Regional President Speech

~ - u - Slide 1 - Intro/cover slide I. OPENING REMARKS (J)~ ~ 6:, J),~ C~c_. ~~~c.c.--lc._ SILAS KEEHN: Monetary Policy Perspectives Better Bank Economic Seminar Peoria, Illinois December 5, 1990 -- -~Q..-? - ~-'--4/ 3 ~~ ~~½~1 ~ rLJ..fUAv~a.~<s ~c.,->, ~ fn ~ ~ crfc..,; ~ ~.,. ~~~ - ~ ~ l'l.M ~~C,'A./~ u "{Z:_p ~-r-L/l-4r.r r c.. '- ~~.'-.J~ - cr.o. es-. "f rs~~ - Slide 2 - Title slide: Monetary Policy Perspectives CMay you live in interesting ~ ' __. times.") II. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis INTRODUCTORY REFLECTIONS. A. HARD TO RECALL A TIME IN THE LAST FEW YEARS WHEN THE OFTEN CITED CHINESE CURSE •MAY YOU LIVE IN INTERESTING TIMES• HAS BEEN MORE APPLICABLE. B. DEVELOPMENTS IN THE MIDDLE EAST HAVE RAISED THE RISKS OF POORER ECONOMIC PERFORMANCE. 1. C. AND RISING INFLATION. AT A TIME WHEN THE ECONOMY'S GROWTH WAS ALREADY MODERATING. D. FOR MUCH OF 1990, FISCAL POLICY HOBBLED IF NOT FROZEN IN INDETERMINABLE DEBATES ON SPENDING AND TAXING CONSIDERATIONS. E. AND FINANCIAL MARKETS, NOW INTERNATIONAL IN SCOPE, JITTERY ABOUT U.S. FINANCIAL INSTITUTION PERFORMANCE. I:,· 1215/90 Page2 F. NOW POSSIBLE THAT WE WILL HAVE A QUARTER OR TWO OF NEGATIVE GROWTH. 1. G. WITH GROWTH RESUMING NEXT YEAR. THIS PERIOD OF SLOWNESS OR WEAKNESS MIGHT BE VIEWED AS A TRANSITIONAL PHASE FOR THE ECONOMY. 1. AN ADJUSTMENT TO SOME UNUSUAL DEVELOPMENTS OVER THE LAST FEW YEARS. Slide 3: (transition) The legacy of the 7980s Ill. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis NEED TO LOOK BACK ON THE LAST DECADE. A. RECOGNIZE THE LEGACY OF THE 1980s. B. SO WE CAN LOOK FORWARD TO 1. WHAT'S IN STORE FOR US FURTHER IN THIS DECADE. 12/5/90 Page3 Slide 4: The 1980s - a relatively rewarding period IV. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis REFLECTING BACK ON THE DECADE OF THE 1980s -- A REWARDING PERIOD -- IS THE PARTY OVER? A. WON'T SPEND A LOT OF TIME REVIEWING THE NUMBERS. 1. ALREADY SEEMS LIKE A LONG TIME AGO. 2. MOST ARE WELL KNOWN TO ALL OF YOU. (Chart: Real GNP) B. LONGEST PEACETIME EXPANSION IN OUR HISTORY. 1. 2. 1. EIGHT YEARS LONG THIS NOVEMBER. a. UNLESS FOLKS AT NBER SAY OTHERWISE. b. AVERAGE LENGTH IS LESS THAN 3 YEARS. EXCEEDED ONLY BY THE 1960-69 EXPANSION. a. FUELED BY THE VIETNAM WAR. b. AND OUR THEN GUNS AND BUTTER POLICY. AVERAGE ANNUAL INCREASE IN REAL ROM 1983- 1989. a. IN INFLATION-ADJUSTED TERMS, AN INCREASE OF OVER $1 TRILLION SINCE THE TURN IN THE ECONOMY AT THE END OF 1982 (THROUGH THIRD QUARTER OF 1990). Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12/5/90 Page4 (Chart: Industrial production) D. INDUSTRIAL PRODUCTION AT PEAK LEVELS 1. A 34% INCREASE SINCE 1982. 2. OUR MANUFACTURING FACILITIES HAVE BEEN PRODUCING MORE PRODUCTS THAN EVER BEFORE. (Chart: Payroll employment) E. EMPLOYMENT - PERHAPS THE MOST EXCITING PART. 1. ADDED ALMOST 21 MILLION NEW JOBS BY THE END OF LAST YEAR. I( c) ;~ CJ>y (Chart: CPI) F. INFLATION - ALTHOUGH STILL HIGHER THAN IN 1950s AND 1960s 1. HAS COME DOWN FROM DOUBLE-DIGIT PACE OF 1970s AND EARLY 1980s 2. HAS BEEN RELATIVELY STABLE INFLATION RATE 12/5/90 Pages Slide 5: ... but uneven performance V. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BUT CERTAINLY AN UNEVEN EXPERIENCE (Chart: Regional employment) A. GEOGRAPHICALLY -- CAN SEE IN EMPLOYMENT TRENDS. 1. SOUTHWEST -- RECOVERING NOW FROM 1986 OIL PRICE DROP SHOCK. 2. NEW ENGLAND -- IN DECLINE AFTER EXCEEDING U.S. EXPERIENCE FOR MOST OF EXPANSION. 3. B. MIDWEST -- STILL BELOW U.S. AND INDIVIDUAL COMPONENTS OF OUR ECONOMY HAVE ALSO HAD A VERY UNEVEN EXPERIENCE. (Chart: Auto soles) 1. PRIME EXAMPLE -- AUTOMOTIVE SECTOR. a. ADJUSTMENTS TO COMPETITION FROM IMPORTS, THEN TRANSPLANTS. b. RESTRUCTURING AS RESULT OF THESE MARKET CHANGES. (Chart: Industrial production) C. AND OUTPUT OF OTHER SECTORS ALSO UNEVEN. 1. BUSINESS EQUIPMENT -- GENERALLY VERY STRONG, BUT WITH ITS UPS AND DOWNS. 2. CONSUMER PRODUCTS -- NOT AS ROBUST, BUT STEADIER. 3. DEFENSE -- COMING DOWN NOW AFTER STRONG GROWTH. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215190 Page6 (Chart: Construction spending, 1987 dollars) D. CONSTRUCTION, BOTH COMMERCIAL AND RETAIL. 1. THEY STAYED AT THE PARTY A VERY LONG TIME AND AS WE ARE NOW LEARNING, PERHAPS TOO LONG. E. BUT DESPITE THIS UNEVENNESS, IN A BROAD AGGREGATE SENSE. 1. AND FROM A MONETARY POLICY PERSPECTIVE, THAT'S HOW WE HAVE TO LOOK AT IT. 2. WE HAD A VERY STRONG EXPERIENCE DURING THE LAST DECADE -- OR CERTAINLY FROM 1983 THROUGH 1989. 12/5190 Page 7 Slide 6: ... and imbalances developed VI. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LIKE THAT LAST DRINK -- WE TRIED TO FORGET SOME OF THE PROBLEMS -THE DEVELOPING IMBALANCES -- OR AT LEAST PUT THEM IN THE BACK OF OUR MINDS. (Chart: Federal deficit) A. BUDGET DEFICIT 1. A PROBLEM THAT SPEAKS FOR ITSELF. 2. HISTORY -- NEVER HAVE WE GONE SO FAR INTO AN ECONOMIC EXPANSION WITH A BUDGET DEFICIT RELATIVE TO THE SIZE OF THE ECONOMY AT THESE LEVELS. (Chart: Net international investment position) B. TRADE DEFICIT 1. A HISTORY OF RUNNING OUR TRADE ACCOUNTS WITH A SLIGHT SURPLUS -- FELL OVER THE EDGE OF THE CLIFF IN 1982. 2. IN THE PROCESS WE SHIFTED FROM BEING THE WORLD'S LARGEST EXTERNAL CREDITOR TO THE WORLD'S LARGEST EXTERNAL DEBTOR. 3. AND BECAME ABSOLUTELY DEPENDENT ON THE FLOW OF CAPITAL FROM ABROAD. (Chart: Corporate debt to net worth) C. A MASSIVE BUILD-UP OF CORPORATE DEBT -- CORPORATE RESTRUCTURING$. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215190 PageB 1. FINANCED BY INCREASES IN DEBT WITH ABSOLUTE REDUCTIONS IN EQUITY. 2. WE ENDED THE DECADE WITH A VERY HIGH DEBT-TO-NET WORTH RATIO. (Chart: Consumer installment debt) D. PERSONAL DEBT LEVELS ROSE TO A RECORD POINT. 1. CONSUMER INSTALLMENT DEBT AS A PERCENTAGE OF DISPOSABLE INCOME HAS RISEN TO DISTURBINGLY HIGH LEVELS. E. AS A CONSEQUENCE OF THESE TRENDS, WE ENDED THE DECADE IN A VERY LEVERAGED POSITION. F. THE U.S. ECONOMY BECAME ABSOLUTELY DEBT DRIVEN. G. TO A CONSIDERABLE EXTENT THE SIGNIFICANT INCREASE IN DEBT THAT WE EXPERIENCED FUELED THE STRONG EXPANSION OF THE 1980s. 1. IN THAT ASPECT, THE AWKWARD ANALOGY WITH THE PARTY OVERLY-ENJOYED. 2. REALISTICALLY, WE COULDN'T HAVE EXPECTED IT TO LAST FOREVER. 12/5190 Page9 Slide 7: The 1980s -- a decade of consumption, much financed by foreigners VII. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis IMPORTANT TO REMEMBER THAT THE 1980s WAS A CONSUMPTION DECADE. (Chart: Domestic spending vs. output) A. WE SPENT FAR MORE THAN WE PRODUCED AND THIS WAS LARGELY FINANCED WITH DEBT. (Chart: Foreign capital inflow) B. AND MUCH OF THAT CAPITAL CAME FROM ABROAD. (Chart: Debt owed foreigners) C. WITH A RISE IN THE PROPORTION OF TOTAL DEBT OWED TO FOREIGNERS. 1. THIS LEAVES US WITH AN ENORMOUS BAR BILL TO PAY. 2. AND LIKE A HANGOVER, WE MAY WELL SUFFER FOR OUR EXTRAVAGANCE. (Chart: Net interest paid by domestic business) D. SERVICING THE DEBT WILL BE A DRAIN ON BUSINESS SAVINGS. 1. AS A CONSEQUENCE, WE COULD HAVE LOWER INVESTMENT BY INDEBTED FIRMS THAN OTHERWISE WOULD- HAVE BEEN THE CASE. 2. THIS WILL RESULT IN SLOWER ECONOMIC GROWTH. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215/90 Page 10 3. AND MORE MODEST GAINS IN PRODUCTIVITY WHICH WILL HAVE UNFORTUNATE IMPLICATIONS FOR OUR COMPETITIVE POSITION. v"O ~ ~ t'<~7~~-~ ~A/ k-1-,..11~ ~ ~ 12/5/90 Page 11 Slide 8: ... but flow of funds from abroad won't continue VII. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MOREOVER, WE CAN'T EXPECT THE FLOW OF FUNDS FROM ABROAD TO CONTINUE AS AN ABSOLUTE GIVEN. (Chart: Trade weighted dollar) A. THE VALUE OF THE DOLLAR -- DECLINED AND THEREFORE DOLLAR ASSETS LESS ATTRACTIVE. (Chart: Interest rate differentials) B. THE INTEREST RATE DIFFERENTIALS WHICH GAVE US AN ADVANTAGE HAVE NOW REVERSED. (Chart: Current account and foreign capital inflow) C. IMPROVEMENT IN OUR CURRENT ACCOUNT BALANCE IS MATCHED BY SMALLER CAPITAL INFLOWS. (Chart: Income receipts from/payments to foreigners) D. AND ON TOP OF THIS, WE ARE HAVING TO BEGIN SERVICING OUR VERY LARGE EXTERNAL DEBT. 1. ESTIMATED SERVICING THIS DEBT IN TERMS OF INTEREST AND DIVIDENDS PAID MAY RUN ABOUT $75 BILLION A YEAR. 2. IN OTHER WORDS, ROUGHLY 1% OF GNP OR AS MUCH AS 1/3 OF EACH YEAR'S INCREASE IN THE OUTPUT AND INCOME OF OUR ECONOMY DEDICATED TO SERVICING OUR INTERNATIONAL DEBT. 12/5/90 Page 12 Slide 9: The 1980s -- chose consumption over investment IX. IF WE HAD UTILIZED THE PROCEEDS OF THESE FUNDS TAKEN FROM INTERNATIONAL SOURCES TO INCREASE OUR PRODUCTIVE INVESTMENTS TO PROVIDE INCREASED INCOME TO SERVICE THE DEBT -- THAT WOULD HAVE BEEN FINE. (Charts: Consumption and investment) A. BUT TO A LARGE EXTENT, THE FUNDS WERE USED FOR CONSUMPTION RATHER THAN INVESTMENT. 1. CONSUMER SPENDING PROPORTION OF REAL GNP ROSE IN THE 1980s. 2. THE PROPORTION OF REAL GNP GOING TO NET PRIVATE DOMESTIC INVESTMENT, HOWEVER, FELL. B. AND THEREFORE WE ARE LEFT WITH THE DEBT BUT WITHOUT THE IMPROVED MEANS TO REPAY IT. Slide 10: (transition) 1990: a year of transition X. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis EARLY TO JUDGE, BUT 1990 MAY WELL TURN OUT TO BE THE TRANSITION YEAR. A. NOW GOING THROUGH THE ADJUSTMENT TO THESE FORCES B. THE TRANSITION PHASE. 12/5190 Page 13 Slide 11: 1990 - private debt adjustment underway XI. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BEGINNING TO SEE THE PRIVATE SECTOR DEBT ADJUSTMENT (Chart: Net funds raised by nonfinancial corporations) A. CORPORATE DEBT-- SHOWING SIGNS OF IMPROVEMENT-- RAISING LESS THROUGH DEBT -- LESS EQUITY BEING RETIRED. 1. WE ARE RETURNING TO THE BASICS. 2. BORROWERS AND LENDERS ALIKE HAVE RECOGNIZED THAT EQUITY AND CAPITAL DO MATTER. 3. AND THEY ARE RETHINKING THEIR ATTITUDES WHICH HAVE SEEMED VERY DEBT-ORIENTED FOR TOO LONG. 4. IN THE CASE OF LENDERS, CREDIT STANDARDS HAVE BEEN TIGHTENED. a. CREDIT CRUNCH -- NOT SO IN A LIQUIDITY SENSE. b. WHILE AT THE MARGIN THE SUPERVISORY ELEMENT MAY HAVE STRENGTHENED THE DISCIPLINE. c. IT SEEMS TO ME THAT A SELF-CORRECTING PROCESS, WHICH I THINK IS JUST THE WAY THAT THIS SHOULD HAPPEN, IS, IN FACT, OCCURRING. (Chart: Consumer installment debt) 8. AS I HAVE NOTED, CONSUMER DEBT LOADS ARE VERY HEAVY STILL. 1. THIS IS WORRYING AND IF UNEMPLOYMENT BEGINS TO RISE SHARPLY AND DISPOSABLE INCOME BEGINS TO MODERATE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12/5/90 Page 14 2. WE ARE GOING TO HAVE SOME TROUBLE -- THERE WILL BE SOME LOSSES. 3. BUT ULTIMATELY THE CONSUMER IS PRETTY CAUTIOUS AND CAREFUL. a. INSTALLMENT CREDIT AS A PERCENTAGE OF DISPOSABLE INCOME HAS LEVELED OFF b. 4. AND HOPEFULLY IT WILL BEGIN TO DECLINE. BUT REMEMBER THESE LOANS HAVE BEEN USED IN MANY CASES TO FINANCE CONSUMPTION. a. IF THE DEBT LEVELS COME DOWN SO ALSO DOES CONSUMPTION WITH AN IMPACT ON OUR ECONOMIC PERFORMANCE. 1215190 Page 15 Slide 12: 1990 - international adjustment proceeding XII. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis f- THERE HAVE BEEN SOME IMPROVEMENTS IN THE INTERNATIONAL ASPECT l OF OUR CONSIDERATIONS AS WELL. (Chart: Real net exports and trade weighted dollar) A. THE LOWER DOLLAR, WHICH ADMITTEDLY HAS SOME NEGATIVE ASPECTS 1. CONTRIBUTED TO IMPROVEMENT IN OUR TERMS OF TRADE a. THAT IS, OUR EXPORT PRICES RELATIVE TO PRICES OF GOODS AND SERVICES WE IMPORT CAME DOWN 2. WHICH, IN TURN, EVENTUALLY HELPED OUR NET EXPORTS. (Chart: Imports and exports of goods and services) B. OUR REAL EXPORTS OF GOODS AND SERVICES HAVE BEEN RISING RAPIDLY 1. WHILE OUR IMPORTS HAVE STARTED TO LEVEL OFF 2. THIS COMBINATION OF DEVELOPMENTS LED TO THE NARROWING IN THE GAP BETWEEN EXPORTS AND IMPORTS. (Chart: Average U.S. productivity growth) C. OUR MANUFACTURING SECTOR HAS ACHIEVED EXCELLENT PRODUCTIVITY GAINS. 1. THE OVERALL PRODUCTIVITY NUMBERS ARE BLURRED BY THE SERVICE COMPONENT. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12/5190 Page 16 2. THE PRODUCTIVITY GAINS IN MANUFACTURING DURING THE 1980s SURPASSED THOSE OF PREVIOUS THREE DECADES. 3. AND MY IMPRESSION FROM TALKING TO PEOPLE WHO RUN MAJOR MANUFACTURING OPERATIONS IS THAT a. WITH THE LOWER DOLLAR AND PRODUCTIVITY GAINS b. WE HAVE ONCE AGAIN BECOME COMPETITIVE IN THE WORLD'S MARKETS. (Chart: Merchandise trade balance) D. AND THIS IS SHOWING UP IN AN IMPROVEMENT IN THE MERCHANDISE TRADE NUMBERS ESPECIALLY WHEN WE EXCLUDE OIL IMPORTS. 12/5/90 Page 17 Slide 13: 1990- Federal budget deficit adjustment, a step in right direction XIII. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ONE OF THE KEY QUESTIONS IS WHETHER WE HAVE OR WILL MAKE THE TRANSITION ON THE BUDGET DEFICIT PROBLEM. (Chart: Federal budget deficit) A. DEFICIT IN FISCAL 1990 WAS $220.4 BILLION, ONLY SLIGHTLY LESS THAN RECORD $221.2 BILLION IN FISCAL 1986. B. MOREOVER, THE BUDGET NEGOTIATIONS WERE A •GUT· WRENCHING" EXPERIENCE. 1. RAISED CONCERNS DOMESTICALLY AND INTERNATIONALLY ABOUT U.S. GOVERNANCE. 2. HIGHLIGHTED THE WIDE DIVISIONS ON NATIONAL OBJECTIVES, HOW THEY ARE WEIGHTED AND HOW WE CAN ACHIEVE THEM. 3. PROCESS RAISED CONCERNS ABOUT WHETHER THE AGREEMENT REACHED WILL HOLD UP OVERTIME. 4. C. YET THE U.S. BUDGET WILL CONTINUE TO BE A MAJOR ISSUE. PERHAPS USEFUL TO LOOK AT REVENUES AND OUTLAYS TO UNDERSTAND CRUX OF PROBLEM. (Chart: Federal government revenues and outlays) 1. TOTAL REVENUES AS PERCENT OF GNP CHANGED LITTLE OVER PAST TWO DECADES. a. AVERAGED 18.3% OF GNP IN 1970s. b. AVERAGED 19% OF GNP IN 1980s. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12/5190 Page 18 2. ON SPENDING SIDE, TOTAL FEDERAL GOVERNMENT OUTLAVS RELATIVE TO GNP WENT UP OVER PAST TWO DECADES. 3. a. AVERAGED 20.4% OF GNP IN 1970s. b. AVERAGED 23.1% OF GNP IN 1980s. IN A NUTSHELL, SPENDING RELATIVE TO GNP ROSE MORE THAN REVENUES. a. SO THAT'S WHY THE DEFICIT HAS GONE UP. (Chart: The budget deficit package) D. RECENT BUDGET PACKAGE -- PROMISING TO CORRECT THIS. 1. ALTHOUGH MANY QUESTION VALIDITY OF UNDERLYING ECONOMIC ASSUMPTIONS, PARTICULARLY BEYOND NEXT YEAR. 2. 0MB ESTIMATES SHOW LARGEST PART OF RECENT DEFICIT REDUCTION PACKAGE AFFECTS OUTLAVS RATHER THAN REVENUES. a. ALTHOUGH NEWS REPORTS CONCENTRATED MOSTLY ON REVENUE SIDE (Chart: The deficit outlook) E. DESPITE SIZABLE REDUCTIONS MADE (NEARLY $500 BILLION OVER 5 YEARS) Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215190 Page 19 1. DEFICIT NEXT THREE YEARS STILL SIZABLE, THOUGH PART DUE TO RESOLVING THRIFT SITUATION. 2. STILL MEANS A CONTINUED PRESENCE OF THE TREASURY IN THE CAPITAL MARKETS TO FINANCE THE DEFICIT a. PUTS UPWARD PRESSURE ON OUR INTEREST RATE STRUCTURE. b. AND IN ITSELF, THIS IS AN INHIBITOR OF ECONOMIC GROWTH. 3. BUT, AS ECONOMISTS WOULD SAY1 a. THAT UPWARD PRESSURE ON INTEREST RATES IS LESS THAN IT WOULD HAVE BEEN b. WITHOUT THE RECENT ACTIONS BY OUR FISCAL POLICYMAKERS. 1215190 Page20 Slide 14: The 7990 and 7991 outlook XIV. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THIS TRANSITION HAS BEEN OCCURRING IN A TIME OF SLOWING A. PART OF THE SLOWING IN ACTIVITY REFLECTS THE-ADJUSTMENT TO ,/ THE FINANCIAL ENVIRONMENT 1. / CREDIT HAS BEEN LESS REA,fuy AVAILABLE a. AS NOTED, AP~RIATE IN SOME AREAS // b. REAL ESTATE, ESPECIALLY COMMERCIAL STRUCTURES, ,/ o/£RBUILT / 2. LENDER RESTRAINT NOT WHOLE STORY ,I/ /0· // AND THEIR OWN DEBT POSITIONS I B. BORROWERS ALSO CAUTIOUS GIVEN UNCERTAINTIES BUT MOST IMPORTANTLY MIDEAST DEVELOPMENTS HAVE CONTRIBUTED TO WEAKNESS 1. UNCERTAINTIES RESULT IN INCREASED CAUTIOUSNESS IN BUSINESS AND CONSUMER SPENDING PLANS 2. HIGHER PRICE OF OIL a. INCREASES BUSINESS COSTS b. REDUCES AMOUNTS AVAILABLE TO CONSUMERS FOR OTHER GOODS AND SERVICES 12/5/90 Page21 Slide 75: Some leading indicators down XV. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AS A RESULT OF THESE FORCES, THERE H S BEEN GREATER CONCERN ABOUT THE OUTLOOK F FUTURE ACTIVITY HAVE TURNED A. DOWN (Chart: Leading indicators) 1. COMMONLY CITED COMMERCE DEPARTMENT SERIES ON LEADING INDICATORS HAS SLIPPED (Chart: Consumer sentiment) 2. - - L./ 1h L, S . A....-..., °' , \..'\,\ ~ - ~ ~ -~ ..r SINCE AUGUST, CONSUMER CONFIDENCE HAS PLUMMETED s,.-~ ~ ~ L i v - N o v , (Chart: Purchasing managers' suNey) 3. BUSINESS CONDITIONS HAVE DETERIORATED ACCORDING TO THE PURCHASING MANAGERS a. WITH MORE THAN 50 PERCENT OF THE PURCHASING MANAGERS REPORTING LOWER ORDERS, SHIPMENTS AND BACKLOGS S. N~v. (Chart: Stock market) 4. Lf (. "S ;. ~f , /\IIIV~ .'N c::...f(' 19 8-2--- AND, AS WE ARE ALL AWARE, THE STOCK MARKET HAS NOT PERFORMED WELL a. VIEWED BY SOME AS A LEADING INDICATOR b. AS WEALTH HAS BEEN REDUCED R._t...r""-.) 1215190 Page22 Slide 76: But no significant deterioration XVI. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THE FACTS DON'T SUGGEST THAT WE ARE TUMBLING INTO A RECESSION -ALTHOUGH SLOWING (Chart: Industrial production) A. INDUSTRIAL PRODUCTION STILL HAD BEEN INCREASING, ALTHOUGH AT SLOWER RATE, BEFORE DROP IN OCTOBER (Chart: Payroll employment) B. PAYROLL EMPLOYMENT, AFTER A LONG AND RAPID GAIN. LEVELING OFF 1. TWO-THIRDS OF RECENT DECLINES FROM MANUFACTURING EMPLOYMENT a. 2. THAT HAS BEEN TRENDING DOWN SINCE LATE 1988 RECENTLY SERVICE EMPLOYMENT GAINS ALSO MODERATING (Chart: Manufacturing and trade soles) C. WHILE MANUFACTURING AND TRADE SALES 1. HAVE CONTINUED TO INCREASE EVEN AFTER ADJUSTMENT FOR PRICES (Chart: Domestic auto sales) D. SALES OF DOMESTIC NAME PLATE AUTOS 1. CONTINUE TO BE IN 7 TO 7 PLUS (MILLION) RANGE 2. SURPRISING STRENGTH TO MANY f)~~ Jy...,cnrs 1215190 Page23 Slide 17: Real activity relatively well-balanced XVII. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CONCERNS ABOUT RAPID DETERIORATION OF THE ECONOMY AND POTENTIAL FOR SERIOUS DOWNTURN OR RECESSION OVERBLOWN BY THE MEDIA A. REAL ACTIVITY CONTINUES TO BE RELATIVELY WELL-BALANCED 1. OUTSIDE REAL ESTATE AREA AND FINANCIAL IMBALANCES 2. A LACK OF EXCESSES (Chart: Consumer spending) 8. TOTAL CONSUMER SPENDING HAS BEEN INCREASING 1. BUT NOT A A PACE TO SUGGEST THE NEED FOR A SIGNIFICANT RETRENCHING (Chart: Foreign trade) C. UNLIKE PERIOD BEFORE MID-1980s, WE HAVE SEEN CONTINUED IMPROVEMENT IN FOREIGN TRADE 1. INTERNATIONAL SIDE HAS MADE AN IMPORTANT CONTRIBUTION TO GROWTH (Chart: Nonresidential fixed investment) D. WHILE OVERBUILDING IN COMMERCIAL STRUCTURES 1. INDUSTRIAL STRUCTURES AND EQUIPMENT PURCHASES HAVE KEPT PACE WITH THE ECONOMY'S EXPANSION 2. HAVE NOT HAD AN INVESTMENT BOOM THAT FREQUENTLY HAS PRECEDED SHARP ECONOMIC DOWNTURNS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215190 Page24 (Chart: Inventory/sales ratio) E. NOR HAVE THERE BEEN ANY EXCESSES IN INVENTORIES 1. INVENTORIES HAVE ADJUSTED AT PACE WITH SALES 2. CONSEQUENTLY, THERE IS LITTLE EXPECTATION OF A MASSIVE INVENTORY LIQUIDATION AT THIS TIME 12/5/90 Page28 Slide 79: GNP XIX. ADDING ALL THE COMPONENTS UP LEAVES US WITH A REAL GNP OUTLOOK A. FOR SLUGGISH, BUT POSITIVE, GROWTH THIS YEAR AND NEXT, ON ANNUAL AVERAGE BASIS 1. ON A QUARTERLY BASIS, a. NEGATIVE IN FOURTH QUARTER OF 1990, DOWN ABOUT 2 -- PERCENT b. PERHAPS ANOTHER SLIGHTLY NEGATIVE READING IN THE FIRST QUARTER (-0.5%) c. - 1/ L. - I '71;:, BUT GROWTH RESUMING AS WE PROGRESS THROUGH 1991 -( - Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215/90 Page29 Slide 20: Consumer prices XX. THE OUTLOOK FOR INFLATION A. AFTER TEMPORARY SPIKE THIS YEAR LARGELY DUE TO OIL PRICES 8. MOVING BACK DOWN IN 1991 C. UNLIKE PREVIOUS PERIODS WHEN OIL PRICES ROSE SHARPLY 1. CURRENT ECONOMY IS NOT OVERHEATED 2. THIS MEANS THAT LESS OF OIL PRICE RISE LIKELY TO BE PASSED THROUGH a. OIL PRICE SHOCK ONLY TEMPORARY b. WILL NOT BE BUILT INTO UNDERLYING INFLATION RATE Cf,u 5 r~ Slide 21: The monetary policy challenges XXI. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THIS. OF COURSE. IS OF CRUCIAL CONCERN TO MONETARY POLICY A. ONE OF MANY CHALLENGES WE FACE 12/5190 Page 30 Slide 22: Key to successful transition: Price stability XXII. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BECAUSE FROM A MONETARY POLICY PERSPECTIVE, A TRULY SUCCESSFUL TRANSITION WILL BE DEPENDENT ON OUR PROGRESS TOWARD PRICE STABILITY. (Charts: CPI, all items, and CPI less food and energy) A. AN INFLATIONARY ENVIRONMENT WON'T HELP THE ADJUSTMENT PROGRESS. B. 1. WILL ONLY EXACERBATE THE DEBT PROBLEMS. 2. AND CREATE NEW PROBLEMS ON THE INTERNATIONAL SIDE. THERE IS THE GROWING INTERNATIONAL COMPONENT TO OUR ECONOMY. 1. OUR ECONOMY FORMERLY OPERATED IN A SOMEWHAT SELFCONTAINED ENVIRONMENT. a. OUR VARIOUS IMBALANCES WERE NOT EXPOSED TO THE WORLD MARKETS. b. WE ARE NOW INTER-TWINED IN A GLOBALIZED ECONOMY. c. AND THE INDIVIDUAL ASPECTS OF OUR ECONOMY, BOTH GOOD AND BAD, ARE RIGHT IN THE CRUCIBLE OF THE WORLD'S FOCUS. C. HAVE BEEN MAKING PROGRESS ON INFLATION ALBEIT MADE SLOWLY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12/5190 Page 31 1. OUR COMMITMENT CONTINUES TO BE TO PROVIDE AN ENVIRONMENT OF REASONABLE PRICE STABILITY. a. CERTAINLY MORE DIFFICULT AS RESULT OF MIDEAST ON TOP OF WEAKER ECONOMY. 1215190 Page32 Slide 23: 7990 - some monetary policy considerations XXIII. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MAKING MONETARY POLICY IN 1990 CERTAINLY HAS BEEN A CHALLENGING EXPERIENCE. A. TO A LARGE DEGREE, LEANING AGAINST THE WINDS OF INFLATION. (Chart: Growth and inflation) B. THE GROWTH vs. INFLATION TRADE-OFF -- A PERENNIAL MONETARY POLICY ISSUE. 1. BECAME MORE DIFFICULT AS YEAR PROGRESSED. 2. WITH ECONOMIC GROWTH SLOWING SHARPLY AND INFLATION TURNING UP. (Chart: Total debt and depository credit extended) C. WHILE SLOWDOWN IN TOTAL DEBT GROWTH SEEN AS DESIRED PART OF ADJUSTMENT/TRANSITION PROCESS. 1. CONCERNED WITH SHARP DROP IN GROWTH OF DEPOSITORY CREDIT EXTENDED. a. ALTHOUGH PART OF DROP REFLECTS SHRINKING THRIFT INDUSTRY AS THAT SITUATION IS RESOLVED. b. COMMERCIAL BANKS HAVE NOT PICKED UP THAT CREDIT BUSINESS. c. RATHER, CREDIT STANDARDS TIGHTENED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215190 Page33 2. MONETARY POLICY MADE A TECHNICAL CORRECTION IN JULY TO INSURE THAT THERE WASN'T ANY INAPPROPRIATE TIGHTENING OF MONETARY POLICY BECAUSE OF LENDER RESTRAINT. (Chart: Oil prices- West Texas int. crude) D. BUT THEN EVENTS IN THE MIDEAST ADDED TO PRICE PRESSURES. 1. REFLECTED IN INCREASED INFLATIONARY PREMIUMS IN LONGTERM MARKETS. 2. HOPEFULLY, HOWEVER, PEACEFUL RESOLUTION. a. MAKING OIL PRICE INCREASES TEMPORARY. b. AND AS I NOTED EARLIER, WITH CURRENT SLOWER GROWTH, OIL PRICE SHOCK LESS LIKELY TO BECOME INGRAINED. (Chart: Interest rates) E. SINCE THEN, WITH PASSAGE OF BUDGET PACKAGE AND IN FACE OF SIGNS OF WEAKENING ECONOMY, FURTHER MODEST REDUCTIONS IN FED FUNDS RATE HAVE OCCURRED. 1. AND LONG-TERM RATES HAVE RECEDED. f=;,4J F~ - ~ /0~ - - ~ , B c:, 7f/"'- - ~ - TO 12/5190 Page34 Slide 24: Until recently, real GNP above potential XXIV. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TO ANSWER THE QUESTION THAT I ASKED AT THE BEGINNING -- IS THE PARTY OVER? -- PROBABLY, YES, AT LEAST IN A 1980s CONTEXT. A. BUT FRANKLY, THAT MAY NOT BE ALL BAD. 1. THE POST-WORLD WAR II GROWTH HISTORY-- 3% BUT SUBDIVIDES INTO 3-1/2% AND 2-1/2%. 2. THE LATE 1980s RATE OF 3.8% -- WELL OVER. 3. THE PARTY-· WITH GROWTH ABOVE POTENTIAL -- COULD NOT HAVE GONE FOREVER. a. 4. WITHOUT INCURRING RISING INFLATION. IT WOULD HAVE BEEN UNREALISTIC TO HAVE EXPECTED THAT IT WOULD. B. WE ARE EXPERIENCING THE HANGOVER FROM THE PARTY NOW BUT IT NEED NOT BE A LONG ONE. 1. THE IMBALANCES THAT HAVE DEVELOPED IN THE RECENT YEARS FUELED OUR STRONG GROWTH TEMPORARILY. a. BUT CREATED AN UNSTABLE AND UNSUSTAINABLE SITUATION. b. 2. THEY ARE ALL CORRECTABLE. IF WE DON'T CONTINUE TO DEAL WITH THEM -- IF WE USE THE •HAIR OF THE DOG" REMEDY -- IN MY VIEW, WE COULD HAVE A VERY DIFFICULT EXPERIENCE AHEAD OF US. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1215190 Page35 3. BUT I JUST DON'T THINK THAT SUCH A NEGATIVE VIEW IS A REALISTIC OR A REASONABLE EXPECTATION. -A-M- ~ ~ U'tJ~b~u.J' ~ ' - - - " ~ '1-vt:6, ~. 1215/90 Page36 Slide 25: After 1990 transition, move toward growth with price stability XXV. WE HAVE A LONG RECORD OF BEING ABLE TO WORK OUR WAY THROUGH THESE KINDS OF ISSUES. 1. THE RECORD IS CLEAR THAT WE HAVE DONE IT IN THE PAST AND I SEE NO REASON TO EXPECT THAT WE WON'T DO IT AGAIN. 2. IT IS ENTIRELY POSSIBLE THAT WE WILL EXPERIENCE A TRANSITIONAL PERIOD WITH UNEVENNESS (A EUPHEMISM FOR A RECESSION) IN THE NEAR TERM. 3. BUT ONCE THROUGH THE TRANSITION OR ADJUSTMENT, WE COULD WELL BE ESTABLISHING A BASE FOR CONTINUING AND POSITIVE ECONOMIC RESULTS. 4. VERY LIKELY NOT IN THE MAGNITUDE OF THE 1980s WHICH I HAVE FREQUENTLY REFERRED TO --THAT PARTY REALLY IS OVER. 5. BUT GROWTH IN A MAGNITUDE MORE CONSISTENT WITH OUR AVERAGE EXPERIENCE OVER THE LAST TWO DECADES. 6. THIS GROWTH NATIONALLY WILL BE CONSISTENT WITH ACHIEVING AND MAINTAINING PRICE STABILITY. THANK YOU. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 

Silas Keehn (1990, December 4). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19901205_silas_keehn

@misc{wtfs_regional_speeche_19901205_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1990},
  month = {Dec},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19901205_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}