Regional President Speech

SK DRAFT (1) SILAS KEEHN REMARKS AT LUNCHEON NASHVILLE, TENNESSEE APRIL 3, 1985 I. INTRODUCTION A. WEATHER/ECONOMY II. IN A BROAD SENSE, ECONOMIC OUTLOOK CONTINUES TO BE FAVORABLE A. THOUGH CURRENTLY EXPERIENCING A PAUSE 1. NO REASON TO CHANGE BASIC FORECAST OF CONTINUATION OF· EXPANSION AT LEAST THROUGH 1985 B. GNP +3 - 3-1/2% 1. DOWN FROM LAST YEAR'S 6% 2. THIRD YEAR EXPANSION C. UNEMPLOYMENT - 7% OR LITTLE UNDER BY END OF THE YEAR 1. HIGH - BUT VAST IMPROVEMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) 4/1/85 PAGE 2 D. INFLAllON - C.P.I. CURRENTLY 3-1/2% 1. SOME INCREASE DURING BALANCE OF YEAR 2. BUT NOT AS MUCH AS MIGHT HAVE ANTICIPATED GIVEN A. GOOD BUSINESSES ARE DOING QUITE WELL - BAD BUSINESSES ARE DOING VERY BADLY 1. RETAIL SALES, INCLUDING AUTOS, VERY STRONG 2. HEAVY CAPilAL GOODS INDUSTRIES DOING BADLY 3. ANYTHING AGRICULTURALLY ORIENTED - DISMAL B. NONETHELESS, IN A TOTAL PERSPECTIVE THE RESULTS ARE VERY GOOD IV. IN PAST HAVE COMMENTED ON RISKS TO RECOVERY ( s/fh_) /c_ A. RESURGENCE OF INFLATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 4/1/85 PAGE 3 2. MIGHT HAVE EXPECTED THAT DECLINE WOULD BE TEMPORARY 3. BUT, AS NOTED, OUTLOOK FAVORABLE 4. WAGE COSTS A. RECENT EXPERIENCE B. PRODUCTIVITY C. UNIT LABOR COSTS D. CH A N GE I N AT TI TU DE BY UN I ON S ' ~ < ~ > '.:-,... : r~ • ( - I -...J {L G'-'"L~t,1.. ~ ,· ~-\j ~ 'i -~J-·· _,, 5. PRICE ESCALATION - MODERATE A. CAPACITY UTILIZATION B. INTENSE MARKET PRESSURES (1) INCREASES JUST DON'T STICK G <'... C. ~ ~ _'L.·'::S-.AN (.5l_._ ) B. ; DOMESTIC FINANCIAL STRAINS ~ ~ ~~ 1. CONTINENTAL~~ ~.oi.;_µ - A. REGULATORY RESPONSE ,,-~ ~ ~ 2. OHIO A. WELL CONTAINED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 4/1/85 PAGE 4 . . f r- l._ .c, · ) r l-'--.) • ( • • ).' I .. . r .L '- l , . 1 t,.ll /• I .., '• ,(_ • I.) B. BUT DEVELOPED PRETTY RAPIDLY AGRICULTURE A. LOCALIZED - BUT A PROBLEM 4. A. SIGNIFICANT VACANCY IN COMMERCIAL PROPERTIES l-l ~-· ., : c ( , . c · 1 ·? .t :· / 2 - L f i-.. 1 , ~ ~ Lf i L I I. , 5 . -· ENE R~ ~ ~ ) • , A. PRICE EROSION 6. MARKETS ARE PRETTY BRITTLE A. ATMOSPHERE IS ELECTRIC I ' ( I\. \' 'l -·---- ! . r,~' [Lr • l..(...._) • ,- t RENEWED PROBLEMS WITH THE HEAVILY DEBTED LDC CO U N T RI ES /~c Lk ,•- 1. SIGNIFICANT PROGRESS - MEXICO ?/ ~. ---~ 2. BUT BRAZIL/ ARGENT I NA - 1 ;+-{ (tJ.:) .....,r r I rtc.-<.-c<~ t.JJ ,,_,· ·r. w(' t-, i'L( ..f'{'ir--- ~✓- / r:-~;-(<" / ~~~c--f ~ . • • " • \ •• ' ' ...,, ..... l .... ~~ - / /'(J (? C <- , -, ~~- "'-' - /J V. BUT THE BIGGEST RISK BY FAR - THE SO-CALLED TWIN DEFICITS - FISCAL AND TRADE A. THE IMBALANCES ARE BECOMING UNMANAGEABLE AND ARE REALLY THREATENING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 4/1/85 PAGE 5 B. LET ME ·COMMENT ON THE SURPRISING, INDEED, METEORIC, RISE IN THE INTERNATIONAL VALUE OF DOLLAR lHAT HAS OCCURRED OVER PAST TWO YEARS 1. UNTIL RECENTLY - ONLY GO UP 2. DESPITE EXPECTATIONS TO THE CONTRARY C. IN HINDSIGHT, NOT SURE THE INCREASE SHOULD BE SUCH A SURPRISE - THE ENVIRONMENT WENT THROUGH ENORMOUS CHANGE A. OPERATING CHANGE OCTOBER 1979 B. WE WERE GOING TO BE SERIOUS ABOUT 1NFLATION 2. REAGAN ELECTED IN 1980 - SIGNIFICANT MANDATE A. RETURN TO FUNDAMENTAL VALUES 3. AS A RESULT OF FED'S OPERATING CHANGE - RATES BECAME MORE VOLATILE A. ROSE TO ASTONISHING LEVELS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 4/1/85 PAGE 6 B. AS INFLATION CAME DOWN - REAL RATES INCREASED C. DOLLAR TOOK ON A NEW ATTRACTIVENESS - RETURN WAS HIGH t., . ---- j) _ ?~ -Jr C, 0 r ~..J.--t r.✓1..,,..., ,~ ~ ':. r , , .., ') r--1.--1_,,.-. ------t ~-:µ.-1- ""-f 4. RECESSION ENDED IN LATE 1982 A. MARKETS GAINED CONFIDENCE IN OUTLOOK FOR ECONOMY B. PARTICULARLY SO WHEN REALIZED THAT INFLATION WOULD REMAIN UNDER CONTROL /YNc!f 5. POLITICALLY, WE CONTINUED TO OFFER AN ATTRACTIVE ALTERNATIVE A. NOT THE CASE WITH MANY OTHER COUNTRIES D. THE POINT IS - EARLY 198OS PROVIDED AN ENORMOUS ENVIRONMENTAL CHANGE 1. VASTLY DIFFERENT THAN LATE 1970S A. RAMPANT INFLATION B. ERRATIC ECONOMY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) 4/1/85 PAGE 7 C. WEAK ADMINISTRATION 2. THE STAGE WAS SET FOR THE INCREASE THAT OCCURRED VI. EXCHANGE RA/ PARTICULARLY WITH FLOATING EXCHANGE RATES, ARE,~F COURSE, A FUNCTION OF SUPPLY AND DEMAND - THESE PRESSURES ALSO MITIGATED IN FAVOR OF AN INCREASE IN THE VALUE OF THE DOLLAR A. DEMAND /.1· - ( ~{- 1. DOLLAR SERVE, AS PRINCIPAL MEDIUM OF EXCHANGE A. 70% OF WORLD TRADE IS SETTLED IN DOLLARS 2. WORLD WIDE EXPANSION (- , · • , (IL ..-.!- r ·, \~ U' h A• .1.. '( ~i',' C1,,,,V--: <.) A. MORE MODEST THAN DOMESTIC -) c:· rr-. • ( _v J>· ·1 c_f f~~' ei.1.-rv B. (t(aUGH TO PUT PRESSURE ON DEMAND FOR DOLLARS r ·i B ./ r:·: i c..l /..,I\ i, )t--'c (t.__,1 3. THE U.S. HAS SUBSTANTIAL AND WELL DEVELOPED CAPITAL MARKETS - UNPARALLELED A. SIGNIFICANT INCREASE IN DEMAND FOR DOLLAR DENOMINATED ASSETS - FINANCIAL AND PRODUCTIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 4/1/85 PAGE 8 4. DEMAND PRESSURES BECAME PRETTY HEAVY B. SUPPLY 1. OPERATIONAL CHANGE - OCTOBER 1979 (, J :l 1: C-.(\:. '. :_ :" 1 ,, , ..., 6 -Ct v~·\ ( L 0,. . J..1..-~- ~ Q,, ~-~. D'vj..C. 2. CLEAR SIGNAL THAT SUPPLY OF BANK RESERVES, _THER}~RE DOLLARS, WOULD COME UNDER RESTRAINT ~>~ ·~ r,I * " • I • ~~--·~ 3. (OPERATION OF DOMESTIC MONETARY POLICY BASICALLY ESTABLISHES THE FRAMEWORK OF SUPPLY ASPECTS AS ~ Jv¼).·~~ THEY ~ /TO EXCHANGE MARKETS VII. AS A CONSEQUENCE, VALUE OF DOLLAR ROSE INEXORABLY A. BECAME SELF-FULFILLING PROPHECY - NO LOSE SITUATION 1. TRADERS BOUGHT AND SOLD WITH ENSURED PROFITABILITY B. RECENl INTERVENTION 1. CANNOT CHANGE FUNDAMENTALS r r; L A. VOLUMES TOO LARGE 2. BUT DOES INTRODUCE AN ELEMENT OF UNCERTAINTY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (1) 4/1/85 PAGE 9 3. MAY WELL HAVE BEEN AN UNDERLYING REASON FOR RECENT DECLINE C. BUT DESPITE PRESS COMMENTS THAT FROM A MONETARY POLICY PERSPECTIVE INTERVENTION IS INFLATIONARY 1. IT EXPANDS THE MONEY SUPPLY 2-_ ~ Al'crr- (;µ ~ D. TECHNICALLY, AND UNLESS CORRECTIVE ACTION IS TAKEN, INTERVENTION DOES ADD TO THE MONEY SUPPLY E. WHEN THE FEDERAL RESERVE INTERVENES (ON BEHALF OF THE TREASURY}, SAY, AGAINST THE D.M. 1. WE ENTER MARKET AND SELL DOLLARS FOR D.M. 2. WE PAY FOR TRANSACTION BY CREDITING THE RESERVE ACCOUNT AT A U.S. BANK 3. THIS STEP IS OPERATIONALLY EXPANSIONARY - WE ADD 10 RESERVES JUST AS IF WE HAD PURCHASED TREASURY SECURITIES AND HAD PAID FOR THEM IN THE SAME MANNER BY CREDITING A RESERVE ACCOUNT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • SK DRAFT Cl} 4/1/85 PAGE 10 4. BUT THIS OPERATION IS COMPUTED INTO OUR ANALYSIS OF RESERVE PATHS 5. WE WILL THEN UNDERTAKE AN OPERATION TO TAKE OUT THE RESERVES CREATED BY THE INTERVENTION F. SAME IS TRUE FOR INTERVENTIONS BY FOREIGN CENTRAL BANKS 1. THE COMMUNICATIONS ARE EXCELLENT 2. ROUTINELY OFFSET ALL · FOREIGN EXCHANGE TRANSACTIONS INVOLVING DOLLARS G. IN SHORT, EXCHANGE INTERVENTIONS CERTAINLY ADD AT LEAST A THIRD DIMENSION TO CONDUCT OF MONETARY POLICY 1. BUT THEY DO NOT CAUSE US TO LOSE CONTROL 2. IF THE AGGREGATES ARE HIGH IN RELATION TO RANGES FOR YEAR, IT IS NOT DUE TO EXCHANGE INTERVENTIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) 4/1/85 PAGE 11 VIII. E-6-NCtQ:S·tO~ - ALL THIS BRINGS ME BACK TO THE ROOT CAUSE OF SO MANY OF THE ADVERSE FACTORS WE ARE DEALING WITH - r ~ ----c.ra ..c ~"'~ THE FISCAL DEFICIT - bc•'1--<-~ A. INCREASINGLY DIFFICULT - MANAGE MONETARY POLICY - HOSTILE FISCAL ENVIRONMENT B. WE ARE FACING SOME VERY SIGNIFICANT MONETARY POLICY CHALLENGES 1. AGGREGATES, PARTICULARLY M-1, HAVE EXPERIENCED STRONG GROWTH FOR PAST FOUR MONTHS 2. MAY WELL HAVE MODERATED IN MARCH, BUT STILL, M-l_J_AT : ~p .OF RANGE ESTABLISHED FOR YEAR 1-,...# :· { 11. C , . "' .;(4, Cho1~ C. IN BRIEF, WE t1AVE A :@Af¢E BETWEEN SEEMINGLY BAD ALTERNATIVES 1. IF WE BEGIN TO EXERCISE RESTRAINT - MAY WELL CAUSE RATES TO INCREASE 2. ADVERSE EFFECTS ON DOMESTIC ECONOMY 3. EXACERBATE THE EXCHANGE PROBLEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT Cl) • 4/1/85 PAGE 12 D. IF WE DON'T BEGIN TO CONTROL THE GROWTH OF AGGREGATES 1. WOULD HAVE UNFORTUNATE IMPLICATIONS FOR INFLATIONARY OUTLOOK . , q G. . 7 c; . f~-t ....-~t•_.:.,J Q.·{C~ 2. IN TURN, NEGATIVE IMPACT FOR THE DOMESTIC ECONOMY AND INTERNATIONAL SENTIMENT FOR THE DOLLAR 0 .. ( ·. i _. :,- c~ sr-_~ () 3. VERY DIFFICULT PERIOD - -U-.J>l.. ~ ~ ~ ~ ~-~ ~ ~ \'"'~ t'Nttca:::r O~t~ E. BUT WE HAVE COME THROUGH SOME SIMILAR PERIODS OF -~ CHALLENGE ~/- 'f{-~ 1. WITH GREAT SUCCESS - 1984 2. CONFIDENCE THAT WE CAN AGAIN THIS YEAR 3. ON THAT OPTIMISTIC NOTE * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1985, April 2). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19850403_silas_keehn

@misc{wtfs_regional_speeche_19850403_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1985},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19850403_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}