Regional President Speech

SILAS KEEHN REMARKS TEACHERS' WORKSHOP AT THE FEDERAL RESERVE BANK OF CHICAGO JULY 25, 1986 I. INTRODUCTION - EXPRESS APPRECIATION A. AN UNDERSTANDING OF OUR ECONOMIC STRUCTURE CRITICALLY IMPORTANT 1. TEACHERS HAVE A UNIQUE RESPONSIBILITY TO EDUCATE THE NATION'S CHILDREN 2. INCREDIBLE DICHOTOMY: THE OVERWHELMING IMPORTANCE OF THE ECONOMY TO THE NATION'S WELL-BEING YET THE FREQUENT LACK OF A FUNDAMENTAL UNDERSTANDING BY OUR POPULATION B. YOUR WILLINGNESS TO SPEND THE WEEK WITH US A CLEAR INDICATION OF YOUR COMMITMENT TO THIS SUBJECT II. ALL TIMES ARE INTERESTING - BUT THE CURRENT SITUATION IS PARTICULARLY INTERESTING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 2 A. A QUICK LOOK AT THE ECONOMY 1. LATE LAST YEAR - EARLY THIS YEAR - THE CONSENSUS - MODEST GROWTH FOR THE FIRST HALF 2. SIGNIFICANT IMPROVEMENT IN THE SECOND HALF B. THE NECESSARY INGREDIENTS TO PRODUCE THE IMPROVEMENT 1. LOWER INTEREST RATES - SOME 400 BASIS POINTS OVER 1HE LAST 12 TO 15 MONTHS A. AND THIS HAS HAD A POSITIVE EFFECT ON THOSE SECTORS SO SENSITIVE TO INTEREST RATES 2. SIGNIFICANT REDUCTION IN ENERGY VALUES A. FAVORABLE FOR THE INFLATIONARY OUTLOOK AND PERSONAL INCOME 8. VERY RUGGED ON THOSE SECTORS OF OUR ECONOMY SO DIRECTLY AFFECTED - THE SOUTHWEST AN OBVIOUS EXAMPLE OF WHAT I MEAN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 3 3. THE LOWER EXCHANGE VALUE OF THE DOLLAR - A DECLINE OF SOME 35% SINCE THE PEAK ALMOST 18 MONTHS AGO A. THE EXCEPTION - WITH AN APPROPRIATE LAG, A SIGNIFICANT INCREASE IN EXPORT ACTIVITY III. THESE INGREDIENTS HAVE CERTAINLY BEEN HELPFUL BUT SO FAR THE RESULTS NOT QUITE WHAT WE EXPECTED A. WHAT S CHANGED - THE ECONOMIES OF OUR MAJOR TRADING 1 PARTNERS ARE NOT IMPROVING 1. EARLIER THIS YEAR WE EXPECTED THAT THE JAPANESE AND GERMAN ECONOMIES WOULD BE GROWING AT RATES MORE RAPID THAN WAS THE EXPECTATION FOR OUR OWN ECONOMY 2. JUST THE OPPOSITE HAS BEEN THE CASE - THOSE TWO ECONOMIES ARE NOT PROVIDING SUPPORT FOR OUR EXPORT PRODUCTS AND, THEREFORE, ARE NOT PROVIDING AN OPPORTUNITY FOR INCREASED SALES VOLUME Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 4 3. MOREOVER, WHILE THE YEN/DOLLAR AND DEUTSCHE MARK/DOLLAR VALUES GET THE MAJOR AT TENT ION, THE EXCHANGE VALUE OF THE DOLLAR HAS NOT DECLINED MUCH OR AT ALL WITH SOME OF THE TRADING NATIONS WHO MIGHT BE CUSTOMERS FOR OUR PRODUCTS A. CANADA - OUR GREATEST TRADING PARTNER - THE VALUE OF THE U.S. DOLLAR HAS REMAINED QUITE LEVEL AGAINST THE CANADIAN DOLLAR 8. ALSO TRUE OF KOREA, HONG KONG AND MANY OTHER COUNTRIES THAT, IN ESSENCE, PEG THEIR CURRENCIES OFF OF THE DOLLAR C. FOR MANY PRODUCTS THAT ARE IMPORTED INTO THE U.S. - PRODUCTION IS MERELY SHIFTING FROM JAPAN TO KOREA - CONTRIBUTING TO THE JAPANESE ECONOMIC PROBLEMS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 5 IV. DESPITE THESE CHANGES, THE OUTLOOK CONTINUES TO BE FAVORABLE A. CHAIRMAN VOLCKER'S TESTIMONY 1. THE EXPECTATION THAT THE EXPANSION WILL CONTINUE FOR THE REST OF THIS YEAR AND THROUGH 1987 2. THIS HAS BEEN A STRONGER ECONOMIC CYCLE THAN IT'S GENLHALLY GIVEN CREDIT FOR A. EMPLOYMENT 8 MILLION TO 11 MILLION B. WE NOW HAVE OVER 100 MILLION INDIVIDUALS IN THE PAYROLL POOL IN THIS COUNTRY - PRETTY IMPRESSIVE C. UNEMPLOYMENT HIGHER THAN WE WOULD LIKE BUT THERE HAVE BEEN SOME MITIGATING CIRCUMSTANCES 3. REAL GNP GROWTH SOME 10% ABOVE THE PRIOR PEAK (1982 DOLLARS) - RECORD LEVEL 4. PERHAPS EVEN MORE SURPRISING, INDUSTRIAL PRODUCTION SOME 11% ABOVE THE PRIOR PEAK - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 6 ANOTHER RECORD LEVEL A. WE KEEP READING ABOUT THE SERVICE ECONOMY AND THERE HAS BEEN A SHIFT B. BUT INDUSTRIAL PRODUCTION HAS ALSO GROWN B. TO EMPHASIZE THE POSITIVE, THIS HAS BEEN A VERY POSITIVE ECONOMIC CYCLE 1. WE ARE NOW WELL THROUGH THE FOURTH YEAR OF THE ECONOMIC EXPANSION 2. COMPARATIVELY, THIS HAS BEEN A VERY STRONG CYCLE - ONE OF THE THREE LONGEST SINCE WORLD WAR II 3. THE MEDIA FREQUENTLY PUTS A DIFFERENT TONE ON THE SITUATION - I HOPE THAT YOU WILL READ THROUGH THOSE COMMENTS, DEVELOP YOUR OWN VIEWS, AND CONVEY THEM TO YOUR STUDENTS V. BUT WHILE IT IS AN INTERESTING TIME, IT IS ALSO ONE OF SIGNIFICANT CHALLENGE IN THE CONDUCT OF MONETARY POLICY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 7 A. LET ME ENUMERATE SOME OF THE ISSUES THAT COMPLICATE OUR LIFE AND THAT YOU WILL WANT TO KEEP YOUR EYE ON 1. THE FISCAL DEFICIT - IT HAS BEEN A WORRY THROUGHOUT A. GRAMM-RUDMAN HAD AT BEST AN ILLUSORY ASPIRIN EFFECT B. WE KNEW THAT IT DIDN'T SOLVE THE PROBLEM BUT THERE WAS THE ANTICIPATION THAT IT WOULD AT LEAST MECHANICALLY LEAD CONGRESS TO TAKE THE NECESSARY STEPS C. THE SUPREME COURT DECISION, THOUGH NOT IN ANY WAY A SURPRISE, NONETHELESS DOES MAKE IT ABSOLUTELY CRYSTAL CLEAR THAT THE DEFICIT PROBLEM IS BACK WITH US AND CONGRESS HAS LESS THAN 40 WORKING DAYS LEFT TO DEAL WITH THE 198 7 BUDGET BEFORE ADJOURN I NG TO FACE THE CONGRESSIONAL AND SENATORIAL RACES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 8 D. THE DEFICIT ISSUE IS PARTICULARLY IMPORTANT AND I THINK YOU WILL WANT TO FOLLOW DEVELOPMENTS IN THIS AREA VERY CAREFULLY B. CONTINUED DEFICITS OF THE MAGNITUDE THAT WE HAVE BEEN EXPERIENCING ARE SIMPLY NOT SUSTAINABLE 1. 0.M.B. RECENTLY ANNOUNCED THAT THE FISCAL 1986 DEFICIT WILL REACH A RECORD $220 BILLION 2. WHILE DEFICITS ARE NOT INAPPROPRIATE IN TIMES OF ADVERSE CIRCUMSTANCES - THE WAY TO DEAL WI TH THESE TYPES OF PROBLEMS 3. AS I SAY, WE ARE NOW WELL THROUGH THE FOURTH YEAR OF AN ECONOMIC EXPANSION - IN THE HISTORY OF OUR COUNTRY WE HAVE NEVER ALLOWED THIS TO HAPPEN - CONGRESS HAS DEALT WITH THE PROBLEM AND BROUGHT THE BUDGETS BACK INTO BALANCE C. THE PENDING TAX BILL - CERTAINLY THE SENTIMENT OF THE COUNTRY IS FOR TAX REFORM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 9 1. THE JOINT CONFERENCE COMMITTEE HAS BEGUN THEIR DELIBERATIONS 2. IN THE INTEREST OF PROVIDING DISCERNIBLE BENEFITS FOR THE CONSUMER - AND IT'S AN ELECTION YEAR - THERE IS A RI SK THAT THE TAX BURDEN WI LL BE SHIFTED UNDULY FROM THE CONSUMER TO THE CORPORATION 3. ULTIMATELY THAT ENDS UP BACK IN THE LAPS OF THE CONSUMER THROUGH HIGHER PRICES 4. THERE IS A GROWING FEELING THAT THIS TAX REFORM WILL END UP BEING ANTI-BUSINESS AND THAT IS HAVING AN UNSETTLING EFFECT ON THE MARKETS 5. I TH INK YOU WI LL WANT TO FOLLOW THESE DEVELOPMENTS VERY CAREFULLY D. PERHAPS THE CRITICAL ISSUE THE GREATEST IMPONDERABLE THAT WE FACE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 10 1. ARE WE FACING THE RISK OF RENEWED INFLATION OR DIS-INFLATION OR PERHAPS EVEN DE-FLATION 2. CENTRAL BANKERS SEEM TO HAVE AN INHERENTLY UNCOMFORTABLE FEELING THAT INFLATION CAN ONLY GET WORSE 3. THE RECENT RECORD IS GOOD - WE'VE HAD LUCKY HITS FROM THE DECLINE IN PRICES OF OIL AND OTHER BASIC COMMODITIES 4. BUT WE ARE A SOCIETY THAT IS SOCIALLY AND POLITICALLY DRIVEN BY HIGHER LEVELS OF INFLATION 5. WE VE BEEN THERE BEFORE - LATE 1970S - THE I CORRECTIVE PROCESS EXCEPTIONALLY EXCRUCIATING 6. WITH THIS KIND OF BIAS, WE TEND TO BE RATHER RESTRICTIVE IN OUR APPROACH TO MONETARY POLICY 7. BUT, AL TERNAT IVEL Y, THERE ARE SOME PERSUASIVE REASONS THAT INFLATION MIGHT NOT POSE THE RISKS THAT OUR INSTINCTS MIGHT SUGGEST Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 11 A. AGAIN, WE ARE WELL INTO THE FOURTH YEAR OF THIS ECONOMIC CYCLE - HISTORY OF PRICE CYCLES WOULD SUGGEST THAT INFLATION WOULD BE UNDER MUCH GREATER PRESSURE BY THIS TIME B. OPE RAT I NG RATES OF OUR MANUF AC TUR I NG SEC TOR AVERAGE ABOUT 78% - AT THESE LEVELS COMPETITIVE FACTORS ARE TOO GREAT AND PRICE INCREASES WON'T STICK IN THE FULL SENSE C. LABOR CIRCUMSTANCES HAVE CHANGED DRAMATICALLY D. UNION ATTITUDE IN THE NEGOTIATION PROCESS IS QUITE DIFFERENT NOW THAN WAS THE CASE IN THE '70S WHEN WE WERE DEALING WITH SUCH HIGH LEVELS OF INFLATION 8. THIS INFLATION ISSUE IS ONE OF THE MAJOR QUANDARIES FACING THE FED IN ITS POLICY DECISIONS A. WE WON'T HAVE THE ANSWER UNTIL IT IS TOO LATE - LAG TIME Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 12 B. THE CONSEQUENCES ARE ENORMOUS; DEFLATIONARY - LESS RESTRICTIVE, INFLATIONARY - MAINTAIN OUR GUARD E. OUR ECONOMIC SYSTEM HAS BECOME VERY LEVERAGED - WE HAVE HAD THIS ENORMOUS BUILDUP OF DEBT THROUGH ALL SECTORS OF OUR ECONOMY 1. r TALKED ABOUT THE FISCAL DEFICIT - DEFICITS RESULT IN DEBT - THE TREASURY DEBT WENT TO $500 BILLION IN 1975 2. A STATISTICAL FACT, WE PIERCED THE $2 TRILLION LEVEL ON APRIL FOOL S DAY OF THIS YEAR 1 3. WE WILL HIT THE CURRENT STATUTORY CEILING IN AUGUST AND, AGAIN, THIS IS AN ISSUE THAT YOU WILL WANT TO FOLLOW CAREFULLY AS CONGRFSS DEALS WITH THIS NETTLESOME PROBLEM 4. CONSUMER DEBT LOADS AT RECORD LEVELS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 13 5. CORPORATE DEBT LOADS EQUALLY HEAVY - EXACERBATED BY MERGERS AND TAKEOVERS 6. EXTERNAL DEBTS OF THE LESSER DEVELOPED COUNTRIES F. FINANCIAL SYSTEM STRESS - THE MARKETS HAVE BEEN SMACKED PRETTY RECURRINGLY BY FINANCIAL INCIDENTS OVER THE PAST FEW YEARS 1. THRIFTS - OHIO/MARYLAND 2. GOVERNMENT SECURITIES DEALERS 3. BANK CLOSURES - MAY WELL REACH 150 THIS YEAR A. LARGE OKLAHOMA I NS TI TUT I ON CLOSED ONLY LAST WEEK 4. SO FAR THE REGULATORS HAVE BEEN ABLE TO COPE - THE RECORD IS GOOD - I HAVE EVERY CONFIDENCE THAT WE WILL CONTINUE A. BUT THERE IS ALWAYS THE RISK THAT ONE MIGHT GET AWAY FROM US Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 14 G. PERHAPS THE LARGEST CHANGE THAT -HAS OCCURRED OVER THE PAST DECADE - OUR GREATEST CHALLENGE - BUT PERHAPS ALSO OUR GREATEST OPPORTUNITY - THE GLOBALIZATION OF THE WORLDWIDE ECONOMIC SYSTEM 1. OUR MONET ARY POL I CY DEL I BE RATIONS ARE NO LONGER CONDUCTED IN AN ENTIRELY DOMESTIC CONTEXT 2. OUR ECONOMY HAS NOW BECOME VERY INTERDEPENDENT WITH THE ECONOMIES OF THE WORLD 3. FISCAL AND MONETARY POLICIES WILL HAVE TO BE BETTER COORDINATED 4. THIS POSES SOME PRETTY SIGNIFICANT SOCIO/POLITICAL QUESTIONS THAT LEGISLATORS AND REGULATORS ARE GRAPPLING WITH A. CAN WE BE SOCIETALLY COMFORTABLE WITH SOME OF THE CHANGES WE ARE EXPERIENCING - VERY SIMPLY, THE EXPORT OF PRODUCTIVE JOBS INTO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 15 LOWER COST AREAS - THE FAR EAST, CENTRAL AND SOUTH AMERICA ET AL 8. CAN OUR LABOR FORCE ADJUST TO THESE SIGNIFICANT CHANGES C. IF NOT, A GULF WILL EMERGE BETWEEN OUR LESSER TALENTED, PERHAPS UNEMPLOYABLE, POPULATION AND THOSE WHO HAVE AND ARE MAKING THE ADJUSTMENT - THE TEACHERS IN OUR COUNTRY HAVE A UNIQUE RESPONSIBILITY TO BRING THEIR STUDENTS THROUGH THIS TRANSITION IN A WAY THAT THEY WII I BE EDUCATIONALLY EQUIPPED TO DEAL WITH A RAPIDLY CHANGING ECONOMIC ENVIRONMENT D. THE ENVIRONMENT WILL BE CONDUCIVE TO REWARD I NG THOSE WHO CAN MAKE THE SH IF T BUT WILL BE VERY HARSH ON THOSE WHO CAN'T Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 16 E. I AM SURE THAT YOU UNDERSTAND THE IMPLICATION OF THIS FAR BETTER THAN I VI. CONCLUSION - LET ME CONCLUDE BY HIGHLIGHTING AN ISSUE THAT HAS GREAT SIGNIFICANCE, NOT JUST FOR THE FED, BUT I WOULD SUGGEST FOR OUR ECONOMIC WELL-BEING - NAMELY, THE INDEPENDENCE OF THE FEDERAL RESERVE SYSTEM A. WE WERE CREATED BY THE CONGRESS AND MOST APPROPR I ATFL Y AT THE END OF THE DAY WE CAN BE CONTROLLED BY THE CONGRESS - BUT OUR ABILITY TO DEVELOP AND CONDUCT MONETARY POL I CY FREE OF UNDUE POLITICAL PRESSURES IS CRITICALLY IMPORTANT 1. IF WE WERE TO IOSE OUR INDEPENDENCE AND COME UNDER DIRECT POLITICAL CONTROL, THE PRESSURES TO RE-FLATE WOULD BECOME HEAVY B. FROM TIME TO TIME THERE ARE EFFORTS TO STEM {?) OUR INDEPENDENCE AND THERE IS CURRENTLY ONE UNDERWAY THAT YOU SHOULD FOLLOW - THE MELCHER CASE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 17 1. CHALLENGES THE CONSTITUTIONALITY OF HAVING PRESIDENTS SIT ON THE FEDERAL OPEN MARKET COMMITTEE 2. WE ARE APPOINTED BY THE LOCAL BOARD OF DIRECTORS AND APPROVED BY THE BOARD OF GOVERNORS 3. l HERE FORE, WE ARE NOT A PART OF THE NORMAL APPOINTMENT PROCESS 4. BUT THAT WAS CLEARLY THE INTENT OF THE CONGRESS - THE LEGISLATIVE HISTORY 5. THE SUIT WOULD EITHER ELIMINATE THE PRESIDENTS AS VOTING MEMBERS OF THE FOMC OR MAKE THEM SUBJECT TO THE POLITICAL APPOINTMENT PROCESS 6. THE EFFECT WOULD BE THE SAME 7. THE DECISION WTI L BE MADE BY THE SUPREME COURT IN THE NEAR FUTURE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/25/86 PAGE 18 8. THE OUTCOME CRITICALLY IMPORTANT - THE STRUCTURE OF rHE SYSTEM - THE ROLE OF THE RESERVE BANKS AND THE BOARDS OF DIRECTORS - REGIONAL VERSUS CENTRALIZATION C. THESE ARE JUST A FEW OF THE ISSUES THAT WE WORK WITH AND THAT WORRY US l. OUR RECORD IN WORKING THROUGH THESE PROBLEMS HAS BEEN PRETTY GOOD 2. YOU CAN FEEL CONFIDENT THAT WE WILL DO IT AGAIN 3. AND THAT THE ECONOMIC RE SUL TS WILL REFLECT THE SUCCESS OF OUR EFFORTS. * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1986, July 24). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19860725_silas_keehn

@misc{wtfs_regional_speeche_19860725_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1986},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19860725_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}