i;<:-t.S .-~-·~•·:~, N ,·,u,<111,.-,;/c;~•.-,- In 1983, Ml velocity rose,,.,mo.r:-e 5~ewly than 1n prev1ous f1rst year of recovery periods. It appears that the decline in 1nterest rates 1n the second half of 1982 cont1nued to bolster Ml growth early 1n 1983. In addition, Super NOW accounts became available in early 1983. As 1983 progressed, Ml veloc1ty growth accelerated, suggest1ng a more normal pattern was evolv1ng. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Slide #13 Why Ml Velocity Should Behave Normally in 1984 1. Interest rates relatively stable 2. Inflationary expectations not changing rapidly 3. No major financial innovations expected 4. Recent velocity trend more normal Therefore, a review of factors that appear to-have contributed to the "unusual" behavior of Ml velocity from mid-1981 through 1983 suggests a more normal relationship is highly probable in 1984. First, inte~~s t rates have been relatively stable and are expected to be relatively stable in 1984. Second, sharp changes in inflation are not expected so that inflationary expectations should not change rapidly. - Third, no major financ1aJ innovations such as NOWs or Super NOWs or MMDAs are expected. We may have to reevaluate this situation if Congress allows payment of interest on demand deposits or reserves, but not likely to be effective in 1984. Fourth, the recent velocity growth trend has been close to the historical experience. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de 13 (Cont1nued) Because Ml veloc1ty 1s expected to behave more normally, the FOMC dec1ded to ,-(\,. place somewhat more we1ght l.ft Ml 1n 1984, but substant1al we1ght st111 w111 be g1ven to M2 and M3. But the factors that suggest a more normal relat1onsh1p between Ml and 1ncome th1s year also suggest more normal relat1onsh1ps between other money measures and 1ncome. Therefore, I th1nk we can be more conf1dent 1n us1ng monetary growth as a gu1depost to monetary po11cy. ' . And monetary po11cy act1ons d1rected towards moderating monetary and cred1t growth trends as env1s1oned 1n th~ growth ranges recently adopied should contr1bute to ach1ev1ng a s~sta1nable econom1c g~owth path w~11e _ma1nta1n1ng the progress made on 1nfJat1on. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #14 Major External Challenges 1. Federal Def1c1t 2. International Trade Def1c1t ,,. ~<._ ~ ().~..f I~ But there are External Challenges (or R1sks) to ach1ev1ng our econom1c goals -- challenges over wh1ch monetary p~l1cymak~rs h~ve 11ttle control. - The two major External Challengei now stem from~) the Federal Def1c1t Outlook and 2) the Internat1onal:Trade Def1c1t Outlook We've made good progress towards ach1ev1ng econom1c object1ves of pol1cy. And . - 1t 1s my 1ntrent, and that of other monetary pol1cymakers, to dQ what we can &#45;&#45;&#45; to assure that progress continues. But, monetary pol1cy can not do 1t alone. What we need 1s a proper balance between monetary and f1scal pol1cy. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #14 (Cont1nued) And, as Pres1dent Reagan sa1d 1n h1s budget melsage "only the threat of 1ndefinitely prolonged high budget defic1ts threatens the continuat1on of susta1ned non1nflationary growth and prosper1ty. It - (.. raises the spector of sharply h1gher 1nter,. st rates, choked-off 1nvestment, renewed recess1on, and ris1ng unemployment." . ·" The 1nternat1onal trade def1c1t outlook 1s very m94~ related to the • federal def1c1t outlook. Unless act1on on federal deficit 1s taken soon, we likely .. w111 have to 1ncrease our rel1ance on sav1ngs from abroad 1n order to accommodate government and pr1vate sector cred1t needs, and th1s means further deter11oration on our trade balan~e. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #15 Chart Federal Budget Def1c1t ($) The federal budget def1c1t 1s a subject that l) has been talked about a lot, 2) almost everyone agrees needs to be dealt w1th, but 3) near-term prospects for action seem remote In f1scal 1983, the federal def1cit was a record $195.4 b1111o.n; .surpass1ng - - the previous $110.6 b1111on record in fiscal 1982. Moreover, the outlook for - - - fiscal 1984 and 1985 1s not encourag1ng. The Pres1dent's ~udget shows def1c1ts of $184 b1111on 1n FY'84 and $180 b1111on 1n FY'85, and some regard these est1mates as overly opt1m1st1c. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Slide #16 Chart Federal Def1c1t as a% of GNP From another perspect1ve, the federal def1c1t was nearly 6 percent of GNP 1n ---- 1983, the h1gh for the post-World War II years, and 1s 11kely to be only - sl1ghtly lower 1n 1984. The Budget f1gures 1nd1cate federal def1c1ts as a percent of GNP at 5.2 percent 1n FY 84. 1 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Slide #17 Total Interest Bearing Public Debt -- If federal deficits continue in the $175- $200 billio~ range, it won't be long before the total debt outstanding exceeds $2 trillion. At the end of 1183, the total interest bear1ng debt outstanding was $1.4 tr1111on and at the current pace is 1ncreas1ng by $2 - $3 b1n1on per week. 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Interest pa1d 1n FY 84 expected to be $150 b11~1on,~ 17/l~cent; 1n 1 FY 85 expected to be $165 b1111on, _or almost 18%. 1 --· Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S11de #19 "I\,; Demands 04-R Available Saving (Net) I don't want to give impression that federal deficits are always bad. There was some good generated by the deficits of pas_t few years. Federal deficits as a percent of GNP generally do r1se dur1ng recessions and early in recoveries, providing fiscal stimulus to get recovery underway. - But, once recovery is underway, federal def1c1ts _as a percent of GNP usually - drops sharply or remains .at a relat1vely lsow level compared to what 1s expected to prevail in the fo~seeable future. The gloomy s1de of the federal defic1~ story -- credit market iroplications of financing the deficit. In the past, sharply declining or relatively low federal defic1ts relative to GNP provided room for additdlnal borrowing to support expa~d1ng business capital outlays and housing. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Slide #20 Chart Sources of Available Saving (Net) But even with a modest pickup in private sector demands this year, past trends suggest that domestic saving will be insufficient to meet both federal government and pr1vate sector borrowing needs. For many years we've managed to save (net of depreciat1on) only 7 to 9 percent of GNP, - If budget deficits absorb 5 perceht or more of GNP as expected, not much wfll be left for the investment we need. Last year savings from abroad provided an increasing share of our needs in the form of a net capital inflow. And if domestic savings relative to GNP remain in the 7 to 9 percent range, the shortfall between domestic savings an-d government plus private sector needs will increase our reliance on savings from abroad even further. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 29 S11de #21 Chart on Current Account Def1c1t But cont1nued rel1ance on sav1ngs from abroad works to exacerbate the 1nternat1onal trade def1c1t s1tuat1on -- the second major External Challenge we face. The counterpart of a net cap1tal 1nflow 1s a net def1c1t on our current account -- trade and serv1ces -- w1th other countr1es. Wh1le th1s s1tuat1on 1s tolerable for a t1me, 1t cannot be susta1ned for a long per1od. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 30 Sl1de #22 H1gh Value of Dollar Benef Hs •Attracts fore1gn sav1ngs ~Makes 1mports "cheaper" •Lower domest1c 1nflat1on •Faster growth for other countr1es •Exporters not shar1ng 1n recovery •Internat1onal debt s1tuat1on threatened •Other countr1es need sav1ngs too L1ke the federal def1c1t, the 1nternat1onal trade s1tuat1on, wh1ch results largely from h1gh value of dollar, has had some benef1ts. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 31 S11de #22 (Cont1nued) The high value of dollar 1) has enabled us to attract savings from abroad which helps keep domest1c 1nterest rates lower than otherwise 2) makes imports relat1vely less expensive which helps keep domest1c 1nflat1on lower than otherwise as well as prov1ding st1mulus for growth in other countr1es. But, the costs are also large and grow1ng more ser1ous as time passes 1) Our exporters and those competing d1rectly w1th 1mports have not shared at all proport1onately 1n the recovery. 2) The internat1onal debt situation that so far has been managed is threatened. 'L ' 3) Other countr1es w111 1ncreasingly need the1r own sav1ngs .o) f the1r recovery 1s to proceed also. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 32 S11de #23 Benef1ts of lower federal def1c1ts •lower 1nterest rates •Reduced re11ance on fore1gn sav1ngs •More room for pr1vate sector borrow1ng Wh11e the challenges posed by the tw1n def1c1ts seem large, they are not 1nsurmountable. 01rect1on for f1scal po11cy act1on seems clear Moves to narrow federal def1c1t would 1) lower 1nflat1onary expectat1ons lead1ng to lower interest rates than otherw1se 2) 1mpact benef1c1ally on trade def1c1t by reduc1ng re11ance on fore1gn savings 3) prov1de more room for pr1vate sector borrowing to support expand1ng cap1tal outlays Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 33 Slide #24 Benefits of moderating money and credit growth •Maintains progress on inflation •Contributes to sustainable growth Oirect1on for monetary pol1cy action also seems clear Providing for moderat1ng money and credit growth would 1) maintain progress on inflation since rapid monetary growth rek1ndles inflationary expectations 2) contribute to sustainable economic growth I don't need to remind you that a fairly heavy cost was paid to achieve the progress on inflation-to-date To r1sk that progress by adopt1ng short-run monetary policy strategies that temporar1ly lead to lower interest rates but 1n the longer-run put us back on the 1nflationary spiral would be "the most unkindest cut of all." Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 34 S11de 24 (Cont1nued) Let me conclude w1th someth1ng that 1s not a r1sk - namely monetary pol1cy Volcker has been loud and clear - our cont1nu1ng and long range object1ve, return to cond1t1ons of pr1ce stab111ty 1. Our announced ranges for monetary aggregates in 1984 consistent w1th th1s 2. We won't cave - Too much committed 3. Elect1on Year - Create d1ff1cult polit1cal pressures - already occurring 4. We won't monetize the debt 5. We w111 prov1de adequate money to the system to fac1litate continued expansion ¥ 6. But not so much that 1nflat1o~111 be re-1gnited 7. The Fed will be point man this year 8. Can stand the heat Meanwhile, and 1mportantly, good economic expansion in place and that always provides a very happy climate. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1984, March 5). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19840306_silas_keehn

@misc{wtfs_regional_speeche_19840306_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1984},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19840306_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}