Regional President Speech

SILAS KEEHN REMARKS ILLINOIS STATE UNIVERSITY NORMAL, ILLINOIS MAY 30, 1985 I. INTRODUCTION - GRACIOUS INTRODUCTION ~ "¥-,,, r:;.e?~J ~ P~~~~~~~oc/. A. THOUGHT I WOULD TALK AB.PUT JUST A FEW OF 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 - AND THERE IS A REASON FOR MY TAKING TIME TO DO THIS A. DESCRIPTION OF THE FEDERAL RESERVE SYSTEM, BANKS, BRANCHES, GEOGRAPHIC, ET AL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 2 1. EACH BANK A GOVERNMENT CORPORATION - SEPARATE A. STOCK OWNED BY MEMBER BANKS B. BOARD OF DIRECTORS - 9 C. 3 CLASSES - THE ELECTIVE PROCESS - (1) ED POWERS - PRESIDENT/CEO MUELLER CO., DECATUR 2. BOARD OF GOVERNORS - 7: 14 YEAR STAGGERED TERMS - INSULATE FROM POLITICAL PRESSURE A. APPOINTMENT/CONFIRMATION PROCESS B. CHAIRMAN/VICE CHAIRMAN B. THE IMPORTANCE IN HIGHLIGHTING THIS STRUCTURE 1. INTERLACING - CHECKS AND BALANCES A. EVERYTHING THE RESERVE BANKS DO SUBJECTED TO CHECK AND BALANCE B. AN EXCEPTIONALLY IMPORTANT, YET LITTLE UNDERSTOOD, FEATURE FOR THE SUCCESSFUL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 3 OPE RAT I ON OF A CENTRAL BANK - MONET ARY POLICY TE£·i-wr= , 1ME 2. IN TURN, THIS HIGHLIGHTS THE INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM - UNIQUE AND EX:CFPIIIUAbl!Y IMPORTANT FEATURE ~ 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 {l) THERE IS NO SHORTAGE OF DIALOGUE C. YET WE DO ENJOY A SIGNIFICANT DEGREE OF INDEPENDENCE IN THE CONDUCT OF OUR AFFAIRS {l) WHICH, FRANKLY, WE JEALOUSLY GUARD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 4 ( 2} NOT A TURF ISSUE - EXCEPTIONALLY IMPORTANT TO THE CONDUCT OF MONETARY POLICY 3. AS CONGRESS MOVES ALONG IN THIS SESSION, THIS ISSUE WILL ASSUME A HIGHER VISIBILITY A. ALREADY THERE ARE INDICATIONS THAT THEY WILL RE-FOCUS ON THIS ISSUE B. THERE IS THE RISK THAT WE COULD GET CAUGHT IN THE MIDDLE AS THE FISCAL DEFICIT/TAX REVENUE IMBROGLIO INTENSIFIES - AND IT SURELY WILL ~-·v: r,'VL-, ~ CG._ J..J~ m1, ~k ~7Z~~~~ 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 ILL. STATE U. MAY 30, 1985 PAGE 5 3. YET EACH OF THESE ACTIVITIES, AT LEAST TANGENTIALLY, RELATES TO MONETARY POLICY - THE PRIMARY RESPONSIBILITY AND ONE OF ABSOLUTELY OVERRIDING IMPORT~NCE FIRST AREA IV. AS A START, OUR BASIC OPERATIONS, THE PROCESSING OF VARIOUS WHOLESALE ACTIVITIES 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 I NCREAS I NGL Y 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 ILL. STATE U. MAY 30, 1985 PAGE 6 A. THERE IS THE IMPRESSION THAT WE ARE ATTEMPT I NG TO EXPAND OUR PRESENCE - OUR MARKET POSITION - TURF 3. RAT HER, WE HAVE BEEN I NCREAS I NGL Y CONCERNED ABOUT THE RISKS ImiERENT IN THE WHOLE WIRE AREA A. ENORMOUS VOLUMES - WEEKLY DOLLAR VOLUME ON 4 SYSTEMS EXCEEDS ONE TRILLION DOLLARS B. 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 LI QUE FY THE FINANCIAL SYSTEM A. THIS WOULD HAVE OBVIOUS MONETARY POLICY IMPLICATIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis !LL. STATE U. MAY 30, 1985 PAGE 7 6. OUR OPERATIONAL PRESENCE IN THE PAYMENTS MECHANISM, THE PIPELINE THROUGH WHICH ALL FINANCIAL TRANSACTIONS ARE PROCESSED, IS ESSENTIAL TO THE MONITORING OF THE PROPER FUNCTIONING OF THE FINANCIAL SYSTEM 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~{~ THROUGH THE EXAMINATION PROCESS C. THE FINANCIAL SERVICES INDUSTRY IS GOING THROUGH A PERIOD OF SIGNIFICANT STRUCTURAL CHANGE I>-- THE MARKETRlOCE tM.•1NGES ARE ecet11UUfJO FOP ~a-RE "-RA?IDLY TIIAN THE RE6ULATORY/LEGISLATI\JE CHANGES ---- Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 8 A. WITHIN THE PAST FEW MONTHS - VIRTUALLY EVERY DAY - IMPORTANT DEVELOPMENTS - WHOLE AREA LITERALLY SEETHING (1) SEARS - PERHAPS THE CLASSIC EXAMPLE OF CHANGES THAT ARE BE I NG BROUGHT ABOUT BY NON-TRADITIONAL FINANCIAL ENTITIES (A) AS I AM SURE YOU ALREADY KNOW, SEARS OWNS SEARS SAVINGS BANK IN CALIFORNIA, ALLSTATE INSURANCE, COLDWELL BANKER (REAL ESTATE) AND DEAN WITTER (BROKERAGE). (B) EARLIER THIS YEAR, SEARS ACQUIRED GREENWOOD TRUST CO. IN DELAWARE (I) INTENTION TO ACQUIRE BANK IN SOUTH DAKOTA Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 9 ( C) SEARS EARL I ER ANNOUNCED THAT THE DELAWARE BANK WOULD ISSUE A UNIVERSAL CREDIT CARD (DISCOVER) BY THE END OF THIS YEAR. (TO BE TESTED IN ATLANTA IN THE FALL.) ( AND IN A RECENT SPEECH BEFORE OF DETROIT, CHA I ~MAN, A /BOLD 1 \ / • \ STATEHENT THAT SEA~ WOULD LIKE \ '·, . TO BE I N TH E CONSUMER '-aA NK I NG BUSINE S ,,~ ACCEPTING HOU~,, ✓ . -· ••• -------- : '··. DEP~T \ AND MAKING CONSUMER \ // ----- tOANS ( E) CLEARLY, SEARS HAS EVERY INTENTION OF BEING A MAJOR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 10 PARTICIPANT IN AREAS THAT HERETOFORE HAVE BEEN THE DOMAIN OF THE COMMERCIAL BANKS (F) INDEED, RETAILERS AS A GROUP SEEM TO POSE THE GREATEST THREAT TO BANKS IN PROVIDING FINANCIAL SERVICES TO CONSUMERS (I) THEY OFFER ALMOST ALL OF THE SAME FINANCIAL ~BODIICIS Mff) SERVICES ~ Co.NSl:JME'RS AS BANKS DO ~ (II) THEY HAVE EXTENSIVE DISTRIBUTION NETWORKS AND LARGE CUSTOMER BASES ALREADY IN PLACE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 11 (III) THE SHEER SIZE AND MOMENTUM OF THESE MAJOR RETAILERS AND THEIR ABILITY TO EXPAND ON A BASIS FREE OF REGULATION LOOMS AS A SIGNIFICANT COMPETITIVE CHALLENGE '° F• TH E TR AD I TI ON AL PROVIDERS OF FINANCIAL SERVICES (IV) THESE RETAILERS KNOW _____ ..._ ,. . .. MARKE ---- ARf--vERY---- !'1FORTABLE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 12 2. BUT MANY BANKS HAVE NOT JUST STOOD BY AND WATCHED THIS HAPPEN - RESPONSE - MANY IMPORTANT EXPANSIONARY MOVES BY BANK AS WELL - U.S. TRUST COMPANY A. MARCH OF LASl YEAR, THE FED RELUCTANTLY GAVE U.S. TRUST COMPANY OF NEW YORK APPROVAL TO CONVERT I TS FLOR I DA TRUST COMPANY INTO A "NONBANK BANK" (NO COMMERCIAL LOANS) B. THIS OPENED THE FLOOD GATES. SINCE NOVEMBER 1, 1984, THE OCC APPROVED 200 APPLICATIONS FOR NONBANK BANKS (OF BANKS) COVERING 31 STATES C~ BIil AN APPEALS: COIIEH DECISION RELAJING JO HAS CLOSED THE ~- "~TES , . ·--~--l::-EA%f- C. .. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 13 - :rEP4FlQflMlLY. Now IT SEEMS MORE LIKELY THAT CONGRESS WILL BE DRAGGED INTO THE FRAY AND BE CALLED UPON TO DEFINE THE WORD "BANK" ONCE AGAIN D. BUT MY POINT -- THESE STRUCTURAL CHANGES ~tlc...:r- ARE HAVING A PROFOUND tF I iti ON OUR ~~ S, k,, / ,' ''l ~BltiTY TO EFFECTIVELY ADDRESS OUR ~,'cl: r-,1t1s S r ~ERV ~ ISORY RE~IIILIT'L ~ 1,¾_cf\,,-f J;,v-, ~ ~-CA,cz:u,, 3 SOM~ QTl•ER MAftKE i PLACE EVENTS· DUR-lfttr'"-tt+t=~EMH YEAR - DIQT STRl::JEHH~E. DIH' ,RETIY::::Tfil.!l_~ ~NB IIA~t! nlA"ttf:N'8£8 8~ft,. SUPER'II iORY -CAPAC.UY (1) REGULAIORY: ...9 ''\::,. _-.. --...- -,.r. .. -.~ ...., A.BiROP-:IH~~lMELY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 14 C . PROB LE MS I N TH E AG R I CU L T UR AL SEC I QR_~ ND THE BANKS~THAT LEND TO FARMERS ~ o/°" ·~------ o. H~.!,.!.J,,-'-?"L....._-R:!IU::_~I-~_c.INCINNATI/MAR~No _~-- --•••• ., __ • -·- ·- ........ _ THRIFTS D. ONLY JUST BEGINNING TO SEE THE IMPACT OF =-PLA-CE CHANG!;> IN THE FINANCIAL SERVICES INDUSTRY E. THE EXAMPLES OF OTHER INDUSTRIES THAT HAVE GONE THROUGH DEREGULATION ARE INSTRUCTIVE 1. AIRLINES, TRUCKING, BROKERAGE F. BANKING WILL BE NO DIFFERENT 1. THE PROCESS WILL BE VERY UNEVEN 2. THERE WILL BE MANY ROUGH SPOTS AS WE CONTINUE TO GO THROUGH THIS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 15 ~ G. / ROOT PROBLEM HERE - THE FINANCIAL SERVICES INDUSTRY IS FACING AN OVERCAPACITY PROBLEM - ~-~ () .,~ ~-~_--d---~- ~ , ~ -'· -T 12A'"'>" . l. 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. SOME CONSOLIDATION AND REDUCTION IN THE NUMBER OF PARTICIPANTS WILL BE A NATURAL CONCLUSION H. CLEARLY, THESE DEVELOPMENTS WI LL TOUCH ON THE SAFETY AND SOUNDNESS OF THE FINANCIAL SYSTEM l. FAILURES THAT DESTABILIZE FINANCIAL I NS TI TUT IONS COULD HAVE AN IMPACT ON THE MARKETS AND FINANCIAL CONDITIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 16 A. MONETARY POLICY, THE LOGICAL RESPONSE TO THIS PROBLEM B. ONCE AGAIN, AN ISSUE THAT SEEMS VERY NARROW AND VERY MECHANICAL IN NATURE HAS MONETARY POLICY IMPLICATIONS THIRD AREA VI. ECONOMIC RESEARCH AND MONETARY POLICY - WE ARE IN ONE OF THE HAPPY PERIODS WHEN MOST THINGS FROM BOTH ECONOMIC AND MONETARY POLICY PERSPECTIVES ARE IN REASONABLY GOOD ORDER, YET TH IS SEEMINGLY BENIGN ATMOSPHERE MAY WELL BE MASK I NG SOME VERY SER I OLIS 1~ rr~ GP!' I [N6..S VI I. IN A BROAD SENSE, ECONOMIC OUTLOOK CONTINUES TO BE FAVORABLE A. THOUGH CURRENTLY EXPERIENCING A PAUSE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 17 1. NO REASON TO CHANGE BASIC FORECAST OF CONTINUATION OF EXPANSION AT LEAST THROUGH 1985 A. BUT I WI LL ADMIT TO A GROW I NG LEVEL OF APPREHENSION (RETAIL SALES NUMBERS MARCH - 1. 9%, LEAD I NG I ND I CATORS CONT I NUE TO SHOW DECLINES, AND SEVERAL CAT EGOR I ES NONDEFENSE SPENDING HAVE SHOWN WEAK OR NEGATIVE GROWTH) B. GNP +3 - 3-1/2% l. DOWN FROM LAST YEAR'S 6% 2. THIRD YEAR EXPANSION 3. FIRST QUARTER'S RESULTS (+0.6%), A MATTER OF SIGNIFICANT CONCERN 4. OUTLOOK FOR 2ND QUARTER CONSIDERABLY BETTER C. UNEMPLOYMENT - 7% OR LITTLE UNDER BY END OF THE YEAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 18 1. HIGH - BUT VAST IMPROVEMENT 2. WOULD REM I ND YOU THAT ECONOMIC GROWTH HAS CREATED 8 MILLION JOBS SINCE 1982 D. INFLATION - C.P.I. CURRENTLY 3-1/2% 1. SOME INCREASE DURING BALANCE OF YEAR 2. BUT NOT AS MUCH AS MIGHT HAVE ANTICIPATED GIVEN PHASE OF CYCLE 3. NONETHELESS - LONG RANGE - STILL TOO HIGH, NIXON 1971 A. MORE WORK TO DO VIII. BUT THE UNEVENNESS CONTINUES - PARTICULARLY TRUE IN MIDWEST - VERY DISTURBING - PUZZLING - DICHOTOMY - GROWTH - SERVICE SECTORS - WEAKNESS - HEAVY PRODUCTIVE A. GOOD BUSINESSES ARE DOING QUITE WELL - BAD BUSINESSES ARE DOING VERY BADLY 1. ANYTHING AGRICULTURALLY ORIENTED - DISMAL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 19 B. NONETHELESS, IN A TOTAL PERSPECTIVE THE RESULTS ARE VERY GOOD IX. BUT THERE ARE SOME SIGNIFICANT RISKS TO THE EXPANSION FIRST RISK A. RESURGENCE OF INFLATION s-o: i.;:: 1979 -= 1 13 l'--1-%- 2"-: MIGA I HAVE EXPECTED THAT DECLINE WOULD BE 5 :::,. 3. BUT, AS NOTED, OUTLOOK FAVORABLE 4. RISK THAT IS DIMINISHING WITH THE PASSAGE OF TIME SECOND RISK B. OCCURRENCE DOMESTIC FINANCIAL STRAINS 1. CONT I NENTAL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 20 RECORD IS PRETTY GOOD - HAVE BEEN (1) ABLE TO DEAL WITH THESE PROBLEMS ON A ONE-BY-ONE BASIS - r2, rNFORMATioN N@fwoiK : ih:<ffit~s, ~~ ir.,n~&- CENJRV ;~crfun1r of'~~ ~ ~ / 2. BUT LOAN PROBLEMS AGAIN EMERGING AS A THREAT 6b 1/ - AGRICULTURE A. LOCALIZED - BUT A PROBLEM 3. REAL ESTATE - CATEGORY THAT KEEPS COMING BACK AGAIN AND AGAIN - ~ - ~ ~ ~~~~ A-;- SIGNlfIC~N_I : VACA-NC¥ .:..--~rn::"'"':=toMMERCIA[ PRQPERT·I-5~::~·1_:~·:~·-ffii~E~OUJ THE ~:.c- 4. ENERGY - HOPE WORST BEHIND PRICE ER-Q.S.l.QN A? f'A' • ,t;J. ~ ~ -rn-v ~ ~ O~ / ~ ~ ft-WS, ·rrrv Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 21 °"-~~·~ 5. THIS IS CERTAINLY A~I IHPOIH-AN, RISK - I AM CONCERNED ABOUT POTENTIAL WEAKNESS IN LOAN PORTFOLIOS THIRD RISK C. RENEWED PROBLEMS WI TH THE HEAVILY DEBT ED LDC COUNTRIES , -~r,;-;- lA/4 ___.) /J.,vuz_ ~ N IJ4;V s i? ~ ~ 1. SJGNIFICANI PROSQEss - MEXICO. A. BU-r- t~friEt.Y NEW· t"ONtE'.RN - NEED TO MilllEE 2. BUT BRAZIL/ARGENTINA - PRESSURES - RECONCILE INTERNAL SOCIAL NEEDS/EXTERNAL DEBT REPAYMENT X. BUT LET ME TURN TO THE BIGGEST RISK BY FAR - THE SO-CALLED TWIN DEFICITS - DOMESTIC 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 U. ILL. STATE MAY 30, 1985 PAGE 22 ~~ B. LET ME GO ASIDE ON THE INTERNATION~~OR A MOMENT AND COMMENT ON THE SURPRISING, INDEED, METEORIC, RISE IN THE EXCHANGE VALUE OF DOLLAR THAT HAS OCCURRED OVER PAST TWO YEARS 1, "'-UNT I l:·- RE E€ NTL"i' ONL'r' t!IO t1ft - C. IN HI NOS I GHT, NOT SURE THE INCREASE SHOULD BE •'-<. ~E;,...,C;)M SUCH A SURPRISE - THE ENVIRONMENT WENT THROUGH ENORMOUS CHANGE 1. VOLCKER APPOINTED JULY 1979 - EARLY MESSAGE - MONET ARY POL I CY - TOUGH CONTROL - 3 MONT HS LATER - FOMC A. OPERATING CHANGE OCTOBER 1979 B. WE WERE GOING TO BE SERIOUS ABOUT INFLATION 2. MEAGAN ELECTEB IN 19Blf= S16NIFIL"lfFP•ANDft.TE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 23 , N r r eA,..12 ~ 3. AS A RESULT OF FED'S OPERATING CHANGE - RATES BECAME MORE VOLATILE A. ROSE TO ASTONISHING LEVELS - HAD EFFECT - RECESSION - B. AS INFLATION CAME DOWN - NOMINAL RATES CAME DOWN, BUT REAL RATES INCREASED C. DOLLAR TOOK ON A NEW ATTRACTIVENESS - RETURN WAS HIGH D. PERHAPS SINGLE MOST IMPORTANT REASON 4. THEN RECESSION ENDED IN LATE 1982 A. MARKETS GAINED CONFIDENCE IN OUTLOOK FOR ECONOMY B. PARTICULARLY SO WHEN REALIZED THAT INFLATION WOULD REMAIN UNDER CONTROL 5. l~NB, NltTF½e'Att t, NE -CONllmJ€~ 18 ffl'.ER AN A-TTRACTl'fl Atffmttv£ - SPWt-f-...S#UND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 24 ~OJ-- T44E-=CASE ~~~_!_ OTl'tEft COUNTR LE.S ~~ D. THE PO I NT IS - EARLY 1980S PRO't':L:Bi-Q AN ENORMOUS ENVIRONMENTAL CHANGE 1. VASTLY DIFFERENT THAN LATE 1970S A. RAMPANT INFLA1ION B. ERRATIC ECONOMY C. WEAK ADMINISTRATION 2. THE STAGE WAS SET FOR THE INCREASE THAT OCCURRED 3. GENERAL AGREEMENT - VALUE TOO HIGH - ROOM FOR DECLINE - APPROPRIATE AND WELCOME A. YET, ON BALANCE, VALUE MAY REMAIN COMPARATIVELY HIGH. UNTIL THE UNDERLYING FUNDAMENTALS, OR MARKET PERCEPT ION OF ;;z;;k_ FUNDAMENTALS, CIISUOfS o..... ~•t/..t~N, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 25 XI. BUT TO CONCLUDE, AND AS ALWAYS, ALL THIS BRINGS ME BACK TO THE ROOT CAUSE OF SO MANY OF THE ADVERSE FACTORS WE ARE DEALING WITH - THE REALLY BIG CHALLENGE - THE FISCAL DEFICIT - BORING AND TIRESOME A. INCREASINGLY DIFFICULT - MANAGE MONETARY POLICY - HOSTILE FISCAL ENVIRONMENT oC{;(;lW<_ r B. WE ARE FACING SOME VERY SI6NIFICA-NT MONETARY . POL I CY Cl1Al:.W:N6!;~ t ~) ~ . 1. AGGREGATES, PARTICULARLY M-1, HAVE EXPERIENCED STRONG GROWTH FOR PAST 6 MONTHS 2. M-1 STILL TOP OF RANGE ESTABLISHED FOR YEAR C. IN BRIEF, THE FOMC HAS A CHOICE 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 ILL. STATE U. MAY 30, 1985 PAGE 26 D. l F WE DON'T BEGIN TO CONTROL THE GROWTH OF AGGREGATES 1. WOULD HAVE UNFORTUNATE IMPLICATIONS FOR INFLATIONARY OUTLOOK A. TRAGIC MISTAKE 2"1 1N Tl:JRN, NEG AT I 1/E IMPAC:T QN TM a DOMESTIC ECS:HQMY AfflL I NTP:RNAT H)NAL SENT LMENT ON »LE 3. GOING THROUGH A VERY DIFFICULT PERIOD - WE WILL FACE STRONG PRESSURE TO INFLATE OUR WAY OUT OF THESE PROBLEMS AND THE BURGEONING DEBT LOAD A. WITHOUT A DOUBT - THIS IS OUR BIGGEST PROBLEM - OUR BIGGEST CHALLENGE w{,,// ~ dw~,·,v~ B. Mal INIA IN !:NG THE APPROPRIATE BALANCE ~rt,s~ ~~~ ,.,.l'n.J) BETWEEN RESTRAINT ENOUGH ROOM I\ FOR CONTINUED ECONOMIC GROWTH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ILL. STATE U. MAY 30, 1985 PAGE 27 ~.~_) C. MAINTAINING TH1s'fBALANCE WILL BE EXCRUCIATINGLY DIFFICULT E. BUT, HAPPILY, WE HAVE COME THROUGH SOME SIMILAR PERIODS OF CHALLENGE 1. WITH GREAT SUCCES~ - 81 - 82, 1984 1 1 2. CONFIDENCE THAT WE CAN AGAIN THIS YEAR 3. FAVORABLE RESOLUTION OF THE CURRENT BUDGET w~ NEGOTIATIONS IN CONGRESS WctL BE AN IMMENSE HELP - MARKET REACTION POSITIVE 4. ON THAT OPTIMISTIC NOTE * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1985, May 29). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19850530_silas_keehn

@misc{wtfs_regional_speeche_19850530_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1985},
  month = {May},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19850530_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}