Regional President Speech

SILAS KEEHN DEPAUL UNIVERSITY DECEMBER 8, 1988 I. INTRODUCTION A. THIS YEAR COMMEMORATES THE 75TH ANNIVERSARY OF - 1. DEPAUL UNIVERSITY COLLEGE OF COMMERCE/FEDERAL RESERVE SYSTEM 2. WE'VE HAD A NUMBER OF ACTIVITIES--IMPORTANT EVENT 3. I AM PLEASED TO HAVE PARTICIPATE PARTICULARLY IN THAT THE 7' FEDERAL RESERVE ACT WAS SIGNED 75 YEARS AGO B. LET ME SURPRISE YOU BY STARTING WITH A COMMENT ABOUT OUR BUILDING AT THE CORNER OF LASALLE AND JACKSON 1. WE HAVE BEEN WORK I NG ON A MAJOR RENOVATION FOR FOUR YEARS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 2 - 2. PROJECT WILL BE COMPLETED AND OUR RENOVATED BUILDING DEDICATED NEXT HAY ON THE 75TH ANNIVERSARY OF THE DAY OUR BANK WAS INCORPORATED C. I ONLY MENTION THIS BECAUSE 1. WHEN THE BUILDING WAS INITIALLY CONSTRUCTED IN 1921 2. OUR THEN DIRECTORS LOOKED AT THE HISTORY BOOKS A. THE FEDERAL RESERVE SYSTEM WAS THEN QUITE NEW AND, YOU WI LL REMEMBER, IS THE TH I RD CENTRAL BANK IN OUR COUNTRY'S HISTORY B. THE CHARTERS OF THE FIRST AND SECOND BANKS WERE NOT RENEWED 3. WITH CONCERNS THAT HISTORY MIGHT REPEAT ITSELF YET A THIRD TIME A. THE BUILDING WAS DELIBERATELY DESIGNED SO THAT IT COULD BE ALTERNATIVELY USED AS THE SITE FOR A COMMERCIAL BANK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 3 - 4. WHILE THE IDEA THAT A MONETARY AND FINANCIAL SYSTEM AS ADVANCED AS ~ OURS COULD FUNCTION WITHOUT A CENTRAL BANK SEEMS ABSOLUTELY UNTHINKABLE A. THERE ARE THOSE WHO EVEN TODAY WOULD ADVOCATE THIS B. BUT SHORT OF THAT EXTREME VIEW 1. OTHERS WOULD ARGUE FOR A HIGHER DEGREE OF POLITICAL CONTROL OVER THE MONETARY POLICY PROCESS 2. OUR CURRENT LEVEL OF INDEPENDENCE, WHILE SOMEWHAT UNUSUAL AMONG THE CENTRAL BANKS OF THE WORLD, IS A CRITICAL FEATURE OF THE FEDERAL RESERVE SYSTEM A. SOMEWHAT REPETITIVE THEME IN MY COMMENTS TODAY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis II. WITHOUT GOING INTO A LONG LECTURE, LET ME JUST SAY A WORD OR TWO ABOUT THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM THREE VERY DISTINCT PARTS -- A VERY CAREFUL BALANCE BETWEEN THESE THREE PARTS -- A MARVELOUS CONSTRUCTION OF CHECKS AND BALANCES A. THE 12 FEDERAL RESERVE BANKS 1. A FUNDAMENTAL ASPECT OF GIVING THE SYSTEM REGIONAL BALANCE A. I'LL GIVE THIS MATTER A BIT MORE EMPHASIS IN A FEW MINUTES B. THE BOARD OF GOVERNORS AND THEIR SUPPORTING STAFF 1. THE ELEMENT OF CENTRALIZATION IN THE STRUCTURE OF THE SYSTEM C. THE FEDERAL OPEN MARKET COMMITTEE {THE F.0.M.C. AS WE CALL IT) 1. INITIALLY CREATE~Y BANKING ACT OF 1933 - o,J)~ <f/¼ :fr a J;-·~ ffrul. ~ • w,,---., w ~ - ~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 5 - A. - FORMAL I ZED A STR-UC---HI-RE FOR SYSTEMAJ IC COORDIN'Af°ION ~OF_ O_PE, N -MARKET OPERATIONS . ~. p A-<.~ ~ J-~r~ \ ? ~ 1. E~RLIER, EACH RESERVE BANK ENGAGED IN OPEN MARKET OPERATIONS 2. B. ORIGINAL ERS, REPRESENTATIVES OF 12 RESE 1. BOARD 2. MEMBERSHIP REVISED IN 1935 A. OF GOVERNORS B. RESERVE BANK REPRESENTATIVES ON BASIS ro ~ ~~Vt~ Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 6 - 3. ROTATION D. JUST AS THE FEDERAL RESERVE SYSTEM HAS A LEVEL OF INDEPENDENCE WITHIN OUR COUNTRY'S POLITICAL STRUCTURE 1. WI TH IN THE SYSTEM ITSELF THE FOMC ALSO HAS SOME LEVEL OF INDEPENDENCE -- OR AT LEAST IS NOT ORGAN I ZAT I ONALL Y A PART OF EITHER THE RESERVE BANKS OR THE BOARD OF GOVERNORS Ill. IN THIS OVERALL COMPLEX THE KEY-POLICY MAKING BODY IS THE FEDERAL OPEN MARKET COMMITTEE A. THE COMMITTEE IS COMPRISED OF THE SEVEN GOVERNORS AND FIVE OF THE 12 RESERVE BANK PRESIDENTS 1. THE PRES I DENTS SERVE ON A ROT AT I NG BASIS EXCEPT FOR NEW YORK WHOSE PRESIDENT IS ALWAYS A MEMBER 2. WHILE THE OTHER SEVEN PRESIDENTS DO NOT VOTE, THEY DO ATTEND ALL THE MEETINGS AND PARTICIPATE FULLY IN THE DELIBERATIONS OF THE COMMITTEE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 7 - A. INCLUDING MAK I NG RECOMMENDATIONS FOR POL I CY ACTIONS B. AN INTERESTING FEATURE OF THE COMMITTEE MEMBERS 1. BANK PRESIDENTS ARE PRIVATE CITIZENS -- NOT GOVERNMENT EMPLOYEES 2. MEMBERS OF THE BOARD OF GOVERNORS ARE PUBLIC INDIVIDUALS APPOINTED BY THE POLITICAL PROCESS 3. CLEARLY THE INTENT OF CONGRESS THAT THERE SHOULD BE PRIVATE PARTICIPATION IN THE DEVELOPMENT OF MONETARY POLICY 2 {[j.,r_~ ~v_JcJ __ A. ('[tGALLY TESTED - FREQUENTLY AND AS RECENTLY AS LAST YEAR C. THE COMMITTEE MEETS 8 TIMES A YEAR IN WASHINGTON 1. AND DEPENDING ON DEVELOPMENTS, WE MEET AS FREQUENTLY AS NECESSARY BY TELEPHONE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 8 - 2. LAST OCTOBER, IMM ED I ATEL Y FOLLOW I NG THE STOCK MARKET DISRUPTIONS, FOR EXAMPLE, WE MET DAILY BY TELEPHONE D. THE COMMITTEE HAS THE AUTHORITY TO CONDUCT OPEN MARKET OPERATIONS -- THE PURCHASE AND SALE OF SECURITIES THROUGH WHAT'S CALLED THE uDESKu IN NEW YORK 1. THESE PURCHASE AND SALE TRANSACTIONS ARE THE TOOLS FOR IMPLEMENTING THE MONETARY POLICY DECISIONS OF THE FOMC 2. AND THROUGH THAT ACTIVITY, INFLUENCING THE DIRECTION OF EVENTS IN THE FINANCIAL MARKETS AND ULTIMATELY REAL ECONOMIC PERFORMANCE E. THE DISCOUNT RATE IS ALSO A TOOL OF MONETARY POLICY 1. THE BOARDS OF DI RECTORS OF EACH OF THE RESERVE BANKS RECOMMEND THE DISCOUNT RATE EVERY TWO WEEKS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 9 - A. BOARD OF GOVERNORS SETS IT ON THE BASIS OF THESE RECOMMENDATIONS -- THEY CANNOT SET THE RATE INDEPENDENT OF A RECOMMENDATION FROM A RESERVE BANK 2. WHILE THE DISCOUNT RATE IS MUCH MORE VISIBLE THAN OPEN MARKET OPERATIONS A. IT IS NOT CHANGED ALL THAT FREQUENTLY AND, THEREFORE, CHANGES CAN HAVE A SIGNIFICANT IMPACT ON THE MARKETS B. CONSEQUENTLY, OPEN MARKET OPERATIONS ARE OUR WAY OF MAINTAINING A FLEXIBLE AND RESPONSIVE POLICY AND ARE THE DOMINANT POLICY INSTRUMENTS F. THE UNIQUE STRUCTURE OF THE FOMC -- REGIONAL REPRESENT AT ION FROM THE RESERVE BANKS AND CENTRAL REPRESENTATION BY THE GOVERNORS AS WELL AS PRIVATE AND PUBLIC PARTICIPATION -- PROVIDES SOME IMPORTANT ADVANTAGES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 10 - 1. BUT PERHAPS THE MA IN STRENGTH IS IN THE WI DE SPECTRUM OF POLICY RECOMMENDATIONS THAT THIS DIVERSIFIED STRUCTURE PROVIDES A. WI TH A PRESENCE OUTS I DE OF WASH I NG TON AND SIGNIFICANT OPE RAT IONS SERVI NG EACH OF THE DISTRICTS 1. PRESIDENTS BRING IMPORTANT FIRST-HAND KNOWLEDGE OF REGIONAL DEVELOPMENTS TO THE DELIBERATIONS 2. AN STRUCTURE OF 2. GIVEN THE SIZE OF THE COMMITTEE -- 19 PARTICIPANTS AND A SUPPORT I NG STAFF SOMEWHAT LARGER -- SOME MIGHT JUDGE THE GROUP TO BE SO LARGE AND DIVERSE THAT IT MUST BE DIFFICULT TO COME TO REASONED CONCLUSIONS A. AND THERE HAS ALWAYS BEEN SOME MYSTIQUE ABOUT THE PROCESS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 11 - 1. OUR DISCUSSIONS ARE HIGHLY CONFIDENTIAL AND THE MINUTES OF THE MEETINGS ARE RELEASED ON A DELAYED BASIS B. BUT I ASSURE YOU THAT THE PROCESS IS A VERY ORD I NARY ONE -- MUCH LI KE THE MEETINGS THAT MOST OF YOU ATTEND WITH SUCH FREQUENCE 1. THOUGHT I MIGHT PUT TH IS PROCESS IN A SOMEWHAT PRIVATE SECTOR PERSPECTIVE TODAY 3. As A START, J.a THIS DECISIOH rnot:e:::rs, THERE IS NO QUESTION BUT THAT THE CHAIRMAN'S ROLE IS ABSOLUTELY CRITICAL AND REQUIRES GREAT SKILL A. HE MUST BE ABLE TO §tilfl""~IDENTIFY THE COMMON ELEMENTS IN THE POSITIONS BE I NG EXPOUNDED BY THE PARTICIPANTS B. AND DEVELOP A CONSENSUS AMONG THE PARTICIPANTS C. NOT UNUSUAL FOR THE CHAIRMAN OF ANY BUSINESS MEETING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 12 - IV. A. THE ULTIMATE OBJECTIVES OF MONETARY POLICY ARE STRAIGHTFORWARD 1. TO FOSTER CONTINUING ECONOMIC GROWTH WITHIN A FRAMEWORK OF PRICE STABILITY A. CLEARLY SPELLED OUT BY LAW 2. UNFORTUNATELY THE TWO ELEMENTS, BOTH IMPORTANT IN THEIR OWN RIGHT, MAY, AT TIMES BE IN CONFLICT A. IN THE 195OS THERE WAS THE THOUGHT THAT THERE WAS A TRADE-OFF BETWEEN THE TWO -- A LITTLE MORE INFLATION COULD BRING HORE EMPLOYMENT 1. CLEARLY DISPROVED 2. LEARNED, IN FACT, THAT COULD HAVE HIGH INFLATION WITH HIGHER THAN DESIRED UNEMPLOYMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 13 - B. AND ALSO CLEAR FROM EARLY 198OS THAT 1. GREATER THE DI STANCE FROM THE OBJECTIVES OF GROWTH AND PRICE STABILITY 2. THE MORE DIFFICULT THE ADJUSTMENT PROCESS A. AS INFLATION REDUCED, THE MORE UNEMPLOYMENT ROSE B. CERTAINLY FELT IT HERE IN THE MIDDLE WEST B. LIKE PRIVATE SECTOR DECISION MAKING, THE NEED TO CLARIFY THE DESIRED OBJECTIVES IS CRITICAL 1. I N TH E FO M CI S CASE , TH I S CLAR I F I CAT I ON RE QU I RE S DETERMINING WHAT GROWTH RATE IS CONSISTENT WITH PRICE STABILITY 2. AND JUST WHAT IS MEANT BY PRICE STABILITY A. MAINTAINING EXISTING INFLATION RATES? B. OR MOVING TO LOWER LEVELS OF INFLATION? Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 14 - 3. CURRENT SITUATION AN EXCELLENT EXAMPLE A. THERE IS A CONSIDERABLE DEBATE AS TO HOW FAST ECONOMY CAN GROW WITHOUT AN ACCELERATION OF INFLATION -- THE POTENTIAL GROWTH RATE OF THE ECONOMY B. SOME ARGUE THAT OUR ECONOMY CAPABLE OF 3 TO 3 1/~R MOR~ PWiii=EN" REAL GROWTH 1. WITH THIS DEFINITION OF THE OBJECTIVE, THEN, MONETARY POL I CY MIGHT EASE WITHOUT RENEWED INFLATION C. OTHERS - AND I'M IN THIS CAMP - VIEW A LOWER GROWTH RATE SAY 2 TO 2 1/2 PERCENT AS A MORE REASONABLE LEVEL WITHOUT REACCELERATING INFLATION 1. MORE RECENT RECORD SUPPORTS THIS LEVEL OF GROWTH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 15 - 2. IF WE PUSH HARDER, WE REALLY RISK OVER-HEATING THE ECONOMY 4. SO WHILE THE BASIC OBJECTIVES OF THE DECISION PROCESS ARE l~~L\ WIDELY ~~ " € C,L--C.--~~ A. INTERPRETATION OF WHAT THEY REALLY MEAN DIFFERS B. SOUNDS FAMILIAR TO BUSINESS DECISION MAKING? C. OUTSIDE OBSERVERS WILL CERTAINLY HAVE VASTLY DIFFERENT VIEWS -- A. PUBLIC AND CONGRESS WILL FREQUENTLY BE BIASED, FOR VERY UNDERSTANDABLE REASONS; 1. TOWARD PUSHING THE ECONOMY TO HIGHER LEVELS OF GROWTH A. WITH THE HOPE THAT A LITTLE MORE GROWTH WILL CREATE MORE EMPLOYMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 16 - B. BUT IGNORING THAT THIS IS AT THE COST OF MORE INFLATION 2. AND WILL FORGET THAT PRICE STABILITY CONTRIBUTES TO GROWTH BY REDUCING UNCERTAINTY A. AND THAT MAINTAINING ECONOMIC GROWTH IN THE LONG RUN REQUIRES PRICE STABILITY 3. AND ALSO FORGOT TEN IS THE FACT THAT THERE IS A "TIME" TRADE-OFF -- MONETARY POLICY DECISIONS HAVE A LAGGED EFFECT A. EASIER POLICIES NOW MAY CREATE MORE ECONOMIC GROWTH AT THE OUTSET -- BUT AT A COST B. LATER, WELL AFTER THE INITIAL MOVE, PRICES BEGIN TO ADVANCE 4. THEREFORE, CENTRAL BANKS TEND TO BE BIASED TOWARD PRICE STABILITY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 17 - A. AT THE END OF THE DAY WE WILL BE JUDGED BY OUR ABILITY TO PROTECT THE VALUE OF THE CURRENCY ~= V. INFORl'IAIJON UNCER~ ---- A. ,AS IN PRIVATE SECTOR, GOOD DECISIONS MUST PROCEED FROM A GOOD INFORMATION BASE 1. PRIOR TO AN FOMC, ALL OF THE PARTICIPANTS BRIEFED BY RESPECTIVE STAFFS AND VARIETY OF EXTERNAL SOURCES -- IMPORTANTLY BANK DIRECTORS A. WE ARE VERY INFORMATION SENSITIVE B. OUR INFORMATION GATHERING NETWORK IS VAST ~~ 1. NUMBER, VARIETY, OF OUR ANTENAE ~ C. IN A STATISTICAL SENSE, OUR ECONOMIC DATA BASE IS VERY COMPREHENSIVE 1. SAID TO BE THE BEST IN THE COUNTRY PERHAPS THE WORLD Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 18 - 2. WE REALLY DO HAVE THE BEST SET OF FACTS AVAILABLE ON WHICH TO BASE A DECISION A. AND CAN USE TH IS DATA TO TEST AL TERNA TE DECISIONS 3. AGAIN, A PROCESS WHICH CLOSELY PARALLELS PRIVATE SECTOR PROCESS B. OUTCOMES OF ACTIONS, HOWEVER, ARE 1. PERHAPS SOMEWHAT MORE UNCERTAIN THAN IS TYPICALLY THE CASE IN THE PRIVATE SECTOR A. GIVEN THE IMMENSE SIZE AND COMPLEXITY OF THE FINANCIAL MARKETS AND THE ECONOMY 1. RE LAT I ONSH I PS BETWEEN OUR DECISIONS AND ECONOMIC RESULTS CAN BE QUITE UNCLEAR 2. YED ECONOMIC REACTION TO A SPECIFIC POLICY DECISION FURTHER COMPLICATES THE PROCESS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 19 - ,~,'VJ? 2. DECISIONS, THEREFOR VERY "TIME" itlJSlllV'E A. MAY RECALL STATEMENT OF CHAIRMAN MARTIN 1. WE TAKE AWAY THE PUNCH BOWL JUST AS THE PARTY GETS GOING B. AND INDEED MAY ~ APPEAR THAT WE ARE ACTING ERRONEOUSLY AT THE TIME THAT WE MAKE A MOVE rasau ·; J ;;rn: u, • er~tAR C. FACT REMAINS THAT THE DE~N TO ACT, AND THE ACTION ITSELF MUST~ THE PUBLIC EVIDENCE OF THE EVENT 1. INDEED IF ACTING PROPERLY, THE EVENT THAT WE ARE PROSPECTIVELY RESPOND I NG TO WI LL NOT OCCUR h~~~~ 4. COMPLICATING THE PROCESS -- T.++E YNC~TAINlY ABOU"f' THE RE LAT I ONSH I PS AMONG ECONOMIC VAR I ABLES HAS INCREASED IN RECENT YEARS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 20 - A. DURING THE 1960s AND 1970s COULD BE RELATIVELY CONFIDENT OF RESULT OF ACTIONS 1. THE GROUND-RULES WERE CLEARER THEN B. BY 1980S, HOWEVER, CONDITIONS HAD SIGNIFICANTLY CHANGED 1. THE MONETARY AGGREGATES WHICH HAD BEEN VERY USEFUL GUIDES FOR MONETARY POLICY IN THE LATE 1970'S AND EARLY BO'S 2. MUCH LESS RELIABLE NOW 3. WE'VE HAD TO SEEK OUT OTHER INDICATORS A. FACTS AND DATA CRUCIAL -- BUT ULTIMATELY LIKE SO MANY OTHER THINGS -- THIS IS A JUDGMENTAL BUSINESS 5. UNCERT~~~ ABOUT IMPACT OF MONETARY POLICY ACTION~-ALSO INCREASED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 21 - A. BECAUSE OF OVERHANG OF EXTERNAL INFLUENCES OVER WHICH MONETARY POLICY HAS NO CONTROL B. MOST PROMINENT-FISCAL POLICY, IN PARTICULAR, FEDERAL GOVERNMENT DEFICITS Al! C. AND TH E OT HER DEF I CI T, f> 0 UR NEG VE TR ADE o,...J. O{~C!£1.N It,,( BALANCE, AND RESULT I NG A~ lfJ FOREIGN FUNDS TO OFFSET OUR BUDGET DEFICIT ; : ~ COMPLEXH-¥ OF/~HE EXCHANGE VALUE OF DOLLAR ~ ~ ~ ~~~ ~ ~ l r - a E. THESE CRITICAL ISSUES HAVE LIMITED THE OPTIONS FOR ACTION VI. HAVING GONE THROUGH THE STRUCTURE AND THE PROCESS OF THE FOMC, LET ME JUST SAY A FEW WORDS ABOUT THE CURRENT ECONOMIC SITUATION A. IN OTHER WORDS, JUST HOW ARE WE DOING IN TERMS OF OUR OBJECTIVES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 22 - 1. CERTAINLY THE ECONOMIC RESULTS OVER THE PAST SEVERAL YEARS HAVE BEEN GOOD A. WE ARE ENTERING THE 7TH YEAR OF THIS POSITIVE CYCLE 2. NOT ONLY HAS TH IS BEEN A LONG CYCLE BUT BY ALL STANDARD MEASUREMENTS IT HAS BEEN A STRONG CYCLE AS WELL A. IN REAL TERMS, GROSS NAT I ONAL PRODUCT AND INDUSTRIAL PRODUCTION ARE AT RECORD LEVELS Se;w,u.~. 3. EMPLOYMENT -- PERHAPS THE MOST EXCITING PART OF OUR RECENT EXPERIENCE, HAS BEEN VERY STRONG A. EMPLOYMENT HAS INCREASED BY SOME 16 MI LL I ON r JOBS SINCE THE 4TH QUARTER OF 1982 / ~ I ~ ~ ~. • --~'l.-< ro..lL o.J 1. UNEMPLOYMENT COMPARATIVELY VERY LOW - FULL EMPLOYMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 23 - 4. THIS HAS BEEN AND CONTINUES TO BE A LONG AND VERY REWARDING ECONOMIC CYCLE B. LOOKING AHEAD 1. WE HAVE EVERY EXPECTATION THAT WE WILL CONTINUE TO EXPERIENCE POSITIVE GROWTH THROUGH 1989 -- ABOUT AS FAR AS THE FORECASTING EYE CAN SEE 2. WE WOULD ANTICIP~ AN INCREASE IN GNP NEXT YEAR IN THE 2 1/2% TO~% AREA A. WITH SOME REDUCTION IN THE GROWTH OF PERSONAL CONSUMPTION ACCOMPANIED BY STEADY PROGRESS IN CORRECTING OUR TRADE BALANCE MOST PARTICULARLY CONTINUED INCREASES IN THE EXPORT OF MANUFACTURED PRODUCTS C. WHILE THE OUTLOOK FOR CONTINUED ECONOMIC GROWTH SEEMS REASONABLY ASSURED, AT THIS POINT THE RISKS ARE IN THE AREA OF INFLATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 24 - 1. WHILE PR I CE PRESSURES HAVE NOT BEEN AS GREAT AS ONE MIGHT HAVE EXPECTED AT THIS STAGE OF THE ECONOMIC CYCLE, THERE ARE CERTAINLY SOME UPWARD TENDENCIES A. C. P. I. REACHED LOW IN 1986 B. INCREASED TO A LITTLE OVER 4% AT END OF 1987 C. CURRENTLY TENDING TOWARD 5% AT AN ANNUAL RATE D. THE MAJOR CONCERN -- WILL THIS TREND CONTINUE 1. OR STABILIZE AND BEGIN TO SHIFT DOWNWARD 2. WHILE SO FAR WAGE INCREASES HAVE BEEN OFFSET BY IMPROVED PRODUCTIVITY (UNIT LABOR COSTS IN CHECK) A. SOME OF THE MORE RECENT NUMBERS ARE A LITTLE TROUBLING Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 25 - 1. HOURLY EARNINGS ARE CLEARLY INCREASING AT A MORE RAPID PACE THAN THEY DID LAST YEAR 2. AND WHEN YOU ADD IN BENEFITS)THE INCREASES IN COMPENSATION ARE NOW RUNNING AT ABOUT 5 1/2 PERCENT IN CONTRAST TO 3 1/2 PERCENT LAST YEAR 8. IF WE SEE A BREAKOUT OF WAGE INCREASES ON THE UPS I DE, TH IS COULD BECOME PERVASIVE IN TERMS OF INFLATIONARY PRESSURES ON OUR ECONOMY 1. AND THAT'S THE RISK IN THE CURRENT SITUATION D. BUT WHILE THE ECONOMIC NEWS HAS BEEN GOOD OVER THE PAST FEW YEARS, WI TH THE PASSAGE OF TIME WE HAVE DEVELOPED SOME SER I OUS IMBALANCES IN OUR FINANCIAL SYSTEM 1. THE COMMON DENOMINATOR OF THESE IMBALANCES IS THE SIGNIFICANT INCREASE IN DEBT THAT HAS BEEN BUILT INTO THE VARIOUS SEGMENTS OF OUR ECONOMIC STRUCTURE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 26 - - - 2. {iwILL SPARE YOU A LONG ELABORATION OF THESE DEBT ISSUES BUT AS I LOOK AT THE BURGEON I NG FEDERAL, CONSUMER AND CORPORATE DEBT LOADS, THEY ARE MORE THAN A LITTLE WORRYING 3. THE CONSEQUENCES OF A RECESSION WOULD BE SERIOUS A. ANY INTERRUPT I ON OF CASH FLOW COULD CAUSE ..S-,yw,'j-1-coJ-- /l..u.»7 ~s PROBLEMS IN THE SERVICING OF THESE DEBT LOADS E. THIS PUTS THE FOMC IN A VERY DIFFICULT POSITION -- THE DEVELOPMENT OF AN APPROPRIATE •M ONET ARY POL I CY MUST CERTAINLY BE DEPENDENT ON SOME REASONABLE BALANCE IN ,a,§i?Y~ OUR ECONOMIC AND FISCAL POLICIES-- THIS 1,~, NOT THE CASE t-. 1. IT BECOMES TERRIBLY DIFFICULT TO DEVELOP AN APPROPRIATE MONET ARY POL I CY IN SUCH A HOST I LE FINANCIAL ENVIRONMENT F. AND MAKES DEALING WITH OUR PRICE STABILITY RESPONSIBILITIES MUCH MORE COMPLICATED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 27 - 1. ~-, A 51 RATE OF INFLATION IS HARDLY AN ACCEPTABLE DESCRIPTION OF PRICE STABILITY - ~ s ~ ~ ~ ~ 3. BUT, OF COURSE, GREATER LEVELS OF REST RA I NT TO DEAL WITH THE INFLATION ISSUES WOULD PUT PRESSURE ON THE MARKETS, CAUSING SOME INTEREST RATES TO RISE AND WOULD HAVE AN IMPACT ON THE RATE OF ECONOMIC GROWTH A. THE OBJECTIVE IS TO ACHIEVE PRICE STABILITY WITHOUT EXPERIENCING A RECESSION -- BUT IT'S A TOUGH BALANCE ~ ~-~dtir-r~ G,'J~ F. IN THESE iiRi:uMsl;Nc-Es)roiHE; ;~~~RNA1IVE THAT soHE A MIGHT SUGGEST 1. TO ACCEPT RISING LEVELS OF INFLATION 2. ~ STIIEM W9RIS TO PURSUE MONET ARY EASE RATHER THAN - ~ ( ~ it. ob/4-.t) ~ \.N 3. WHICH MUST INEVITABLY RESULT IN EVEN GREATER LEVELS OF INFLATION Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 28 - A. WE WOULD EXPERIENCE A RUINOUS CYCLE B. WE'VE BEEN THERE BEFORE -- 1979-80 C. THE CORRECTIVE PROCESS IS BRUTAL G. LET ME CONCLUDE BY AGAIN SAYING THAT WE ARE COMMITTED TO PRICE STABILITY IN THE LONG RUN -- ONE OF THE MAJOR OBJECTIVES OF THE FOHC 1. AND THAT IS WHY THE INDEPENDENCE THAT I HAVE HIGHLIGHTED WITH YOU TODAY IS SO TERRIBLY IMPORTANT A. GI VEN SOME OF THE ISSUES I' VE TOUCHED ON, PARTICULARLY THE IMBALANCES IN THE FINANCIAL STRUCTURE B. THERE WILL INEVITABLY BE PRESSURES TO TOLERATE LEVELS OF INFLATION THAT WE WILL NOT FIND ACCEPTABLE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 29 - 2. AND THAT'S WHY WE ~EEO TO BE ABLE TO PURSUE OUR r (){, ~ OVERRIDING MONET ARY OBJECTIVES WITHOUT POL IT I CAL 1, INTERFERENCE 3. SO FAR, THE RECORD HAS BEEN EXCELLENT -- THIS HAS NEVER BEEN A PROBLEM -- WE'VE BEEN ABLE TO MAKE THE NECESSARY MOVES TO DEAL WITH THE REQUIREMENTS OF THE TIME A. BUT IT'S A VERY DIFFERENT WORLD TODAY 1. WITH MORE CONSTRAINTS ON THE LATITUDE FOR MONETARY POLICY 2. ~R~~=~C F ,~_Qj"r4'+- ~ /\)p$ ~ WITHIN A REASONABLE PERIOD OF TIME B. AS I REMINDED YOU AT THE OUTSET, FOR A VARIETY OF REASONS THE FIRST AND SECOND BANKS OF THE UNITED STATES DID NOT SURVIVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 30 - C. WITH AN ADMITTED BIAS, I WOULD SUGGEST TO YOU THAT IT IS TERRIBLY IMPORTANT FOR THE ECONOMIC WELL-BEING OF OUR COUNTRY THAT OUR BUILDING AT LASALLE AND JACKSON CONTINUE TO BE USED FOR CENTRAL BANKING ACTIVITIES! THANK YOU VERY MUCH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1988, December 7). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19881208_silas_keehn

@misc{wtfs_regional_speeche_19881208_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1988},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19881208_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}