Regional President Speech

SILAS KEEHN REMARKS UNIVERSITY OF NORTH CAROLINA COLLEGE OF BUSINESS ADMINISTRATION CHARLOTTE, NORTH CAROLINA APRIL 10, 1987 I. INTRODUCTION - HONORED TO PARTICIPATE IN THIS OUTSTANDING LECTURE SERIES A. OPPORTUNITY TO PUT OUR CURRENT ECONOMIC EXPERIENCE IN A BROADER PERSPECTIVE 1. POINT OF VIEW OF A CENTRAL BANKER 2. ALSO AS THE PRESIDENT OF A FEDERAL RESERVE DISTRICT THAT HAS BEEN DEEPLY AFFECTED BY THE CHANGES THAT l WILL OUTLINE B. AS l WI LL ELABORATE, WE HAVE EXP ER I ENC ED SOME VERY ~ -{tj ~ FUNDAMENTAL CHA~GES IN OUR ECONOMY~ ~ tv ~ ~~ /, f-/')./e,. l.)~ l:. - ~ NOT NOR14Ab oc~~IAi6E~ ~RTANT CF~OAD RAMIFICATIONS C. AND THIS LEAVES THOSE OF US THAT DEAL WITH MONETARY POLICY WITH SIGNIFICANT CHALLENGES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 2 UJt,/,~~ II. THE DECADE OF THE 180S HAS BEEN A FASilblAilN~ PERIOD - SOME 2-1/2 YEARS TO GO THAT I AM SURE WI LL BE "INTERESTING" - BUT HOPEFULLY NOT IN THE CHINESE SENSE OF THE WORD A. LET ME GO BACK TO 1980 - A MILD RECESSIONARY ENVIRONMENT 1. INFLATION - 13% AND HIGHER - EVERY EXPECTATION L CALLED FOR EVEN HIGHER LEVELS~~ ()1c!RttJ..~'-'-"'--7 2. INTEREST RATES WERE HIGH (DISCOUNT RATE INCRE~SED A. l="RQM 12% TO 13% IN THE lST 01tfH-E.R) AND WOULD INCREASE EVEN MORE AS THE YEAR PROGRESSED (.n J SCOUNT RATE INetUfHN8 SURCIIAR6E =- RAISED ,o --16% IN THe 11TH QUARTER) B. RISING INTEREST RATES HAD THEIR EFFECT - THE RECESSION FOLLOWED 1. MANY WOULD DESCRIBE IT AS THE WORST SINCE THE 1930s Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 3 2. PARTICULARLY TRUE IN THE HEAVILY INDUSTRIALIZED MIDWESTERN AREA A. CONTINUING TO FEEL EFFECTS OF THIS PERIOD 3. WE FINALLY REACHED THE TURNING POINT IN THE 4TH :r. rf.. ~ i ~ ~ QUARTER OF 1982.,) 4:"" WENT FROM RECE33H)N TO RECO"v1E~'f, NOw EXPANSION - ~ -,>I~~ ,~'-F1JL~- TODAY 1. I HOPE THAT I WOULD HAVE CALLED THE TURN IN THE ECONOMY RIGHT - BY THE SPRING OF 1983 THE RECOVERY SIGNS WERE QUITE CLEAR 2. BUT HAD I FORECASTED SOME OF THE EVENTS THAT HAVE ~~~·~~ OCCURRED DIIEi?ING THE INTERVENING PERroD, YOU MIGHT HAVE BEEN INCREDULOUS w ~ ~ A. FEDERAL BUDGET DEFICITS Rt!NNING AS HiGH A~ $220 'QILLIG-N- PERSISTENTLY THROUGHOUT THE .,/t,\A1'fJ~T""O~=>:::JO ~ PERIOD DESPITE THE RECOVERY AND EXPANSION A Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 4 ( 1) ±5% OF GNP-- (2) ABSOLUTELY UNPRECEDENTED~~·~ B. THAT OUR TRADE SURPLUS WOULD TURN INTO A MASSIVE TRADE DEFICIT RUNNING SOME $150-$170 BILLION ON AN ANNUAL BASIS ;;," ~H::::o~~:~OM BEING A NET EXTERNAL CREDITOR TO BECOMING THE LARGEST EXTERNAL DEBTOR C. THAT CORPORATE DEBT WOULD MUSHROOM D. CONSUMER INSTALLMENT DEBT WOULD REACH RECORD LEVELS (1) CONSUMER SAVINGS RATES - RECORD LOWS E. THAT DESPITE THESE MASSIVE CREDIT DEMANDS BY ALL , ~--'( SECTORS OF OUR ECONOMY, INTEREST RATES WOULD C'OMt- ~ 7Po-.;~-~ • BMffi NOT GO UP, F. THE INFLATION RATE WOUL~~ DOWN~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 5 FURTHER AND FUTHER INTO THE CYCLE (1) RATHER THAN GOING UP AS IS NORMALLY THE CASE ~ ~~ G. FOUR YEARS AGO YOU WOULD HAVE ~QUND THESE s ~J.,'u', ~ /~ ~rut,u~9-v f?Y"V\ FORECASTS UNBELIEVABLE BUT YET THAT S EXACTLY 1 /\ WHAT HAPPENED - AND OUR ECONOMIC EXPERIENCE DURING THIS PERIOD HAS BEEN VERY POSITIVE III. PAUSING TO CONSIDER OUR CURRENT SITUATION, SOME 2/3RDS THROUGH THE DECADE, l M REMINDED - BEST OF TIMES/WORST OF 1 TIMES A. EXPANSION HAS CONTINUED - 17 CONSECUTIVE QUARTERS 1. SECOND LONGEST - A LITTLE OVER A YEAR AWAY FROM BEING THE LONGEST IN THE POST-WWII PERIOD B. WON'T SPEND TIME ON FORECAST FOR 1987 1. LITTLE I CAN ADD TO WHAT YOU ALREADY KNOW A. BROADLY 1987 - REPLAY OF 1986 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 6 B. SOME IMPORTANT SHIFTS UNDERLYING BROAD EXPECTATION (l} CONSUMPTION/TRADE C. EXPANSION WILL CONTINUE D. CLEARLY WE ARE IN A LONG PERIOD OF ECONOMIC GROWTH .E. ANOTIIER 5 QUM<IEkS LONGEST- C. CHARACTERISTICALLY THIS HAS AND CONTINUES TO BE A STRONG CYCLE 1. EMPLOYMENT - 13 MILLION - 102 MILLION - ~ ¾~ / ra-t;t 1 ON ~~ £._~ 3 t,-11 tt.r 2. INDUSTRIAL PRODUCTION AT RECORD LEVELS A. DESPITE THE DECLINE IN MANUFACTURING EMPLOYMENT INDICATING A SHIFT TO A SERVICE ECONOMY B. THE MANUFACTURING SECTOR OPERATING AT RECORD LEVELS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 7 3. GNP - IN REAL TERMS AT RECORD LEVELS 4. INFLATION RATE DOWN A. A LITTLE UNDER 2% LAST YEAR - ENERGY RELATED B. WILL BE HIGHER THIS YEAR, SAY, 3-1/2 TO 4% - THE UNWINDING OF THE POSITIVE EFFECTS FROM ~~·~,w ~ fv"-4U., 0 I L AND c-e mm D IT I ES TH AT WE [j,-~(P 5 CI ED LAS T YE AR 5. AUTOMOTIVE SALES - EXPECT SALES OF, SAY, 10.3 MILLION THIS YEAR A. THE 4TH CONSECUTIVE YEAR OF SALES OVER 10 MILLION 6. HOME STARTS - ANTICIPATE STARTS OF 1.6 MILLION OR 1.7 MILLION THIS YEAR A. THE 5TH YEAR OF HOME STARTS IN EXCESS OF 1-1/2 MILLION UNITS 7. ANY TIME THESE 2 SECTORS DOING THIS WELL - INDICATIVE OF A STRONG ECONOMY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 8 8. THESE ARE VERY POWERFUL NUMBERS - IN TH IS PERSPECTIVE THE FUNDAMENTALS ARE GOOD - THIS REALLY IS THE BEST OF TIMES hf- ~~~' f,JJ) • ~~ t.vU). ~ ~ ~ lw'o IV. BU T -I N IA. • EN S E , RS T OF TI ME S - TH E OT H E R S I DE OF / QUOTE A. WITH THE PASSAGE OF TIME - BUILDUP OF IMBALANCES IN THE SYSTEM - VERY WORRYING - DEBT RELATED 1. I'VE COMMENTED ON THE CONTINUING FISCAL DEFICIT A. AS A CONSEQUENCE, THE TREASURY DEBT, NOW 2-1/4 TRILLION, MORE THAN DOUBLED IN THE LAST FIVE YEARS - THE COMPOUNDING EFFECT HAS BEEN SIGNIFICANT 2. THE REVERSAL IN THE TRADE ACCOUNTS RESULTING IN THE TRADE DEFICIT A. HAS PUT US IN THE POSITION OF BEING THE LARGEST EXTERNAL DEBTOR TO THE TUNE OF SOME $250 BILLION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 9 B. WE HAVE BECOME HIGHLY RELIANT ON THE INTERNATIONAL MARKETS C. CLEARLY WE ARE LIV I NG BEYOND OUR MEANS - CONSUMPTION HAS OUTPACED DOMESTIC PRODUCTION OUR HIGH STANDARD OF LIVING HAS BEEN (1) SUPPORTED BY THE INTERNATIONAL MARKETS D. VERY PRECARIOUS POSITION TO BE IN _ n . . ~u. ~~~/AP--:,~~ tu Q u~ ~ 3. ON A CONSOLIDATED BASIS, CORPORATE DEBT TO NET WORTH HAS INCREASED SOME 80% A. FUELED BY MERGERS AND TAKEOVERS B. CORPORATE AMERICA HAS DECAPITALIZED ITSELF 4. CONSUMER INSTALLMENT DEBT IS 16-1/2% OF p~\ -BiSr1€ £.§LE INCOME - A RECORD LEVEL A. THE STRONG GROWTH IN CONSUMPTION THAT WE'VE EXPERIENCED OVER THE PAST FEW YEARS HAS LEFT A VERY LARGE BAR BILL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 10 5. WE HAVE BECOME A DEBT-DRIVEN SOCIETY - SURPRISING IN LIGHT OF LOWER RATE OF INFLATION A. HIGHLY SUSCEPTIBLE TO ADVERSITY IN THE EVENT OF A RECESSION 6. ADD TO THIS RISK LIST THE EXTERNAL DEBTS OF LESSER DEVELOPED COUNTRIES A. THE REFINANCING PROBLEMS DIFFICULT ENOUGH (1) BUT CONTINUED ECONOMIC EXPANSION IN THE MARKETS INTO WHICH THESE COUNTRIES EXPORT PRODUCTS AND MATERIALS IS ESSENTIAL IN ORDER TO GENERATE FOREIGN CURRENCY TO SERVICE THEIR DEBTS ---- 8. NING GROWTH RATES IN SOME OF THE ~R ----------- // INDUSTRIAL C TRIES (E.G. GE-RMANY AND JAPAN) // PROVIDE LESS OPPORTUN Y FOR LDC EXPORTS // C. CLEARLY THE ,E-XlERNAL DEBT REFI CING PROCESS // /' Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 11 SINCE MID-1982 HAS BECOME EXHAUSTED FINANCE ECONOMIC 7. CONSIDERING THESE IMBALANCES - WORST OF TIMES V. GIVEN THE SHARP DICHOTOMY - EXCELLENT ECONOMIC RESULTS YET THE BUILDUP OF VERY THREATENING IMBALANCES - SOMETHING IS VERY DIFFERENT HERE - CLEARLY NOT A TYPICAL ECONOMIC CYCLE - WE HAVE EXPERIENCED SOME MAJOR CHANGES ~ ~ ~ ~ ~ ,'J~ 0-? VO I),(/ A. THE TWO FUNDAMENTAL ELEMENTS ~ . 1. GLOBALIZATION OF THE ECONOMJr~ / tL ~ 2. COMPLETE REVERSAL IN PRICE TRENDS FOR MAJOR RAW MATERIALS, PARTICULARLY OIL B. OF THE TWO, THE GLOBALIZATION OF THE ECONOMY PERHAPS THE MOST SIGNIFICANT 1. DIFFICULT TO PINPOINT WHEN THIS CHANGE STARTED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 12 2. THE EURODOLLAR EMERGED AS AN EXCHANGE MEDIUM IN THE 1960S - THE MARKET FULLY DEVELOPED IN THE '70S A. CATALYST - LUBRICANT oJrf, - ~ tC, 6cJ '3 3. ON A COMPARATIVE BASIS, WE STILL HAD STRONG ECONOMIC AND MANUFACTURING MOMENTUM REMAINING FROM THE POST-WAR PERIOD - WE CONTINUED TO BE A MAJOR EXPORTER A. ENJOYED TECHNOLOGICAL ADVANTAGES B. DIFFERENCES IN LABOR RATES WERE NOT EXPOSED TO THE CRUCIBLE OF DIRECT COMPETITION Mosrr-~ C. ~ie::MtLY ALL OF THAT HAS REVERSED 4. AS A CONSEQUENCE, NET FOREIGN CAPITAL INFLOWS HAVE BECOME AN ESSENTIAL ELEMENT OF OUR ECONOMIC GROWTH ~ A.{)W A. Nf-T Fe RE I GN CAP ITAL I NFL 9W S ACCOUNT FO R 2 0 % OF ALL PRIVATE DOMESTIC INVESTMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 13 B. 22% OF ALL MONEY SPENT ON GOODS IN THE UNITED STATES IS SPENT ON FOREIGN GOODS - UP FROM 9% IN 1970 5. EXTENSIVE OUT-SOURCING IN THE PRODUCTION PROCESS HAS BROUGHT FOREIGN GOODS INTO ALL PHASES OF OUR DOMESTIC PRODUCTION ~R0CF8m A. SO-CALLED "DOMESTIC" PRODUCTS SUBSTANTIAL FOREIGN COMPONENTS - AUTOS FOR EXAMPLE 6. THE CREDIT MARKETS AROUND THE WORLD HAVE BECOME TOTALLY INTEGRATED AND THE FINANCIAL MARKETS ARE NOW OPERATING ON A 24 HOUR CLOCK A. TH IS HAS BEEN A MAJOR ECONOMIC EVENT, 1-Hf 1;111 L RM4IFICATION9 Or M-!J-f-H WE ARE ONLY JUST • -/ r 1 - .-~ - 1-1 ~ 'o L- ~ 4 • c,J:ii,.,.l.s BEGINNING TO DEAL WITH t'J B. INCREASES IN DOMESTIC CREDIT DEMAND HAVE HAD THEIR PRIMARY EFFECT ON THE VALUE OF THE DOLLAR RATHER THAN ON INTEREST RATES u~ :s \. 0 i, ~ J.. ~ _iv-, .,u ~ ~AJ2--¥~~~~f ('l..) µ,;1-~ ~ ~ ~ ~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 14 C. T DEMANDS INCREASED FOR THE REASONS ~ ~ ~T~ ~ 1..,l-/ D. FOREIGN CAPITAL AND FOREIGN GOOD~ kEPT INTEREST RATES AND PRICES LOWER THAN WOULD OTHERWISE HAVE BEEN THE CASE 7. WE ARE NOW AN INTEGRAL PART OF A HIGHLY COMPETITIVE WORLD A. OUR PRODUCTION PROCESSES ARE EXPOSED TO WORLD WIDE MARKETS - INEFFICIENT BEHAVIOR AND MANAGEMENT MISTAKES HAVE QUICK AND VERY APPARENT INTERNATIONAL RECOGNITION. 8. COMPARATIVE DISADVANTAGES BECOME SIGNIFICANT BARRIERS -rt...._r ~ ~ I Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 15 (1) THE ELECTRONICS EXAMPLE - WAGE RATES $24 PER HOUR VS. $1.00 IN MEXICO (2) PRODUCTIVITY AND QUALITY ADVANTAGES ON TOP _-t. ~i--tl,.,;e_~,~ C. WE ARE EXPERIENCING A WHOLESALE RESTRUCTURING CATCHING UP D. THIS MAY HAVE BECOME A VERY MAJOR BALANCING ~~ FACTOR - GLOBALIZATION MAY ~RE TO INCREASE ECONOMIC STABILITY THAN MONETARY POLICY ALONE COULD EVER HAVE ACCOMPLISHED 8. GLOBALIZATION HAS IMPORTANT EMPLOYMENT IMPLICATIONS A. l VE COMMENTED ON OUR STRONG EMPLOYMENT I EXPERIENCE - BUT THE INCREASES HAVE NOT BEEN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 16 IN THE MANUFACTURING SECTOR AND UNEMPLOYMENT HAS REMAINED HIGHER THAN WE'D LIKE B. HISTORICALLY WE VIEWED A 3% UNEMPLOYMENT RATE AS A REASONABLE LEVEL IN A HEALTHY ECONOMY - OBVIOUSLY THIS BENCHMARK HAS CHANGED C. OUR RESEARCH SUGGESTS THAT CHANGES IN THE .U.S. INDUSTRIAL STRUCTURE DUE TO THE CHANGING ~~ -WORbQ BEMAND CONDITIONS HAS BEEN RESPONSIBLE FOR MOST OF THE INCREASE IN THE UNEMPLOYMENT RATES THAT WE HAVE EXPERIENCED OVER THE LAST DECADE D. THOUGH IT'S POLITICALLY AND SOCIALLY DIFFICULT TO ACCEPT, MOST OF THE CHANGES ARE NECESSARY AND AN APPROPRIATE RESULT OF THE STRUCTURAL ADJUSTMENT THAT WE'VE EXPERIENCED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 17 E. WE SIMPLY MUST ' REALLOCATE OUR EMPLOYMENT RESOURCES - AN ISSUE THAT MONETARY POLICY CANNOT ADDRESS IN A SELECTIVE WAY <..__41)-.1 c/"UV\... ~.(. ~ . 9. M HAS BEEN A DE-COUPLING IN THE LINK BETWEEN MANUFACTURING EMPLOYMENT AND GROWTH ~ t.t.$ INDUSTRY HAS BECOME MORE EFFICIENT A. WHILE MANUFACTURING AS A PERCENTAGE OF GNP HAS REMAINED STEADY AT A LITTLE UNDER 25% DURING THE POST-WAR ERA, MANUFACTURING EMPLOYMENT AS A PERCENTAGE OF TOTAL EMPLOYMENT HAS FALLEN FROM 35% IN 1947 TO A CURRENT LEVEL UNDER 20% 8. TECHNOLOGY~PRODUCTIVIT~VED AND PRODUCED MORE GOODS BUT FEWER JOBS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Y: §~ N§: §Aij: 4/10/87 - It;: rt-J- ?,--, ~ ~ u ~ 1 PA ~ GE l ~ kD ~.A;,/)" VI. THE OTHER MAJOR CHA~ -~C~ SHIFT IN PRICES FOR RAW MAlERIALS AND MANY OlHER COMMODilIES A. REALLY A COMPLElE REVERSAL OF EXPECTATIONS THAT WERE FIRMLY IN PLACE AT THE BEGINNING OF THE DECADE 1. WHILE OIL HAS BEEN THE OBVIOUS EXAMPLE - THE CHANGE IS MORE PREVASIVE THAN THAT 2. IN THE LATE '?OS AND EARLY 1980S PRICES WERE ESCALATING AND BASED ON STUDIES SUGGESTING IMMINENT SHORlAGES THE EXPECTATION WAS THAT THESE PRICES WOULD ONLY CONTINUE TO INCREASE 3. BUT NOW WE ARE DEAL I NG WI TH A WORLD WI DE (J'./U\~1 0'd["'£A!AC ~y~ MOST OF THESE ITEMS 4. AGRICULTURAL PRODUCTS PERHAPS ONE OF THE MORE WRENCHING EXAMPLES, PARTICULARLY IN OUR DISTRICT ~~~~~ 5. Ti.IE: CLUB OF ROME Am> ~TUDIES BY OUR OWN DEPARTMENl OF AGRICULTURE FORECAST ED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 19 SHORTAGES OF AGRICULTURAL PRODUCTS - THE MALTHUSIAN DOOMSDAY WAS APPROACHING A. Now WE ARE BUSILY TAKING LAND OUT OF PRODUCTION IN ENORMOUS QUANTITIES TO TRY AND DEAL WITH VAST OVERSUPPLIES B. PARTICIPATION IN TIIE AGRICULTURAL ACREAGE" REDUCTION PROGRAMS SQ EAR THIS YEAR RUNNING ABOUT TWICE OUR EARbl-ER EXPECJAJJONS B. NOT ONLY HAVE WE EXPERIENCED THIS REVERSAL WITH REGARD TO THE ~ H OF RAW MATERIA~THE DEMAND SIDE OF THE EQUASION CHANGES AS WELL 1. MAJOR TECHNOLOGICAL IMPROVEMENTS HAVE REDUCED THE REQUIREMENTS FOR MANY RAW MATERIALS A. CARS USE LESS STEEL AND LESS GAS B. FIBRE-OPTIC LINKS USE POUNDS OF SAND TO REPLACE TONS OF COPPER Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 20 ~ C. ELECTRON~~HER REPLACEJi,MECHANICAL DEFICES OR RADICALLY IMPROVE THEIR EFFICIENCY C. IN NO WAY DO I WANT TO SUGGEST THAT BECAUSE OF THIS CHANGE IN COMMODITY PRICES THE INFLATION PROBLEM IS /;t:::i:._ ~ !!cH>ff+i•J-Mfl.,a~w b ~ BEHIND US - CERTAINL'r\fE MAJOR THREAT TO ou~ ECONOMIC WELL-BEING 1. BUT IMPACT OF COMMODITY PRICES ON INFLATION QUITE DIFFERENT NOW THAN WAS THE CASE AT THE START OF THE DECADE VII. ALL OF THIS FACES THE FEDERAL RESERVE WITH SIGNIFICANT CHALLENGES IN DEALING WITH MONETARY POLICY - JUST HOW DO WE FIT INTO THIS PROCESS A. WE HAVE A CLEARLY SPELLED OUT RESPONSIBILITY e,.,,, "(.I ~ 1:ti" t,,o ( HU MP II REY HM w I( I NS AC T) TO MA I NT A I N CO N DI TI ON S OF ECONOMIC GROWTH WITH HIGH EMPLOYMENT, PRICE STABILITY AND A REASONABLE BALANCE IN OUR TRADE ACCOUNTS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 21 1. BUT GIVEN MY EARLIER COMMENTS, THE MONETARY ~ POLICY PROCESS TO DEAL WITH HH-S RESPONSIBILIT{Pf HAS BECOME INFINITELY MORE COMPLICATED 2. IF OUR ECONOMY WAS EVER THE SORT THAT COULD BE MANAGED BY ECONOMIC POLICY, FINE TUNING IF YOU WILL, IT NO LONGER IS I MIGHT £1:JGGEST H~AT QUR PRJMAB,Y 801 f I~ TO SlA't;- ~l:JT OF TIIE WAY Or A-- HEAi I Rv E1 llNQflr B. THAT SUGGESTS THAT A STEADY MONETARY POLICY IS APPROPRIATE - BUT EVEN THE DEFINITION OF STEADY MONETARY POLICY HAS TAKEN ON NEW DIMENSIONS 1. THE MONEY INCOME RELATIONSHIP WHICH HISTORICALLY HAS BEEN REASONABLY TIGHT, HAS STRAYED OFF OF THE TRACK IN A SIGNIFICANT WAY 2. IN OTHER WORDS, OUR TRADITIONAL MONETARY POLICY GUIDES ARE NOT WORKING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 r£,lL-vfU-J~ t-tiJJ~~ 3. VELOCITY GROWTH OVER THE LAST 6 YEARS HAS VARIED ~ FROM +3% TO -10% C. AS A CONSEQUENCE AND TO USE A SOMEWHAT OVERWORKED WORD, WE HAVE HAD TO BECOME ECLECTIC IN OUR APPROACH l. EXCHANGE RATES, YIELD CURVES, ANALYTICAL MEASURES OF POTENTIAL GROWTH, CURRENT AND FORECASTED LEVELS OF INFLATION AND ECONOMIC ACTIVITY ALL PROVIDE IMPORTANT INPUTS IN THE DEVELOPMENT OF MONETARY POLICY 2. JUDGMENTS, ALWAYS IMPORTANT, MORE SO NOW D. IT'S IMPORTANT TO REMEMBER THAT WE CAN'T PUSH THE ECONOMY BEYOND ITS NORMAL POTENT I AL GROWTH RATE WITHOUT FALLING BACK INTO AN INFLATIONARY ENVIRONMENT ~ 1. ~N THE DEFINITION OF OUR POTENTIAL GROWTH RATE HAS BECOME COMPLICATED, MOST PARTICULARLY BECAUSE OF THE GLOBALIZATION NOTED ABOVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. r-• 4/10/87 .....-1"'"') _ b ... C • ... _ fl- ~' t •P~A GE 2 3 ' ~ ~ Mc-t/\ «--:I ( ~ ~ 0 .r _JI }J.. (-f_ 2. -WH~AS MANY SUGGESTED THAT IN THE 'SOS AND '60S OUR POTENTIAL GROWTH RATE WAS, SAY, 4% AND THAT IT CAME DOWN TO, SAY, 3% IN THE '70S, AN EVEN -s% LOWER RATE, PERHAPS TO 2 T~ 2 lie%, MAY WELL BE CONSISTENT WITH OUR CURRENT GROWTH POTENTIAL ~-t.. 3. IF THIS IS SO, THEN OUR CURRENT EXPERIENCE IS wt-. C<.rr-J~, 1r~ " ~ WITH THIS GROWTH POTENTIAL AND SHOULD BE ~ CONSIDERED A GOOD t2at:f.L, PARTICULARLY AT THIS PHASE OF THE CYCLE - Ag NOTEfl AT TIIE Ob1T6ET. TH!i F l.fffB M1 EN T AL S HE RE RE AL LY ARE 'o' ER V SI RO N G 4. TO TRY AND ACHIEVE EVEN HIGHER LEVELS OF GROWTH RISKS SERIOUS INFLATIONARY CONSEQUENCES A. AS NOTED EARLIER, THE INFLATION RATE THIS YEAR WILL INCREASE TO, SAY, 3-1/2 TO 4% B. WHILE AN OBVIOUS IMPROVEMENT OVER THE VERY HIGH RATES THAT WE EXPERIENCED EARLIER IN THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 24 DECADE, NONETHELESS, NOT A LEVEL THAT REFLECTS PRICE STABILITY IN THE CENTRAL BANKING SENSE OF THE WORD C. RUNNING THE RISK OF RENEWED INFLATION IS SIMPLY NOT ACCEPT ABLE _ 1-- fk. Jli f J... f¥(),'-"-1'~ O ~ AJLl)Ji.AA _,I ( 1) THE CORRECTIVE - PROCESs'<aECOMES ,I INCREASINGLY DIFFICULT VII. CONCLUSION - LET ME LEAVE YOU WITH PERHAPS THE MOST DIFFICULT ISSUE OF ALL - THE POLITICAL CONSIDERATIONS OF ALL THIS A. I HOPE I'VE ADEQUATELY MADE THE CASE THAT THE ECONOMIES OF THE WORLD HAVE BECOME INTEGRALLY GLOBAL I ZED 1. PRODUCTS AND MONEY MOVE RELATIVELY FREELY ACROSS BORDERS 2. BUT ECONOMIC/FISCAL AND MONETARY POLICIES DO NOT - THEY HAVE !iQ.l BEEN GLOBALIZED r::h_ CA.,-u f'~-a.M" ~ v 1 l Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 25 3. THE MAJOR ceUNTRIES ARE: STILi.. QRER.0.TING ON AT lEAST A £EMI AUTONOM08S BASIS 3. WE ARE TALKING ABOUT VERY, VERY DEEP POLITICAL ISSUES HERE 4. THE PERIODIC MEETINGS OF THE LEADERS OF THE FREE ()~''""' WORLD ARE A.. . I-MPQRIO~T EFFORT TO DEAL WITH THESE \.;j-~~ ~ ~i')~ ~MAJOR~ IS:SU.ES: ~BUT~rET~ TII E RE8ULTIN6 ACTIONS SE~M ~J' :4:>y 5. INDEED, THE RISK OF PROTECTION,ROWS AND l DON'T THINK l NEED SPEND TIME DEALING WITH THE CON SEQ UE N C E S OF PRO TE C T I ON I ST L EG I SL AT I ON At t:CMJfJB .;-jl e ' T~ Rb D 6. I VIEW EC8N8fHC ANB MONE I ARY POLic'Y COORDINAllON ~' ' . • wJt. ~ pr/4~<r ~ ~ AMONG THE MAJO~ C~ RI Esf AS PERHAPS THE MOST ----- ~ PRESSING~ IN OUR CURRENT SITUATION I 5S/;Jbt@_ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. OF NO. CAR. 4/10/87 PAGE 26 ~~~~~ B. E ARE ABLE TO F I ND A WAY OF RES OL V I NG TH E.S ~ POLITICAL DIFFERENCES AND COOPERATING AMONGST ~ 0 I.IR£~ S HIP~~- ::i:1:.i-111.i:..[-lf"4-1~A ~Jtflf,rft'~-p,pO i-tt-iITCT1-umt=-i1n=t1?R'Mf:1TI1N ~Arl'T I ON S , 1. THIS WILL BEGIN TO PUT SOME OF THE IMBALANCES THAT I HAVE TOUCHED UPON (MOST PARTICULARLY THE DEBT PROBLEM) IN A MOR:/,~LISTIC PERSPECTIVE 2. AND PROVIDE A BASIS F~~INUING AND HIGHLY REWARDING ECONOMIC EXPERIENCE. * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1987, April 9). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19870410_silas_keehn

@misc{wtfs_regional_speeche_19870410_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19870410_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}