Regional President Speech

IOWA BANKERS ASSOCIATION GROUP ONE ANNUAL MEETING FEBRUARY 6-7, 1987 SOUTH SIOUX CITY, NEBRASKA I. INTRODUCTION A. DELIGHTED TO HAVE AN OPPORTUNITY TO BE BACK 1. GIVES ME A CHANCE TO MEET WITH THE IOWA BANKERS - PARTICULARLY INTERESTED IN YOUR VIEWS AS TO HOW YOU SEE THINGS - FOMC MEETING - NEXT WEEK 2. JUST A BRIEF LOOK AT THE OVERALL ECONOMIC FORECAST A. WON'T SPEND MUCH TIME - LITTLE THAT I CAN ADD TO WHAT YOU ALREADY KNOW (1) IN A BROAD SENSE, 1987 WILL LOOK MUCH LIKE 1986 (2) A CONTINUATION OF MODEST BUT POSITIVE GROWTH B. UNDERNEATH THAT BROAD EXPECTATION, SOME CAUTIONARY COMM.ENT S Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT ( 2) IOWA BANKERS 2/7/87 PAGE 2 1. GROWTH IN CONSUMPTION WILL DECLINE A. THE CONSUMER LED US OUT OF THE RECESSION - SUSTAINED US INTO THE EXPANSION EXTRAORDINARILY HIGH RATE - REALLY LIVING BEYOND OUR MEANS B. CONSUMER INSTALLMENT DEBT AT A VERY HIGH LEVEL C. GIVEN THESE PRESSURES, CONSUMPTION WILL NOT CONTINUE AT SUCH A VERY HIGH RATE C. CAPITAL SPENDING/BUSINESS INVESTMENT WILL ALSO BE UNDER PRESSURE 1. THE TAX BILL: ITC/ACCELERATED DEPRECIATION HAVE REMOVED SOME IMPORTANT INCENTIVES 2. IN THE MANUFACTURING SECTOR, LOW OPERATING RATIOS WILL CURTAIL EXPENDITURES FOR CAPACITY PURPOSES 3. SPENDING FOR PRODUCTIVITY/EXPENSE REDUCTION Wll_L CONTINUE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 3 D. GOVERNMENT SPENDING WILL BE DOWN 1. THE FISCAL DEFICIT IS SHOWING SIGNS OF IMPROVEMENT 2. HAS BEEN A STRONG STIMULUS OVER THE PAST FEW YEARS 3. AT LONG LAST SOME REDUCTION - BUT LESS STIMULUS FOR THE NATIONAL ECONOMY AND THAT MAY HAVE SOME IMPLICATIONS FOR THE AGRICULTURAL SECTOR AS WELL E. THESE, THEN, ARE THE NEGATIVES F. THE AREA OF IMPROVEMENT - INTERNATIONAL TRADE - THE SHIFT HAS BEEN SLOW IN COMING 1. NO PROOF THAT HERE YET 2. THOUGH THE NUMBERS FOR THE FULL YEAR 1986 WERE DISCOURAGING, THE DECEMBER RESULTS, AT LEAST PRELIMINARILY, SHOW SOME SIGNS OF IMPROVEMENT 3. THE SIGNIFICANT DECLINE IN THE VALUE OF THE DOLLAR (DEUTSCHE MARK -45%; YEN -40%) / A. HA S TO PR O VI DE BE TT E R TR A D E OP P O RT U N I TY •l O ./ lvifl("' Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 4 THOSE COUNTRIES AND OTHERS WHERE CURRENCIES HAVE SHOWN SIMILAR APPRECIATION B. ADMITTEDLY, THIS DOES NOT DEAL WITH OTHER EXPORTING COUNTRIES WHOSE CURRENCIES HAVE NOT RISEN 4. NET, WE EXPECT A GOOD INCREASE IN EXPORTS AND I 'LL COMMENT MORE ON THAT IN JUST A MOMENT II. BUT LET ME LOOK BACK FOR JUST A FEW MOMENTS - THIS HAS BEEN A VERY GOOD ECONOMIC CYCLE - BETTER THAN THE GENERAL PERCEPTION A. LENGTH 1. Now INTO THE 5TH YEAR, COMPARATIVELY A LONG CYCLE B. STRENGTH - CHARACTERISTICALLY A GOOD CYCLE - 7A-e} 1. GNP RECORD LEVELS - 12!_ ~ ~ ~ /LI .. . ' /{i'f-1-- ~ 2. AS WE GET FURTHER OUT IN TIME, THE 1982 RECESSION FADES IN MAGNITUDE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 5 C. EMPLOYMENT - VERY FAVORABLE RESULT 1. PAYROLL EMPLOYMENT OVER lOOMM FOR THE FIRST TIME A. TOTAL EMPLOYMENT SIGNIFICANTLY HIGHER 2. MORE THAN 8-l/2MM NEW JOBS SINCE THE LAST PEAK (1980) 3. ABOUT 12MM NEW JOBS SINCE THE BOTTOM OF THE RECESSION (4Q 1982) 4. INCREASES AVERAGING SOME 200,000-220,000 MONTHLY A. 3 CONSECUTIVE MONTHS IMPROVEMENT MANUFACTURING 5. UNEMPLOYMENT (6.7% LAST MONTH) HIGHER THAN WE LIKE BUT THE EMPLOYMENT PICTURE HAS BEEN VERY POSITIVE D. INDUSTRIAL OUTPUT AT RECORD LEVELS 1. THOUGH WE ARE EXPERIENCING AN EMPLOYMENT SHIFT TO SERVICE, NONETHELESS, WE ARE PRODUCING MANUFACTURED PRODUCTS AT RECORD LEVELS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 6 E. INFLATION - VERY POSITIVE RESULTS, PARTICULARLY THIS FAR °6 IN TO THE CYCLE _ • .. _ --,- ~ -1,/... J_;U,L.. ~ ~ ~/~ Tl() ~,v---~ 1.. IMPACT\ VERY, VERY UNEVEN, PARTICULARLY ON THOSE ~~L~~a{(~ PARTS OF OUR ECONOMY THAT W~~ACTE:1) BY THE ENORMOUS RUN UP IN INFLATION RATES DURING THE 1970S 2. THE BEST NEWS IS BEHIND US ON INFLATION - THE r~·T,\;). ~er-to ..) EFFECT OF LOWER OIL/FOOD~T PRICES IS BEHIND us A. WILL BEGIN TO SEE EFFECT OF HIGHER PRICES FOR IMPORTED ITEMS B. lN TERMS OF THE C.P.l., OUR ANTICIPATION IS THAT INFLATION WILL RISE TO 4% OR HIGHER DURING THIS YEAR c_ THERE IS SOME STATISTICAL NOISE HERE - THIS HIGHER NUMBER DOES NOT DIRECTLY RELATE TO THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis v;-r~ ,- {),)A--◊~ SK DRAF1 (2) IOWA BANKERS .5/o ?'1 . .(LPflh' 2/7/87 PAGE 7 ,s,fA- )-"' ?S LOWER NUMBERS - THE VERY FAVORABLE RESULTS IN 1986 - BUT WE WILL NEED TO KEEP A WEATHER EYE ON THIS DURING THE YEAR III. BUT THIS HAS AND WILL CONTINUE TO BE, A VERY, VERY UNEVEN EXPERIENCE - GEOGRAPHICALLY AS WELL AS BY SECTORS OF OUR ECONOMY A. AND, CERTAINLY, THE AGRICULTURAL SECTOR OF OOR ECONOMY AND YOUR PART OF OUR DISTRICT HAVE BEEN VERY HARD HIT BY THE ADJUSTMENT THAT OUR ECONOMY HAS BEEN EXPERIENCING B. THE DISINFLATION PROCESS IS VERY RUGGED AND, AGAIN, VERY UNEVEN IV. BUT LET ME LOOK AHEAD A BIT WITH COMMENTS REGARDING ACTIVITIES THAT MAY BE MORE RELEVANT TO YOUR INTEREST /r)~C~ ~.._~ A. OUR OUTLOOK FOR AGRICULTURAL SECTOR - WE ARE HOPEFUL THAT IN SOME RESPECTS WE MAY HAVE REACHED THE LOW POINT OR AT LEAST A ZONE OF STABILITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 8 1. BUT YET NOTICEABLE IMPROVEMENTS FROM THIS LOW POINT MAY PROVE TO BE ELUSIVE AND LONG IN COMING B. FARM SECTOR EARNINGS 1. DESPITE MARKET DECLINES IN CROP PRICES LAST YEAR, NET CASH INCOME IN THE FARM SECTOR CAME IN AT ABOUT 1985 HIGH LEVEL OF $44 BILLION 2. FARM EARNINGS WERE BOOSTED BY GOVERNMENT SUBSIDIES AS WELL AS BETTER RATES FOR LIVESTOCK PRODUCERS, LOWER PRODUCTION COSTS, AND LOWER INTEREST EXPENSES 3. FOR 1987, WE ARE FORECASTING AN INCREASE IN FARM SECTOR EARNINGS OF PERHAPS 5-10% TO SOME SIGNIFICANT EXTENT THE RESULT OF FURTHER GROWTH IN GOVERNMENT SUBSIDIES C. LAND VALUES ALMOST BY DEFINITION THE WORST HAS 10 BE BEHIND US Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 9 1. THE DOWNTREND CONTINUED THROUGHOUT 1986 - OUR SURVEY INDICATED A DECLINE OF 12% FOR ALL OF 1986 FOR THE DISTRICT AND FOR IOWA 2. BUT THE RATE OF DECLINE SLOWED TO A LITTLE OVER 1% IN THE 4THQ 3. THE LAND MARKET REMAINS VERY UNSETTLED AND WILL CONTINUE UNDER PRESSURE WE ANTICIPATE A CONTINUING THOUGH MUCH MORE MODEST DOWNTREND DURING THE FIRST HALF OF THE YEAR 4. FROM TALKING WITH BANKERS AS -WELL AS OTHER IN THE ST AT E, I AM HEAR I NG , ANECDOTALLY ,, J.H AT MORE ~i ~ r./,1£,l.V_ _ j TRANSACTIONS ARE OCCURRING AND Hl·frl--·t-1ANioF YOU SENSE THAT WE ARE REACHING THE LOW POINT - I'D BE VERY INTERESTED IN YOUR VIEWS ON THIS D. EXPORT PROSPEClS - HERE I D BE A LITTLE BIT CAUTIONARY 1 1. CERTAINLY THE ENORMOUS DECLINES IN THE VALUE OF Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 10 THE DOLLAR HAVE TO PROVIDE BETTER EXPORT MARKET OPPORTUNITIES 2. T\~ DETER I ORK!, IN OUR AGR rcuuuyoRTS .T✓AE OVER PAST ~f- S / -------- D.,ts TR ES S I r-tG 3. COTTON AND RICE HAVE SHOWN IMPROVEMENT, BUT CORN AND WHEAT EXPORTS ARE AT LOW LEVELS NOT EXPERIENCED IN OVER A DECADE, AND SOY BEANS HAVE IMPROVED ONLY MARGINALLY 4. THOUGH WE HAVE BECOME PRICE COMPETITIVE, THERE ARE OTHER FACTORS AFFECTING OUR MARKET POSITION A. DETERIORATION IN TRADE RELATIONS WITH THE SOVIET UNION B. THE ABUNDANCE OF EXPORTABLE SUPPLIES OF GRAIN LAST YEAR IN THE WORLD -· INCLUDING MANY COUNTRIES THAT USED TO BE VERY GOOD CUSTOMERS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 11 C. THE GROW! NG TENDENCY FOR MANY COUNTRIES TO USE EXPORT SUBSIDIES Q ~ l ~ * ~~~'r.,l. H~- D. THE ADVERSE CONSEQUENCES FROM THE GROWING SENTIMENT BOTH HERE AND ABROAD FOR TRADE PROTECTIONISM 5. WE ARE MORE RESERVED THAN SOME REGARDING THE 1987 OUTLOOK FOR AG EXPORTS V. THE OUTLOOK FOR BANKING IN IOWA - CERTAINLY YOU HAVE A ~ Jit1' ~ F~R GRASP OF THIS DIFFICULT SUBJECT THAN I DO, BUT LET ME GIVE YOU MY PERSPECTIVE FROM A REGULATORS POINT OF VIEW A. FARM DEBT 1. THOUGH STILL HIGH, FARM DEBT HAS BEEN DECLINING BUT CONTINUES TO BE HIGH RELATIVE TO CASH EARNINGS 2. EXCLUDING DEBT OWED TO THE CCC, FARM DEBT OWED TO ALL OTHER REPORTING LENDERS AS OF THE END OF THE 3RDQ LAST YEAR WAS DOWN 10% FROM THE PREVIOUS YEAR AND DOWN 14% FROM THE 1984 PEAK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 12 3. THE DECLINE IN FARM DEBT RESULTS FROM INCREASING WRITE-OFFS OF PROBLEM FARM LOANS, MORE RAPID REPAYMENTS OF DEBTS BY FARMERS THAT ARE NOT EXPERIENCING FINANCIAL STRESS, AND PERHAPS MORE CONSERVATIVE LENDING POLICIES OF THE AG BANKS B. WE ANTICIPATE CONTINUED BANK FAILURES IN 1987 1. BUT HERE ALSO A SHIFT 2. MANY OF THIS YEAR 1S FAILURES WILL REPRESENT THE CULMINATION OF EVENTS THAT HAVE BEEN DEVELOPING FOR QUITE SOME WHILE AS OPPOSED TO THE EMERGENCE OF NEW PROBLEMS ------ --- -----~[-- 3. WE FOLLOW THE LIST OF BANKS THA+---A-R-f--WiCI tlQFQ 1~ THE PR0BLE~ CATE&OfMI -VE--R-Y CLOSELY - IN RECENT MONTHS THE TOTAL I~.c-n.ME IN THE DISTRICT HAS DECLINE.D SLIGHTLY - NOTHING DRAMATIC BUT WE ARE HOPEFUL THAT THIS REPRESENTS A LEVELING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 13 -- ,- • I -- TO ·I-N-ffiE---A--5£-BUT l llE RATE OF INTREASE HAS--s-t.-OWE D D-R.AMA+-I-C AL L Y 5. THE RATIO OF NONPERFORMING LOANS TO CAPITAL DE CL I NE D DU R I NG TH E F I RS T TH R E E QUA RT E R S OF 18fil. { Ct g- l AND WE DO NOT ANTICIPATE FURTHER INCREASES IN THE RELATIVE LEVELS OF NONPERFORMING LOANS OR LOSS RATES C. HEl'tE AGAIN l WOULO BE PARTICU[ARLV INTERE3TED IN VDUR ~ COMrtENTS ANO OBSERVATIONS, Bttt WE ARE HOPEFUL THAT THE AGRICULTURAL PROBLEMS AS THEY EVIDENCE THEMSELVES IN THE AGRICULTURE BANKS HAVE REACHED A STABILIZATION POINT AND WILL OVER THE NEXT YEAR OR SO SHOW SIGNS OF _z ~ - ~ ~ ~ IMPROVEMENT - , lf_~ "'--~- ,, ,__ ~~ ~pttJ--·· - v ~ >. VI. JUST A FEW COMMENTS ON THE FEDERAL RESERVE S REGULATORY 1 RESPONSE TO THESE ISSUES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 14 A. FASB-15 - CERTAINLY NOT A NEW MATTER BUT A WAY IN WHICH A RESTRUCTURED LOAN CAN BE BOOKED WITHOUT RECOGNIZING A LOSS 1. NOT A WAY OF COVERING OVER A FUNDAMENTAL PROBLEM BUT THE APPROPRIATE ACCOUNTING TREATMENT FOR A LOAN THAT HAS THE PROSPECT OF WORKING OUT I B. THE CAPITAL FORBEARANCE PROGRAM ;· 1. AS A RESULT OF LOSSES OF FARM/4NERGY LOANS, THE CAPITAL POSITIONS OF MANY BANKS HAVE BEEN REDUCED CONSIDERABLY AND FURTHER EROSION MAY DEVELOP 2. AS A CONSEQUENCE, CAPITAL RATIOS HAVE FALLEN OR MAY FALL BELOW MINIMUM LEVELS SET OUT IN REGULATORY STANDARDS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS is ~ ~ 8 ~--'{ ~~~, ~-~LaR7-u~ 4. tiONETIIFitTIS, A WAY OF DEALING WITH AN INSTITUTION THAT IS EXPERIENCING PROBLEMS - BUT HAS THE ABILITY TO WORK OUT OF THEM 5. WE ARE RELUCTANT TO DO MUCH MORE - IF WE BEGIN TO EASE OUR STANDARDS OF ASSET QUALITY, WE WILL ONLY BE MISLEADING YOU, THE PUBLIC AND OURSELVES AS TO THE TRUE NATURE OF THE PROBLEM C. WE HAVE RENEWED THE TEMPORARY SIMPLIFIED SEASONAL CREDIT PROGRAM FOR 1987 1. WELL RECOGNIZE THAT THIS DOESN'T DIRECTLY DEAL WITH THE NATURE OF THE PROBLEM 2. LOAN TO DEPOSIT ~ IN THE AG BANK GROUP HAVE DECLINED - IT'S ASSET QUALITY NOT LIQUIDITY THAT IS YOUR ISSUE 3. NONETHELESS, SEVERAL BANKS DID USE THIS PROGRAM LAST SUMMER AND IT SEEMS TO US THAT IT'S WORTH PUTTING IN PLACE ONE MORE TIME JUST TO ASSURE ANY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 16 BANK THAT IS AT THE MARGIN IN THE LIUQIDITY SENSE THAT ADEQUATE FUNDING WILL BE AVAILABLE 4. INCIDENTALLY, THE DISCUSSION THAT l HAD WITH YOU ON MY FIRST TRIP AT THIS GROUP MEETING WAS INSTRUMENTAL IN THE DEVELOPMENT OF THIS PROGRAM - FOR THE DOUBTERS OUT THERE, WE REALLY DO LISTEN aj}_/ o=ia.t= ~/1 ~•-wr- VI I. ~~~ - AND 1~{iH IS WEREN'T ENOUGH (TMEANWH I LETHE DEREGULATION PROCESS IN THE FINANCIAL SERVICES INDUSTRY ROLLS ON A. IN A GEOGRAPHIC SENSE, THE SPEED HAS ACCELERATED QUITE CONSIDERABLY IN THE LAST YEAR B. WITH REGARD 10 POWERS, 1 THINK YOU CAN SENSE THAT WITHIN THE RECENT PAST, REALLY JUST A MATTER OF WEEKS, THE TEMPO HAS ACCELERATED DRAMATICALLY 1. DESPITE THE LEGISLATIVE INACTION FOR SO MANY YEARS, l HAVE A SENSE THAT WE WILL SEE CHANGES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SK DRAFT (2) IOWA BANKERS 2/7/87 PAGE 17 MORE RAPIDLY THAN I MIGHT HAVE ANTICIPATED JUST 6 MONTHS AGO C. THIS WILL BRING IMPORTANT CHOICES FOR BANKS IN IOWA 1. BUT ALSO OPPORTUNITIES 2. AS I HAVE FREQUENTLY SAID, THE PROSPECTS FOR SMALL BANKS IN THIS CHANGING STRUCTURAL ENVIRONMENT ARE EXCELLENT - CALIFORNIA EXAMPLE 3. ASSET DIVERSITY HAS BEEN A TERRIBLY DIFFICULT PROBLEM FOR BANKS IN IOWA - THE NATURE OF YOUR GEOGRAPHIC AREA FRUSTRATES YOUR DIVERSIFICATION EFFORTS BUT GIVEN INCREASED DEVELOPMENT OF SECURITIZATION, THIS DIVERSIFICATION MAY BE MORE READILY ACHIEVABLE THAN WAS THE CASE BEFORE VIII. AGAIN, A VERY GREAT PLEASURE TO BE WITH YOU AND 1 WOULD BE VERY INTERESTED IN ANY COMMENTS OR SUGGESTIONS THAT YOU MAY HAVE AND WOULD ALSO LIKE TO ADDRESS ANY QUESTIONS THAT MAY OCCUR • * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1987, February 6). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19870207_silas_keehn

@misc{wtfs_regional_speeche_19870207_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {Feb},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19870207_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}