Regional President Speech

SILAS KEEHN REMARKS NORTHERN TRUST COMPANY FINANCIAL SEMINAR "BUSINESS INSIGHTS AND ISSUES FOR 1985" CHICAGO, ILLINOIS NOVEMBER 15, 1984 I. INTRODUCTION -- GRACIOUS INTRODUCTION REGULATOR -- WARMLY RECEIVED -- KIND WORDS A. THOUGHT I WOULD TALK ABOUT THE CHALLENGES AND CHANGES CURRENTLY FACING THE FEDERAL RESERVE SYSTEM 1. THE IMPLICATIONS OF THESE CHANGES ON THE MARKETS, ON FINANCIAL INSTITUTIONS AND ON THE PUBLIC AT LARGE 2. GIVEN THE NATURE OF OUR ACTIVITIES, THE FEDERAL RESERVE PLAYS A VERY KEY ROLE IN THE AFFAIRS OF OUR COUNTRY -- PERHAPS NOT FULLY UNDERSTOOD II. LET ME START BY QUICKLY REVIEWING THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 2 A. DESCRIPTION OF THE FEDERAL RESERVE SYSTEM, BANKS, BRANCHES, GEOGRAPHIC, ET AL 1. EACH BANK A GOVERNMENT CORPORATION -- SEPARATE A. BOARD OF DIRECTORS -- 9 B. 3 CLASSES -- THE ELECTIVE PROCESS 2. BOARD OF GOVERNORS -- 7: 14 YEAR STAGGERED TERMS A. APPOINTMENT/CONFIRMATION PROCESS B. CHAIRMAN/VICE CHAIRMAN 3. INTERRELATIONSHIP BETWEEN BOARD OF GOVERNORS AND THE BANKS A. RESERVE BANK BOARDS OF DIRECTORS HAVE AN IMPORTANT GOVERNANCE RESPONSIBILITY (1) YET SOMEWHAT DIFFERENT THAN A REGULAR COMMERCIAL BANK DIRECTOR B. OPERATIONAL AND PROCEDURAL CONTROLS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 3 B. THE IMPORTANCE IN HIGHLIGHTING THIS STRUCTURE 1. CHECKS AND BALANCES A. EVERYTHING WE DO SUBJECTED TO CHECK AND BALANCE B. AN EXCEPTIONALLY IMPORTANT FEATURE FOR SUCCESSFUL OPERATION OF A CENTRAL BANK MONETARY POLICY 2. IN TURN, THIS HIGHLIGHTS THE INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM A. CREATED BY CONGRESS -- CAN BE CONTROLLED BY CONGRESS B. THROUGH FREQUENT TESTIMONY, VARIOUS REPRESENTATIVES OF THE FED, MOST NOTABLY THE CHAIRMAN, REPORT TO CONGRESS C. YET WE DO ENJOY A SIGNIFICANT DEGREE OF INDEPENDENCE IN THE CONDUCT OF OUR AFFAIRS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 4 (1) WHICH, FRANKLY, WE JEALOUSLY GUARD 3. AS CONGRESS RECONVENES IN THE NEW YEAR, THIS ISSUE WILL RE-EMERGE A. ALREADY THERE ARE INDICATIONS THAT THEY WILL RE-FOCUS ON THIS ISSUE B. ANY SIGNIFICANT SLOWDOWN IN THE RATE OF ECONOMIC ACTIVITY WILL ONLY HIGHLIGHT THE MATTER C. THERE IS THE RISK THAT WE COULD GET CAUGHT IN MIDDLE AS THE FISCAL DEFICIT/TAX REVENUE IMBROGLIO INTENSIFIES -- AND IT SURELY WILL III. THE FUNCTIONS OF THE FEDERAL RESERVE BANKS A. THREE DISTINCT AREAS OF ACTIVITY 1. FOR COMPLETELY SEPARATE AND DIFFERENT REASONS 2. ALL GOING THROUGH A PERIOD OF SIGNIFICANT CHANGE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 5 3. YET EACH OF THESE ACTIVITIES, AT LEAST TANGENTIALLY, RELATES TO MONETARY POLICY -- THE PRIMARY RESPONSIBILITY AND ONE OF ABSOLUTELY OVERRIDING IMPORTANCE IV. AS A START, OUR BASIC OPERATIONS, THE PROCESSING OF VARIOUS WHOLESALE ACTIVITY FOR FINANCIAL INSTITUTIONS, OF MAJOR MAGNITUDE A. LET ME USE A CURRENT ISSUE, NAMELY ELECTRONIC FUND TRANSFERS, AS AN EXAMPLE OF HOW ULTIMATELY THIS RELATES TO MONETARY POLICY 1. YOU MAY BE AWARE THAT WE ARE INCREASINGLY FOCUSING ON THE EFT AREA AS ONE BEARING SPECIAL CONCERN 2. BECAUSE WE OPERATE THE FEDWIRE, WHICH IS DIRECTLY COMPETITIVE WITH SEVERAL PRIVATE SECTOR NETWORKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {2) 11/14/84 PAGE 6 A. THERE IS THE IMPRESSION THAT WE ARE ATTEMPTING TO EXPAND OUR PRESENCE -- OUR MARKET POSITION -- TURF 3. RATHER, WE HAVE BEEN INCREASINGLY CONCERNED ABOUT THE RISKS INHERENT IN THE WHOLE WIRE AREA A. A BREAKDOWN IN THE WIRE AREA, ON ONE OF THE NETWORKS, COULD HAVE A DESTABILIZING EFFECT ON THE FINANCIAL MARKETS 4. IF A MAJOR INSTITUTION FAILED OR WAS IN SOME WAY UNABLE TO SETTLE ITS POSITION DURING THE DAY OR AT THE END OF THE DAY, A DOMINO EFFECT COULD OCCUR 5. OUR ONLY RECOURSE WOULD BE TO LIQUEFY THE FINANCIAL SYSTEM A. THIS WOULD HAVE OBVIOUS MONETARY POLICY IMPLICATIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 7 6. THIS SUBJECT ONE THAT IS UNDER CURRENT REVIEW. OUR HOPE IS THAT A SURVEILLANCE STRUCTURE CAN BE PUT IN PLACE THAT WILL DEAL WITH OUR CONCERNS A. YET NOT IMPEDE THE EFFICIENCY OF THE SYSTEM, WHICH I AM SURE IS VITALLY IMPORTANT TO ALL OF YOU B. OUR INVOLVEMENT IN OPERATIONS, NOT ONLY THE WIRE AREA BUT CHECK COLLECTION AS WELL, PROVIDES THE FED WITH AN IMPORTANT ENTREE IN THE PAYMENTS MECHANISM 1. PAYMENTS MECHANISM -- ARCANE PIPELINE OBVIOUSLY AN AREA OF CONCERN TO US 2. SOME FINANCIAL INSTITUTIONS QUESTION THE EXTENT OF OUR ROLE IN THE OPERATING AREA 3. BUT THE POTENTIAL RISKS OF HAVING THE FED CEASE ITS PRESENCE ARE VERY SIGNIFICANT A. EVEN OUR HARSHEST CRITICS WOULD NOT WANT THAT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2} 11/14/84 PAGE 8 B. THE MONETARY POLICY IMPLICATIONS BECOME TERRIBLY IMPORTANT SECOND AREA V. SUPERVISION AND REGULATION A. REGULATION -- THE DEVELOPMENT OF RULES BY WHICH FINANCIAL INSTITUTIONS ARE GOVERNED AND CONTROLLED B. SUPERVISION -- THE ENFORCEMENT OF THESE REGULATIONS AS THEY RELATE TO THE INSTITUTIONS FOR WHICH WE HAVE PRIMARY RESPONSIBILITY C. THE FINANCIAL SERVICE INDUSTRY IS GOING THROUGH A PERIOD OF SIGNIFICANT STRUCTURAL CHANGE 1. THE MARKETPLACE CHANGES ARE OCCURRING FAR MORE RAPIDLY THAN THE REGULATORY/LEGISLATIVE CHANGES A. WITHIN PAST WEEK OR TWO -- IMPORTANT DEVELOPMENTS 2. ONLY JUST BEGINNING TO SEE THE IMPACT OF THIS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 9 3. THE EXAMPLES OF OTHER INDUSTRIES THAT HAVE GONE THROUGH DEREGULATION ARE INSTRUCTIVE 4. BANKING WILL BE NO DIFFERENT D. THE FINANCIAL SERVICES INDUSTRY IS FACING AN OVERCAPACITY PROBLEM 1. REGULATION HAS PROVIDED SUPPORT FOR A GREATER NUMBER OF INSTITUTIONS THAN NATURAL MARKET FORCES COULD HAVE PERMITTED 2. DEREGULATION WILL EXPOSE All INSTITUTIONS TO MARKET CONDITIONS THAT THEY HAVE NEVER EXPERIENCED BEFORE A. A CONSOLIDATION AND REDUCTION IN THE NUMBER OF PARTICIPANTS WILL BE A NATURAL RESULT E. CLEARLY, THESE DEVELOPMENTS Will TOUCH ON THE SAFETY AND SOUNDNESS OF THE FINANCIAL SYSTEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 10 1. FAILURES THAT DESTABILIZE FINANCIAL INSTITUTIONS COULD HAVE AN IMPACT ON THE MARKETS AND FINANCIAL CONDITIONS A. MONETARY POLICY, THE LOGICAL RESPONSE TO THIS PROBLEM B. ONCE AGAIN, AN ISSUE THAT SEEMS VERY MECHANICAL IN NATURE HAS MONETARY POLICY IMPLICATIONS THIRD AREA VI. ECONOMIC RESEARCH AND MONETARY POLICY -- WE ARE IN ONE OF THOSE HAPPY PERIODS WHEN MOST THINGS FROM BOTH ECONOMIC AND MONETARY POLICY PERSPECTIVES ARE IN REASONABLY GOOD ORDER, YET THIS AREA ALSO IS FACING IMPORTANT CHALLENGES A. SIGNIFICANT ACCOMPLISHMENTS SINCE THE BASIC OPERATING CHANGE IN OCTOBER 1979 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 11 1. INFLATION RESULTS -- BRIEF PERIOD 2. ADMITTEDLY ACCOMPLISHED AT ENORMOUS COSTS -- PARTICULARLY IN THE MIDDLEWEST A. MANY OF YOU SENSITIVE TO THIS B. OUR CURRENT CHALLENGE TO MAINTAIN THE LONGER RANGE OBJECTIVE -- RETURNING THE ECONOMY TO AN ENVIRONMENT OF PRICE STABILITY 1. YET WE WILL NEED TO BE FLEXIBLE IN OUR APPROACH TO THIS EXCEPTIONALLY IMPORTANT OBJECTIVE C. THERE ARE A NUMBER OF RISKS TO THE CURRENT ECONOMIC EXPANSION 1. I WON'T ENUMERATE THEM ALL BUT BY FAR THE LARGEST RISK IS THE CONTINUING AND GROWING FISCAL DEFICIT 2. THE PUBLICITY -- PARTICULARLY DURING THE CONCLUDING PHASE OF THE ELECTION AND SINCE THEN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 12 -- I ALMOST DARE NOT MENTION IT -- IT HAS BECOME BORING 3. DESPITE THE RHETORIC, IT'S A PROBLEM THAT WE HAVEN'T TAKEN VERY SERIOUSLY A. PERHAPS WITH GOOD REASON, AFTER ALL, THINGS SEEM TO BE GOING REASONABLY WELL (1) EXPANSION, UNEMPLOYMENT, INFLATION (2) SO WHY REACT B. WE TEND TO BE CRISIS ORIENTED -- WE DON'T ACT UNTIL THE CRISIS ARISES 4. BUT TO A VERY LARGE EXTENT, THE MAGNITUDE OF THE DOMESTIC FISCAL DEFICIT IS BEING MASKED BY THE TRADE DEFICIT A. WE All UNDERSTAND THAT THE FOREIGN MARKETS ARE FINANCING A SIGNIFICANT PART OF OUR DOMESTIC DEFICIT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 13 B. WITH THE PASSAGE OF TIME, WE HAVE BECOME VERY COMPLACENT ABOUT A SET OF CIRCUMSTANCES THAT SHOULD MAKE US EXTREMELY UNCOMFORTABLE C. OUR RELATIVELY HIGH INTEREST RATES, LOW LEVELS OF INFLATION, GOOD ECONOMIC CONDITIONS AND SOLID POLITICAL SYSTEM HAVE MADE THE DOLLAR CONTINUINGLY ATTRACTIVE D. BUT MARKETS CAN CHANGE VERY, VERY RAPIDLY (1) IF INTERNATIONAL SENTIMENT CHANGES AND MARKETS TURN AROUND (2) PARTICULARLY IF THE CHANGE IS ABRUPT AND IN SIGNIFICANT AMOUNTS (3) IT COULD HAVE A VERY SERIOUS EFFECT ON OUR MARKETS (4) INTEREST RATES MIGHT WELL GO UP Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {2) 11/14/84 PAGE 14 {5) AND THEN THE FISCAL DEFICIT ISSUE WOULD TAKE ON AN ENTIRELY DIFFERENT DIMENSION D. TO CHANGE THE FOCUS A BIT FISCAL DEFICITS RESULT IN DEBT -- GROWINGLY WORRIED ABOUT THE COMPOUND INTEREST SYNDROME 1. THE CURRENT LEVEL OF FEDERAL DEBT IS SOMETHING OVER $1.5 TRILLION -- AT THE CURRENT RATE, THE LEVEL IS RISING BY SOME $4.5 BILLION PER WEEK 2. OR SOME $900 MILLION EACH AND EVERY WORKING DAY E. IT TOOK OUR COUNTRY 200 YEARS, ALMOST OUR WHOLE HISTORY, TO REACH A DEBT LEVEL OF $500 BILLION 1. JUST 5 MORE YEARS TO DOUBLE THAT TO $1 TRILLION 2. AND NOT YET MIDWAY IN THE CURRENT DECADE, WE HAVE ADDED YET ANOTHER $500 BILLION TO REACH THE $1.5 TRILLION LEVEL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {2) 11/14/84 PAGE 15 3. THE RATE OF ESCALATION HAS BECOME PRETTY FRIGHTENING A. INDEED IS THE MATTER THAT HAS GOTTEN BEYOND OUR CONTROL F. IMPORTANTLY, THE INTEREST COST OF SUPPORTING THIS BURGEONING DEBT HAS OMINOUS IMPLICATIONS 1. MANY STUDIES AND FORECASTS WOULD SUGGEST THAT AN INCREASING PERCENTAGE OF OUR GNP WILL BE COMMITTED TO THE PAYMENT OF INTEREST ON THE DEBT 2. BY THE END OF THE CENTURY, NOT LIGHT YEARS AWAY, SOME 10% OF OUR GNP WILL BE UTILIZED IN THE PAYMENT OF INTEREST -- UP FROM A CURRENT LEVEL OF ABOUT 3% OF GNP 3. THIS IS BECOMING AN UNCONTROLLABLE PART OF THE BUDGET -- THE INTEREST BILL HAS TO BE PAID VII. THE IMPLICATIONS OF ALL THIS FOR MONETARY POLICY ARE CLEAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 16 A. IT WILL BE EXCEPTIONALLY DIFFICULT TO DEVELOP A VIABLE MONETARY POLICY IN SUCH AN ADVERSE FISCAL ENVIRONMENT 1. THERE MUST BE SOME REASONABLE BALANCE IN ORDER TO MAINTAIN OUR CURRENT POLICY OF CONTROLLING INFLATION AND RETURNING THE ECONOMY TO CONDITIONS OF PRICE STABILITY 2. FISCAL/MONETARY POLICY SIMPLY CANNOT BE MOVING IN DIAMETRICALLY OPPOSED DIRECTIONS B. BUT LET ME TRY AND PLACE THIS ON A POSITIVE NOTE. A MUCH LONGER RANGE VIEW OF THE FISCAL PROBLEM CAN BE QUITE ENCOURAGING 1. LOOKING AT THE ENTIRE HISTORY OF OUR COUNTRY A. THE FISCAL DEFICIT/DEBT PROBLEM IS ONE THAT WE HAVE FREQUENTLY FACED, AND IN EACH AND EVERY INSTANCE WE HAVE SOLVED IT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT {2) 11/14/84 PAGE 17 2. OUR DEFICITS HAVE BEEN EVENT ORIENTED -- CAUSED BY A WAR, PANIC, AN ECONOMIC RECESSION -- OR SOME SIMILAR ADVERSE EVENT, WHICH OBVIOUSLY SHOULD BE DEALT WITH BY INCURRING A DEFICIT 3. BUT AFTER THE EVENT, WE HAVE RUN BUDGETARY SURPLUSES AND WE HAVE AT LEAST REDUCED OR IN SOME INSTANCES EVEN ELIMINATED THE DEBT 4. THIS RECORD HOLDS FOR THE REVOLUTIONARY WAR, THE WAR OF 1812, THE CIVIL WAR, WWI, AND ALL OTHER EVENTS WE EXPERIENCED RIGHT UP THROUGH THE IMMEDIATE POST WWII PERIOD 5. IN THE 14 YEARS FROM 1947 THROUGH 1960, THERE WERE 7 FISCAL DEFICITS AND 7 SURPLUSES 6. BUT SINCE 1960, THERE HAS BEEN ONLY ONE SURPLUS YEAR, 1969, AND THAT WAS ONLY $3 BILLION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 18 A. WHEN HISTORIANS LOOK BACK AT THE RECORD, IT MAY BE THAT 1960 WILL HAVE BEEN THE TURNING POINT IN ALL OF THIS 7. WE SEEM TO HAVE ENTERED A NEW PHASE IN OUR HISTORY A. OUR DEFICITS ARE NO LONGER EVENT ORIENTED B. WE ARE NOW WILLING TO EXPERIENCE DEFICITS AND INCREASE THE DEBT TO SUPPORT OUR NORMAL ACTIVITIES C. THIS INVOLVES A MAJOR PHILOSOPHICAL CHANGE IN THE MANAGEMENT OF OUR AFFAIRS C. BUT MY REASON FOR GOING THROUGH ALL OF THIS IS TO SIMPLY SUGGEST THAT THE CURRENT SITUATION CANNOT CONTINUE (AND, OBVIOUSLY, I AM EXPRESSING A PERSONAL VIEW} Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 19 1. IT IS SIMPLY AN UNSUSTAINABLE SET OF CIRCUMSTANCES AND IN THAT SENSE THE SITUATION CAN ONLY IMPROVE -- IT CAN'T GET WORSE 2. AT SOME POINT WE WILL RUN OUT OF MANEUVERING ROOM 3. ENTIRELY POSSIBLE THAT THAT TIME MAY BE APPROACHING 4. IF THE CURRENT SLOWING IN THE RATE OF ECONOMIC EXPANSION WERE TO CONTINUE A. PARTICULARLY IN LIGHT OF THE RECENT EXPERIENCE WITH REGARD TO THE MONETARY AGGREGATES -- M-1 FLAT FOR PAST SEVERAL MONTHS 5. CONGRESS MAY WELL RE-FOCUS ON THE FED AND ON MONETARY POLICY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 20 A. WE COULD BECOME A LIGHTNING ROD AND END UP IN THE MIDDLE ON THIS ONE 6. THE INDEPENDENCE ISSUE THAT I MENTIONED AT THE OUTSET COULD BECOME A MATTER OF CONGRESSIONAL DEBATE VI 11. TO CONCLUDE A. LONG WAY OF SAYING THAT THE FED IS CURRENTLY DEALING WITH SOME EXCITING CHALLENGES 1. THERE REALLY IS A LOT GOING ON, MUCH OF WHICH MAY BE REASONABLY OBSCURE TO THE PUBLIC AT LARGE B. TRIED TO HIGHLIGHT THIS MORNING 1. DEFICIT IS MAJOR ISSUE FACING US 2. lHAT IT Will BECOME INCREASINGLY DIFFICULT TO DEVELOP A VIABLE MONETARY POLICY IN SUCH AN ADVERSE FISCAL ENVIRONMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2} 11/14/84 PAGE 21 3. INCREASINGLY THERE IS THE RISK THAT CONGRESS WILL ATTEMPT TO EXERT GREATER CONTROL OVER THE FED A. IF THIS WERE TO OCCUR, IF WE WERE TO LOSE SOME OF OUR INDEPENDENCE B. THERE WOULD BE SIGNIFICANT PRESSURE TO REFLATE THE ECONOMY C. THIS WOULD BE VERY DIFFICULT TO RESIST D. THE FREE WORLD IS LOADED WITH EXAMPLES OF THIS THAT SHOULD BE INSTRUCTIVE TO US C. BUT I AM OPTIMISTIC THAT SOMEHOW WE WILL ULTIMATELY FACE THIS DEFICIT PROBLEM AND RESOLVE IT 1. THOUGH THE NEAR TERM PROSPECTS SEEM PRETTY DISCOURAGING 2. IMPORTANTLY, THE LONGER RANGE RECORD SUPPORTS THIS OPTIMISM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) 11/14/84 PAGE 22 D. ON THAT POSITIVE NOTE -- LET ME CONCLUDE 1. THANK YOU VERY HUCH * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1984, November 14). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19841115_silas_keehn

@misc{wtfs_regional_speeche_19841115_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1984},
  month = {Nov},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19841115_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}