Regional President Speech

SILAS KEEHN REMARKS TEACHERS WORKSHOP FEDERAL RESERVE BANK OF CHICAGO JULY 31, 1987 4/kfl ~ O'tf---.}\ I. WELCOME - CRITICALLY IMPORTANT ROLE OF THE TEACHERS A. THE Es s ENT I Al __LI NK wI TH s Tu D EN!~--' - I a..,u I• Q.d;~~ ~ c:_ •~ - ~ L ..D VV' ~r-f. B. BUILDING RENOVATION PROGRAM I I. LITTLE THAT I CAN ADD TO THE FULL AGENDA THAT WE HAVE ORGANIZED FOR YOU A. YOU HAVE HEARD FROM OUR EXPERTS ON THEIR AREAS OF EXPERTISE B. LET ME COMMENT ON SOME OF THE ISSUES FACING THE FEDERAL RESERVE SYSTEM AND THE ECONOMY 1. FROM THE PERSPECTIVE OF A MEMBER OF THE OPEN MARKET COMMITTEE III. THE DECADE OF THE '80S - AN ABSOLUTELY UNIQUE PERIOD A. LET ME GO BACK TO 1980 - MILD RECESSIONARY ENVIRONMENT 1. INFLATION - 13% AND HIGHER - EVERY EXPECTATION THAT IT WOULD GO EVEN HIGHER Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 2 2. INTEREST RATES WERE EXTRAORDINARILY HIGH AND WOULD INCREASE EVEN MORE AS THE YEAR PROGRESSED B. RISING RATES HAD THEIR EFFECT - WE ENTERED INTO A RECESSION 1. THE WORST SINCE THE 193OS 2. PARTICULARLY TRUE HERE IN THE HEAVILY INDUSTRIALIZED MIDWEST C. WE REACHED THE TURNING POINT IN THE FOURTH QUARTER OF 1982 - START OF THE RECOVERY NOWCIN EXPANSION 1. AND EMBARKED ON WHAT HAS BEEN A COMPARATIVELY LONG AND POSITIVE ECONOMIC CYCLE IV. WE ARE COMING CLOSE TO COMPLETING THE FIFTH YEAR OF THE CYCLE A. ALREADY THE SECOND LONGEST, SOON TO BE LONGEST, EXPANSION CYCLE OF THE POST WORLD WAR II PERIOD 1. THEREFORE, IN TERMS OF LENGTH ALONE, TH IS HAS BEEN A VERY POSITIVE ECONOMIC EXPERIENCE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 3 B. AND QUANTITATIVELY THIS HAS BEEN A VERY STRONG ECONOMIC EXPERIENCE 1. THE GNP IN REAL TERMS IS AT RECORD LEVELS 2. INDUSTRIAL PRODUCTION IS AT RECORD LEVELS 3. THE RATE OF INFLATION HAS COME DOWN FROM THOSE HIGH LEVELS OF 1980 A. LAST YEAR'S LOW RATE THE RESULT OF ENERGY AND FOOD - THE UNDERLYING INFLATION RATE WAS HIGHER 8. THE INCREASE THAT WE'VE EXPERIENCED THIS YEAR ENTIRELY EXPECTED, AND BECAUSE OF THE TURNAROUND ON ENERGY AND FOOD, THE CURRENT NUMBERS ARE REALLY HIGHER THAN THE UNDERLYING LEVELS OF INFLATION 6cn:x/ ~~~ 4. JUST A COUPLE OF NUMBERS - L,~,_~ A. AUTO SALES t0.2 MILLION/10.3 MILLION - ,, -, 8. HOME STARTS 1.6 MILLION - ~'yAfL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 4 5 . EMPLOYMENT A. SINCE THE TURN ON THE CYCLE, OVER 13 MILLION NEW JOBS/WORK FORCE OVER 102 MILLION 8. JAPAN/EUROPE 3 MILLION 6. THESE ARE ALL VERY POWERFUL NUMBERS A. EVIDENCE OF SOLID ECONOMIC STRENGTH 8. WE TEND TO FOCUS ON THE NEGATIVE AND NOT GIVE OUR ECONOMIC EXPERIENCE THE CREDIT IT DESERVES V. BUT WE ARE FACED WITH A QUIZZICAL DICHOTOMY - THESE GOOD NUMBERS, THE STRONG EXPERIENCE, OFFSET BY A BUILDUP OF IMBALANCES - THREATENING INDIVIDUALLY/COLLECTIVELY A. DEBT RELATED 1. BUILDUP OF DEBT THROUGHOUT OUR ECONOMIC SYSTEM B. FISCAL DIFICIT 1. THIS YEAR A SIGNIFICANT IMPROVEMENT OVER LAST YEAR 2. CAPITAL GAINS TAXES 3. BUDGETARY IMPASSE FOR NEXT YEAR WORRISOME ~~1~~~~ r ~ ~ /3~. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 5 4. CURRENT EXPERIENCE ABSOLUTELY UNPRECEDENTED 5. THE CURRENT IMPASSE ON THE TREASURY DEBT LIMIT SYMPTOMATIC OF THE DEEP UND.E.R LYING PROBLEM /soi C. TRADE DEFICIT - /./-,'j,~ 1. EXTERNAL DEBTOR - $250 BILLION 2. HIGHLY RELIANT ON THE INTERNATIONAL MARKETS TO FUND OUR FISCAL DEFICIT 3. CLEARLY LIVING BEYOND OUR ~~~N~a1 c.. ~~ dlMv'~ b. ~pt>-"r-s ~t~ ~--P ct:::s: »-,'~~~ 4 . WE ARE GOING TO HAVE TO GO THROUGH ._ w~uL:.~J¼U~ -_ ~~ \- --- -- -- A>..~ ~ ~ ~ 5. THE TRADE NUMBERS ARE BEGINNING TO SHOW ~ IMPROVEMENT A. THE TRADE DEFICIT WILL BE REDUCED B. BUT AS A SOCIETY, I AM NOT SURE WE FULLY UNDERSTAND THE RAMIFICATIONS OF THE ~ WtZ!J- ADJUSTMENT THAT BE REQUIRED TO DEAL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 6 WITH THE UNWINDING OF THE ENORMOUS INTERNATIONAL DEBT THAT WE HAVE CREATED OVER THE PAST 4 OR 5 YEARS D. CORPORATE DEBT f HARD TO UNDERSTAND IN LIGHT OF THE REDUCTION ON ,;.~ '~ (Y"" '(µ~ THE RATE OF INFLATION ~ l CONSUMER DEBT / p VI. CLEARLY SOMETHING IS VERY DIFFERENT HERE - THE STRONG ECONOMIC RESULTS ON THE ONE HAND, YET THE BUILDUP OF THESE DIFFICULT IMBALANCES ON THE OTHER HAND A. THIS NOT A TYPICAL ECONOMIC CYCLE 1. WE HAVE UNDERGONE SOME SIGNIFICANT STRUCTURAL CHANGES r[,, ~ l B. GLOBALIZATION - WE HAVE BECOME AN INTEGRAL PART OF AN ECONOMIC SYSTEM THAT HAS BECOME GLOBALIZED C. PERHAPS STARTED WITH THE DEVELOPMENT OF THE EURODOLLAR IN THE EARLY 1960S Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 7 1. AS A CONSEQUENCE, THE DOLLAR HAS BECOME THE TRADING MEDIUM THAT IS ACCEPTED WORLDWIDE 2. ~ -A CQNSE(itlENCE, GOODS AND SERVICES MOVE REASONABLY FREELY ACROSS BORDERS 3. NO LONGER ARE INDIVIDUAL ECONOMIES ISOLATED FROM WORLDWIDE COMPETITIVE PRESSURES 4. MANY PRODUCTS, EVEN SOME OF THOSE THAT WE HAVE CONSIDERED QUITE SOPHISTICATED, HAVE TAKEN ON THE ,,. J CJ~! ~ V. r ~ b 1;t~A~RI~ COMMODITIES -,_ 1tt¥1, 1-a;LABOR RATES BECOME A CRITICAL DIFFERENCE IN THESE CIRCUMSTANCES D. CREDIT MARKETS OF THE WORLD HAVE BECOME FULLY INTEGRATED 1. THESE MARKETS ARE OPERATING ON A 24 HOUR CLOCK (BOT EVENING TRADING) 2. I'M NOT SURE WE FULLY APPRECIATE THE RAMIFICATION OF DEALING WITH MARKETS THAT HAVE BECOME SO INEXTRICABLY INTERTWINED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 8 3. SHOCKS THAT OCCUR IN ONE PART OF THE SYSTEM ARE ALMOST INSTANTLY TRANSMITTED TO OTHER MARKETS ~ E. '+Q REPETITIV(';RHAPS THE MOST ----- ----- ~ THAT WE HAVE EXPERIENCED / SINCE WORLD WAR II - GLOBALIZATION OF OUR WORLDWIDE ECONOMIC SYSTEM 1. BUT WE DO NOT HAVE A WORLDWIDE MONETARY SYSTEM TO DEAL WITH THIS SIGNIFICANT CHANGE 2. lJR I NG I~ THE ttO:ttoMI rS OE II-IE ~IORLQ HH,E:HIER WI U. NECESSITATE SIGNIFICANT POLirtCAL/SOCIAI CHAN~E VI I. THE OTHER MAJOR CHANGE - THE TOTAL REVERSAL IN THE OUTLOOK FOR COMMODITY PRICES A. THE OUTLOOK FOR PRICES AT THE END OF THE DECADE OF THE '70S - SHORTAGES 1. ALL THE STUDIES POINTED TO ALMOST IMMINENT SHORTAGES - CRITICAL RAW MATERIALS 2. AGRICULTURAL PRODUCTION WOULD NOT MEET DEMAND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 9 A. THE MALTHUSIAN DOOMSDAY B. TO SAY THE LEAST, THIS HAS CHANGED 1. AGRICULTURE PERHAPS THE MOST DRAMATIC EXAMPLE 2. COUNTRIES THAT WERE OUR GOOD CUSTOMERS FOR AGRICULTURAL EXPORTS ARE NOW SELF-SUFFICIENT AND IN MANY CASES EXPORTING ON THEIR OWN C. AND THE SAME IS TRUE FOR SO MANY OTHER BASIC COMMODITIES - METALS/OIL D. NOT IN ANY WAY TO SUGGEST THAT INFLATIONARY RISKS ARE BEHIND - THEY NEVER ARE 1. BUT TH IS TOT AL REVERSAL IN THE OUTLOOK FOR THE SUPPLIES OF BASIC COMMODITIES SUGGEST THAT THE IMPACT OF COMMODITY PRICES ON INFLATION WILL BE DIFFERENT VIII. MEANWHILE, THE FED HAS SOME CHALLENGES - AND OPPORTUNITIES - IN THE CONDUCT OF MONETARY POLICY A. AS I SUGGEST THE RESULTS OVER THE LAST 4 OR 5 YEARS HAVE BEEN EXCELLENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 10 B. AND I THINK I CAN SAY WE ARE DEALING WITH OUR o.d LEGISLATil!E RESPONSIBILITIES 1. CONDITIONS OF GOOD ECONOMIC GROWTH 2. CONDITIONS OF HIGH EMPLOYMENT 4, 3. PR I CE ST ABILITY REASONABLE BALANCE IN OUR ~ TRADE ACCOUNTS - HERE WE ARE LACKING C. BUT THE MONETARY POLICY PROCESS HAS BECOME INFINITELY MORE COMPLICATED 1. OUR PRINCIPAL TOOLS - THE AGGREGATES - HAVE AND ARE UNDERGOING SIGNIFICANT CHANGE - LESS USEFUL 2. THE TRADITIONAL MONEY/ INCOME RE LAT I ONSH IP HAS CHANGED 3. VELOCITY CHARACTERISTICS HIGHLY ERRATIC 4. JUST A WAY OF SAYING THAT WHAT IS NORMALLY A DIFFICULT PROCESS HAS BECOME EVEN MORE DIFFICULT D. JUDGMENTS - ALWAYS IMPORTANT EVEN MORE SO NOW 1. CAN I T PUSH THE ECONOMY TOO HARD - INFLATION ARY RISKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 11 2. YET THE CONTINUATION OF THE ECONOMIC EXPANSION CRITICALLY IMPORTANT - REMEMBER THE DEBT BUILDUP THAT I MENTIONED 3. THE ABILITY OF VARIOUS PARTS OF OUR ECONOMY TO SERVICE THESE DEBT LOADS IN CIRCUMSTANCES OF DECLINING INCOME CERTAINLY QUESTIONABLE_,'- d4(, &\. ~ ~ 'ON - ~~ ~pP\-1,-f#C-@r IX. LET ME LEAVE YOU WITH PERHAPS THE MOST DIFFICULT ISSUE OF ~~ ALL - ONE THAT I HAVE TOUCHED ON BRIEFLY CONSIDERATIONS THROUGH ALL OF THIS A. I HOPE I HAVE ADEQUATELY MADE THE CASE THAT THE ECONOMIES OF THE WORLD HAVE BECOME INTEGRALLY GLOBAL I ZED _),1'1~"1 1. PRODUCTS, SERVICES, INF~ AND CAPITAL MOVE RELATIVELY FREELY ACROSS BORDERS 2. BUT ECONOMIC/FISCAL AND MONETARY POLICIES HAVE NOT BEEN GLOBALIZED IN THE COOPERATIVE SENSE OF A.t-~ THE WORD . ~-~ I Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 12 3. HERE WE ARE TALK I NG ABOUT VERY, VERY DEEP POLITICAL ISSUES 4. BRINGING THESE POLICIES INTO SOME TYPE OF COOPERATIVE AND COORDINATED AGREEMENT WI LL BE ~ d.4,(3'~ EXCEPTIONALLY IMPORTANT - 5. THE PERIODIC MEETINGS OF THE LEADERS OF THE FREE WORLD PROVIDE AN OPPORTUNITY TO DEVELOP THIS COORDINATION A. BUT THE NEED IS THERE AND ONE HAS TO BE OPTIMISTIC THAT IN DUE COURSE THE RESULTS WILL FOLLOW 6. IF WE ARE SUCCESSFUL IN FINDING A WAY FOR THE MAJOR NATIONS TO RESOLVE THEIR POLITICAL DIFFERENCES AND COOPERATE AMONGST THEMSELVES A. THIS WILL PROVIDE THE OPPORTUNITY TO BRING SOME OF THE IMBALANCES THAT I HAVE TOUCHED UPON INTO A MUCH MORE REASONABLE PERSPECTIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TEACHERS WORKSHOP 7/31/87 PAGE 13 B. AND PROVIDE A BASIS FOR A LONG, CONTINUING AND HIGHLY REWARDING ECONOMIC EXPERIENCE * * * * * Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1987, July 30). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19870731_silas_keehn

@misc{wtfs_regional_speeche_19870731_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1987},
  month = {Jul},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19870731_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}