Regional President Speech

FINAL SILAS KEEHN REMARKS SPRING MEETING OF BOARD OF DIRECTORS OF THE CHICAGO COUNCIL ON FOREIGN RELATIONS MID-AMERICA CLUB APRIL 9. 1985 :r a..r f\-t ,11..e>--i '~ ~J ~ 5' ( --(/ '--,,<--f' C lc,._.,,'t 0 A I. INTRODUCTION A. WITH SOME HUMILITY B. COMMENT ON THE SURPRISING. INDEED METEORIC. RISE IN THE INTERNATIONAL VALUE OF THE DOLLAR - WHICH. UNTIL RECENTLY. SEEMINGLY COULD ONLY GO UP 1. SOME OF THE FACTORS THAT MAY HAVE CAUSED THIS INCREASE 2. WHAT HAVE BEEN THE CONSEQUENCES OF THE INCREASE 3. WHAT IS THE IMPACT ON DOMESTIC MONETARY POLICY C. AS TO CAUSE. WE REALLY DON'T KNOW 1. WITH REGARD TO MONETARY POLICY - SECRECY ASPECT II. SOME HISTORICAL BACKGROUND A. FOR LONG PERIOD (WW II - 1973) INTERNATIONAL TRADE AND FINANCE CARRIED OUT WITHIN THE FRAMEWORK OF THE EXCHANGEABILITY OF DOLLARS INTO GOLD AND FIXED RATES OF CURRENCY EXCHANGE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 2 1. ROUTINE INTERVENTION IN THE EXCHANGE MARKETS BY THE WORLD'S CENTRAL BANKS THE WAY THESE RATES WERE MAINTAINED A. PARTICULARLY TRUE IN EARLY 196OS WHEN TREASURY AND FED INTERVENED WI TH CONSIDERABLE REGULARITY 2. STABILITY OF EXCHANGE RATES REMOVED GREAT DEAL OF UNCERTAINTY 3. PROMOTED GROWTH OF I NT ERNAT I ONAL TRADE AND INVESTMENT TRANSACTIONS 4. ALSO PROVIDED A SENSE OF DISCIPLINE FOR COUNTRIES IN THEIR ECONOMIC AND FISCAL POLICIES B. BUT THE DISCIPLINE ASPECTS BROKE DOWN IN 1971 1. THERE WAS A SPECULATIVE ORGY IN THE FOREIGN EXCHANGE MARKETS THAT PRECEDED THE COLLAPSE OF THE BRETTON WOODS SYSTEM AND THEN THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 3 TERMINATION OF THE CONVERTIBILITY OF THE DOLLAR INTO GOLD ON AUGUST 15, 1971 2. EFFORTS TO REVIVE THE SYSTEM OF FIXED EXCHANGE RATES WERE UNSUCCESSFUL AND THE CURRENT SYSTEM OF FLOATING EXCHANGE RATES WAS ADOPTED IN 1973 C. AFTER A PERIOD OF NON-INTERVENTION IN THE EXCHANGE MARKETS IN EARLY 197OS, INTERVENTION WAS RESUMED IN MID-197OS 1. CARTER ADMINISTRATION Al FIRST ADOPTED A POLICY OF NON-INTERVENTION BUT RESUMED INTERVENTION IN 1978 TO DEAL WITH A SEVERELY DEPRESSED DOLLAR 2. TREASURY ANNOUNCED PROGRAM OF INTERVENTION THAT WAS VERY EXTENSIVE 3. IN 12 MONTH PERIOD ENDING IN EARLY 1979, INTERVENTION WAS VERY SUBSTANTIAL - Sll BILLION A. AND VIEWED AS SUCCESSFUL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 4 D. REAGAN ADMI NI ST RAT ION CHANGED POL I CY SUBST ANT I ALLY AND ANNOUNCED THAT WE WOULD ABSTAIN FROM I NT ERVENT ION EXCEPT UNDER CONDIT IONS OF DISORDERLY MARKETS 1. SINCE THEN, UNTIL RECENT INTERVENTION, THE DOLLAR HAS FLUCTUATED RATHER FREELY DEPENDING ON CONDITIONS IN THE MARKET 2. MY REASON FOR REVIEWING THIS HISTORY - THE CURRENT PHASE - REGARDLESS OF WHAT MAY NEXT DEVELOP - IS JUST ONE MORE CHAPTER IN AN ONGOING STORY A. YOU CAN BE SURE THAT IT WILL CHANGE Ill. THE CURRENT CHAPTER BEGAN IN THE LATE 1970S A. SIGNIFICANT CHANGES IN THE ENVIRONMENT 1. VOLCKER APPOINTED JULY 1979 A. INITIAL MESSAGE - TOUGHER MONETARY POLICY B. OPERATING CHANGE OCTOBER 1979 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 5 C. WE WERE GOING TO BE SERIOUS IN REDUCING RATE OF INFLATION 2. REAGAN ELECTED IN 1980 - SIGNIFICANT MANDATE A. RETURN TO MORE FUNDAMENTAL VALUES B. AS A CONSEQUENCE OF FED'S POLICY CHANGE 1. INTEREST RATES BECAME MORE VOLATILE - AND ROSE TO ASTONISHING LEVELS 2. AS RATE OF INFLATION CAME DOWN A. NOMINAL INTEREST RATES ALSO DECLINED B. BUT "REAL" INTEREST RATES INCREASED 3. DOLLAR TOOK ON NEW ATTRACT I VENESS - EXCHANGE RATES REFLECTED THAT CHANGE AND ROSE 4. PERHAPS THE MOST IMPORTANT SINGULAR EVENT CONTRIBUTING TO THE RISE OF THE DOLLAR WAS THE SHARP RISE IN U.S. INTEREST RATES. C. BUT THEN AS THE RECESSION ENDED IN LATE 1982 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 6 1. MARKETS GAINED CONFIDENCE IN OUTLOOK FOR ECONOMY 2. AS RECOVERY GAINED MOMENTUM, CONFIDENCE INCREASED EVEN MORE 3. PARTICULARLY SO WHEN IT BECAME EVIDENT THAT INFLATION WOULD REMAIN UNDER CONTROL A. SOME TH I NG AS A SUR PR I SE - OTHER POST WAR RECOVERIES WOULD NOT HAVE SUGGESTED THIS D. POLITICALLY, WE OFFERED AN ATTRACTIVE ALTERNATIVE FOR INVESTMENTS - SOUND, SAFE POLITICAL SYSTEM 1. NOT THE CASE FOR MANY OTHER COUNTRIES - LATIN AMERICAN COUNTRIES E. THE POINT IS, THE EARLY 1980S PROVIDED AN ENORMOUS ENVIRONMENTAL CHANGE 1. VERY DIFFERENT THAN THE LATE 1970S A. RAMPANT INFLATION B. ERRATIC ECONOMY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 7 C. WEAK ADMINISTRATION 2. THE STAGE WAS SET FOR THE CHANGE IN EXCHANGE RATES THAT HAS OCCURRED A. WE SHOULDN'T REALLY BE SURPRISED (l} SOMEWHAT LOGICAL RESULT IV. EXCHANGE RATES, ARE, OF COURSE, A FUNCTION OF SUPPLY AND DEMAND - PARTICULARLY SO IN A SYSTEM OF FLOATING RATES A. I'll COMMENT ON THE SUPPLY PART OF THE EQUATION A LITTLE LATER, BUT 1. CLEARLY, THE DEMAND FOR DOLLARS HAS BEEN INCREASING, HENCE AT LEAST A PARTIAL REASON FOR THE RISING VALUE OF THE DOLLAR IN RELATIONSHIP TO OTHER CURRENCIES B. QUITE A NUMBER OF REASONS FOR THE INCREASED DEMAND 1. THE DOLLAR SERVES AS THE PR I NC I PAL MED I UM OF EXCHANGE ON A WORLD WIDE BASIS - AND HAS FOR SEVERAL DECADES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 8 A. INDEED, ESTIMATED THAT AS MUCH AS 70% OF FREE WORLD'S TRADE IS SETTLED IN DOLLARS B. THOUGH VOLUME OF TRADE DECLINED IN EARLY 198OS AS WORLD WIDE RECESSION DEVELOPED C. WE ARE NOW EXP ER I ENC I NG A WORLD WI DE EXPANSION (1) MORE MODEST THAN DOMESTIC EXPANSION (2) YET ENOUGH TO PLACE UPWARD DEMAND ON DOLLARS TO FINANCE AND SETTLE TRADE 2. IMPORTANTLY THE U.S. HAS SUBSTANTIAL AND WELL DEVELOPED CAPITAL MARKETS A. UNPARALLELED IN OTHER COUNTRIES (1) SUBSTANTIAL INCREASE IN RECENT YEARS IN DEMAND FOR DOLLARS FOR LONG TERM INVESTMENTS IN U.S. - FINANCIAL INVESTMENTS AS WELL AS PRODUCT IVE ASSET INVESTMENTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LVS/85 PAGE 9 (2) FOREIGN DIRECT INVESTMENT IN THE U.S. AVERAGED ABOUT $4 BILLION ANNUALLY IN 1970S; $17 BI LL ION ANNUALLY IN THE 1980S B. TO SAY IT ANOTHER WAY, OTHER CURRENCIES AND CAPITAL MARKETS JUST DON'T OFFER ATTRACTIVE ALTERNATIVES THAT OURS DO 3. BUT OF ALL THESE FACTORS, INTEREST RATES WOULD APPEAR TO HAVE PROVIDED THE GREATEST PUSH ON THE DEMAND SIDE OF THE EQUATION A. ON A REAL BASIS OUR RATES ARE HIGH B. ALSO HIGH IN RELATIONSHIP TO RATES AVAILABLE IN OTHER CURRENCIES 4. COMBINING ALL THESE DEMAND FACTORS, THERE WAS A VERY POWERFUL INDUCEMENT FOR FOREIGN INVESTORS TO INCREASE THEIR HOLDINGS OF DOLLAR DENOMINATED ASSETS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 10 A. TH IS BECAME A SELF-FULFILL I NG PROPHECY - THE MARKETS DEVELOPED A MOMENTUM OF THEIR OWN B. SPECULATORS SAW OPPORTUNITY TO PURCHASE DOLLARS ONE DAY, SELL THE NEXT DAY AT A PROFIT C. ADDED CONSIDERABLY TO THE DEMAND PRESSURES C. BECAUSE OF THIS, THE CENTRAL BANKS BEGAN A PROGRAM OF INTERVENTION EARLIER IN THE YEAR 1. CANNOT CHANGE THE FUNDAMENTALS 2. VOLUMES OF TRANSACTIONS TOO LARGE A. MAY WELL RUN AS HIGH AS $75 BILLION ON A DAILY BASIS 3. ABILITY OF CENTRAL BANKS TOO LIMITED TO RESPOND 4. BUT INTERVENTION DOES INTRODUCE AN ELEMENT OF UNCERTAINTY - HAS BEEN SUCCESSFUL D. THUS, THE ANSWER TO MY FIRST QUESTION, WHY DID THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 11 DOLLAR EXPERIENCE SUCH A SIGNIFICANT INCREASE? 1. THE FUNDAMENTALS HAVE CHANGED 2. THE ENVIRONMENT HAS BEEN RIGHT FOR TH IS SHARP SHIFT IN VALUE 3. BUT AS THIS POINT ALL LOGIC WOULD SUGGEST THAT THE VALUE OF THE DOLLAR HAS GOTTEN AHEAD OF ITSELF A. DOWNWARD ADJUSTMENT HAD BECOME ALMOST INEVITABLE 4. THE VALUE MAY REMAIN HIGH UNTIL THE FUNDAMENTALS, OR, IMPORTANTLY, MARKET SENTIMENT ABOUT THE FUNDAMENTALS, CHANGES A. AND AT SOME POINT THIS WILL, OF COURSE, OCCUR B. WE HAVE CERTAINLY SEEN EVIDENCE OF THIS IN RECENT WEEKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 12 V. CONSEQUENCES OF THE DOLLAR RISE A. CONSEQUENCES FOR THE U.S. HAVE BEEN PRETTY DRACONIAN 1. RISING VALUE OF THE DOLLAR HAS HAD RESTRAINING EFFECT ON EXPORTS A. $221 BILLION IN 1980 - $218 BILLION 1984 2. AND JUST OPPOSITE EFFECT ON IMPORTS A. $245 BILLION IN 1980 - $326 BILLION IN 1984 3. TRADE DEFICIT - HAS INCREASED MASSIVELY A. INCREASED FROM $24 BILLION IN 1980 TO OVER $100 BILLION IN 1984 4. ESTIMATES SUGGEST THAT IMPORTS WOULD BE 15% LOWER AND EXPORTS 15% HIGHER IF IT WERE NOT FOR THE SIGNIFICANT APPRECIATION OF THE DOLLAR IN RECENT YEARS C. CONSEQUENCES FOR THE MIDWEST 1. TRADE IMPACT PARTICULARLY SEVERE HERE WHERE SO MANY AFFECTED INDUSTRIES AND ACTIVITIES ARE CONCENTRATED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 13 2. PRODUCERS MACHINERY AND MACHINE TOOL INDUSTRY A. IMPORTS: $20 BILLION IN 1978; OVER S60 BILLION IN 1984 B. SHARE OF MARKET: 11% TO 21% 3. AUTOMOTIVE INDUSTRY - SPEAKS FOR ITSELF 4. STEEL INDUSTRY A. MIDWEST HAS BECOME CENTER OF U.S. PRODUCTION B. BUT IMPORTS OF STEEL HAVE MORE THAN DOUBLED FROM 12 MILLION TONS IN 1975 TO OVER 26 MILLION TONS IN 1984) 5. EMPLOYMENT IMPACT A. ESTIMATED THAT EXCHANGE VALUE OF DOLLAR HAS COST U.S. WORKERS SOME 2 MILLION JOBS B. GIVEN THE CONCENTRATION OF AFFECTED INDUSTRIES IN MIDWEST - JOB IMPACT ESTIMATED TO BE AS HIGH AS 700,000 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 14 D. AGRICULTURE SO IMPORTANT TO OUR DISTRICT - SEVERLY EFFECTED 1. EXCHANGE RATES USED TO BE PRETTY REMOTE IN THE CENTER OF IOWA - BUT NO LONGER 2. IN 1981-1983 PERIOD U.S. GRAIN EXPORTS REDUCED BY SOME 20 MILLION METRIC TONS DUE TO EXCHANGE VALUE OF DOLLAR VI. WITH THE PASSAGE OF TIME, THE CONSEQUENCES OF THE CURRENT LEVEL OF EXCHANGE RATES ARE TAK I NG ON MORE PERMANENT CHARACTERISTICS A. INVENTORIES OF IMPORTED PRODUCTS IN THE U.S. ARE MAINTAINED AT PRETTY HIGH LEVELS B. DI ST RI BUT I ON CHANNELS AND FINANCING ARRANGEMENTS HAVE BEEN FIRMLY ESTABLISHED 1. ONCE IN PLACE, THEY WI LL BECOME DI FF I CULT TO DISLODGE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 15 C. IN MANY INSTANCES, DOMESTIC PRODUCTION FACILITIES HAVE BEEN CLOSED OR SHARPLY CURTAILED 1. OUR CAPACITY TO EXPAND DOMESTIC PRODUCTION HAS BECOME LIMITED D. VERY SIMPLY, THIS SHIFT IN EXCHANGE VALUES HAS WORKED ITS EFFECT 1. WE HAVE BECOME DEPENDENT ON FOREIGN SUPPLIERS ALMOST REGARDLESS OF SHORT TERM FLUCTUATIONS IN EXCHANGE RATES 2. HAS SOME OMINOUS IMPLICATIONS VI I. CONSEQUENCES ON DEVELOPMENT AND OPERATION OF MONET ARY POLICY A. COMMENTED EARLIER ON DEMAND ASPECTS OF EXCHANGE VALUE OF DOLLAR 1. LET ME NOW SHIFT TO THE SUPPLY ASPECTS OF PHENOMENON WHICH ARE IMPORTANTLY AFFECTED BY MONETARY POLICY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 16 B. FIRST STEPS IN CHAIN OF EVENTS BEGAN IN 1979 - OPERATING CHANGE NOTED EARLIER 1. WE GAVE A CLEAR SIGNAL THAT THE SUPPLY OF BANK RE SERVES, AND THEREFORE DOLLARS, WOULD COME UNDER RESTRAINT 2. OPERATION OF DOMESTIC MONETARY POLICY BASICALLY ESTABLISHES THE FRAMEWORK OF SUPPLY ASPECTS AS THEY APPLY TO EXCHANGE MARKETS 3. VERY SIMPLY, THE SUPPLY CHARACTERISTICS RELATE TO A MONETARY POLICY THAT ADDRESSES THE FED'S OVERRIDING LONGER RANGE OBJECTIVE - RETURNING OUR ECONOMY TO CONDITIONS OF REASONABLE PRICE STABILITY C. GOOD DEAL OF COMMENT IN PRESS THAT FROM A MONETARY POL I CY PERSPECTIVE, INTERVENTION IS I NF LAT I ONARY - IT EXPANDS THE MONEY SUPPLY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 17 1. TECHNICALLY, AND UNLESS CORRECT I VE ACT ION IS TAKEN, THAT IS RIGHT, BUT D. WITHOUT ELABORATING, LET ME BRIEFLY TRACE THE INTERVENTION PROCESS. WHEN THE FEDERAL RESERVE INTERVENES, SAY, AGAINST THE DEUTSCHMARK 1. WE ENTER MARKET AND SELL DOLLARS FOR DM 2. WE PAY FOR THE TRANSACTION BY CREDITING THE RESERVE ACCOUNT AT A U.S. BANK OR BANKS 3. IT IS THIS STEP THAT IS OPERATIONALLY EXPANSIONARY - WE ADD TO BANK RESERVES JUST AS IF WE HAD PURCHASED TREASURY SECURITIES AND PAID IN THE SAME MANNER BY CREDITING A RESERVE ACCOUNT 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 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 18 E. WHEN THE BUNDESBANK INTERVENES BY BUYING DM FOR DOLLARS 1. IN EFFECT THE OPERATION AS IT IMPACTS BANK RESERVES IS THE SAME 2. AND WE DEAL WITH IT IN A SIMILAR WAY F. BUT THE COORDINATION AND COMMUNICATION AMONG CENTRAL BANKS IS EXCELLENT 1. WE ARE AWARE OF All INTERVENTIONS THAT ARE TAKING PLACE 2. WE VERY ROUTINELY OFFSET ALL FOREIGN EXCHANGE MARKET INTERVENTIONS INVOLVING DOLLARS TO BE SURE THAT OUR OPERATIONS WI TH REGARD TO THE MONETARY AGGREGATES ARE NOT IMPACTED BY THESE EXTERNAL FACTORS G. IN SHORT, EXCHANGE INTERVENTIONS CERTAINLY ADD AT LEAST A THIRD DIMENSION TO OUR ACTIVITIES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 19 1. BUT THEY DO NOT PER SE CAUSE US TO LOSE CONTROL OVER OPERATION OF MONETARY POLICY 2. THE CURRENT LEVELS OF THE AGGREGATES ARE PRETTY HIGH IN RELATIONSHIP TO THE RANGES THAT HAVE BEEN SET FOR THE YEAR - BUT THIS IS NOT DUE TO EXCHANGE INTERVENTIONS VIII. CONCLUSION A. BUT ALL THIS BRINGS ME BACK TO THE ROOT CAUSE OF SO MANY OF THE ADVERSE FACTORS THAT WE ARE DEALING WITH - THE FISCAL DEFICIT - TIRESOME AND BORING 1. IT HAS AND WILL BECOME INCREASINGLY DIFFICULT TO SUCCESSFULLY MANAGE MONETARY POLICY IN SUCH AN ADVERSE AND HOSTILE FISCAL ENVIRONMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 20 2. DESPITE THE GOOD INTENT IONS EXPRESSED EARL I ER TH IS YEAR - TANGIBLE PROGRESS HAS BEEN VERY DISAPPOINTING 3. THERE MAY BE A GOOD REASON - DOMESTICALLY, AT LEAST IN A BROAD SENSE, THE EXPANSION IS CONTINUING AT A GOOD SUSTAINABLE PACE - IT IS DIFFICULT TO PERCEIVE THE PROBLEM B. BUT THE CONTINUATION OF THE ECONOMIC EXPANSION CAN BE THREATENED IF WE BUILD UP IMBALANCES OR EXCESSES 1. IN MOST RESPECTS, THE IMBALANCES ARE NOT PRESENT A. PRODUCTION LEVELS GOOD BUT NOT INFLATIONARY B. INTENSE MARKET FORCES ARE KEEPING PRICING IN MODERATION C. WAGE SETTLEMENTS ARE NOT UNREASONABLE AND IN MANY CASES CAN BE COMPENSATED FOR BY PRODUCTIVITY GAINS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 21 D. UNEMPLOYMENT IS DOWN BUT THE LABOR MARKET IS BY NO MEANS TIGHT E. INVENTORIES ARE WELL IN LINE C. BUT, CLEARLY, WE ARE BUILDING UP SIGNIFICANT IMBALANCES IN THE INTERNATIONAL AREA - THE SITUATION HAS BECOME SERIOUS AND REALLY THREATENING 1. THE ENORMOUS BUILD-UP OF DOLLARS IN THE INTERNATIONAL MARKETS CANNOT CONTINUE 2. EVEN IF OUR FUNDAMENTALS REMAIN STRONG, AT SOME POINT INVESTORS MAY WELL DETERMINE THAT ADDITIONAL DOLLAR HOLDINGS WILL CAUSE PORTFOLIO DIVERSIFICATION CONCERN 3. MARKET SENTIMENT MAY CHANGE - INDEED, MAY WELL BE CHANGING RIGHT NOW A. THOUGH WE HOPE ANY CHANGE WILL BE GRADUAL - IT COULD BE ABRUPT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 22 (1} AND COULD HAVE UNFORTUNATE CONSEQUENCES - PARTICULARLY FOR MONETARY POLICY D. MEANWHILE, WE HAVE SOME OTHER VERY PRESSING MONETARY POLICY CHALLENGES 1. THE MONETARY AGGREGATES HAVE BEEN MOVING UPWARD RATHER BRISKLY A. H-1 VERY STRONG GROWTH FOR FOUR MONTHS 1. MARCH - MODERATION B. AT TOP OF RANGE ESTABLISHED FOR YEAR 2. IF WE BEGIN TO EXERCISE RESTRAINT A. HAY WELL CAUSE INTEREST RATES TO INCREASE B. HAVE ADVERSE EFFECTS ON THE ECONOMY C. EXACERBATE THE EXCHANGE VALUE PROBLEM 3. BUT IF WE DON'T BEGIN TO CONTROL THE GROWTH OF THE AGGREGATES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 23 A. TH IS WOULD HAVE UNFORTUNATE IMPLICATIONS FOR INFLATIONARY OUTLOOK B. IN TURN THE DOMESTIC ECONOMY WOULD BE ADVERSELY EFFECTED AND INTERNATIONAL SENTIMENT REGARDING THE DOLLAR WOULD DETERIORATE E. IN BRIEF. WE HAVE A DIFFICULT CHOICE BETWEEN SEEMINGLY BAD ALTERNATIVES - SOMETHING OF A CATCH 22 1. WE WI LL BEGIN TO FACE STRONG AND I NC REAS I NG POL IT I CAL PRESSURE TO I NF LATE OUR WAY OUT OF THESE PROBLEMS AND TO DEAL WITH THE BURGEONING DEBT LOAD 2. BUT WE HAVE COME THROUGH SOME SIMILAR PERIODS OF CHALLENGE A. WITH GREAT SUCCESS - 1981-'82 AND 1984 FOR EXAMPLE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4/5/85 PAGE 24 B. AND l HAVE CONFIDENCE THAT WE CAN AGAIN BE SUCCESSFUL THIS YEAR C. ON THAT OPTIMISTIC NOTE THANK YOU Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1985, April 8). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19850409_silas_keehn

@misc{wtfs_regional_speeche_19850409_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1985},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19850409_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}