Regional President Speech

SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 1 I. DELIGHTED TO BE BACK. A. MINDFUL -- LONG STRING OF POSITIVE ECONOMIC CONDITIONS 1. B. NOT NOW THE CASE. ALSO MINDFUL 1. THIS TIME LAST YEAR FORECASTED 2. THE THEN LONG ECONOMIC RECOVERY WOULD CONTINUE. 3. MORE MODEST GROWTH THAN IN LATTER YEARS OF LAST DECADE. A. SOME OF UNDERLYING CONDITIONS NOT QUITE SO STRONG . . . 4. BUT STILL A. NO RECESSION No SIGNALS NORMALLY SUGGESTIVE OF A RECESSION WERE THERE. II. WHAT HAPPENED. A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FEDERAL BUDGET NEGOTIATIONS LAST SUMMER -FALL. 1. VERY UNSETTLING -- DISRUPTIVE. 2. OUESTIONED OUR ABILITY TO GOVERN. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 2 B. EASTERN EUROPE/SOVIET UNION 1. EXPORTS -- IMPORTANT TO ECONOMIC FORECAST. 2. VIABILITY OF THOSE MARKETS FOR EXPORTED PRODUCTS QUESTIONABLE A. As WELL AS EXPORTS TO OTHER KEY MARKETS WHERE ECONOMIC GROWTH IS MODERATING 3. EXPORT ACTIVITY KEY TO FORECAST A. PICK UP SLACK LEFT BY LOWER PERSONAL CONSUMPTION. C. PRESSURES ON FINANCIAL SYSTEM -PARTICULARLY BANKS. 1. CREDIT RESTRAINT CURTAILMENT OF CREDIT EXTENSION. 2. BANK FAILURES -- VERY UNSETTLING TO PUBLIC CONFIDENCE. D. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MIDEAST -- THE MOST SIGNIFICANT CHANGE 1. FIRST LAST SUMMER -- SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2. BUT EFFECTS INTENSIFIED AS YEAR CAME TO A CLOSE. 3. VERY EXACERBATED BY EVENTS OF JAN/FEB WHEN ACTUAL HOSTILITIES BROKE OUT, A. E. CNN FACTOR. 4. VERY PROFOUND EFFECT. 5. CAN JUST SEE IT IN THE NUMBERS. CLEARLY THE CURRENT/PROSPECTIVE SITUATION FAR DIFFERENT THAN ANTICIPATED 1. HAD THESE EVENTS -- DIFFICULT TO FORECAST -- NOT OCCURRED A. VERY LIKELY WE WOULD HAVE COME THROUGH THE YEAR WITHOUT FALLING INTO A RECESSION. 2. BUT GIVEN THESE EVENTS THAT HAVE CAUSED THE CHANGE IN OUTLOOK 3. OUESTION -- WHAT LIES AHEAD? A. WHAT WILL THE 90S BE LIKE? B. SIGNIFICANTLY DIFFERENT THAN THE 80s. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 4 f. BEFORE TRYING TO ANSWER THAT QUESTION -- 1. Go BACK AND HIGHLIGHT THE MAIN EVENTS OF THE DECADE OF 2. 80s. MANY OF THE ISSUES THAT DEVELOPED -- SET THE STAGE FOR THE WAY THE 90s WILL PLAY OUT. Ill. REFLECTING BACK ON THE DECADE OF THE 1980s -- A REWARDING PERIOD A. LONGEST PEACETIME EXPANSION IN OUR HISTORY. 1. ALMOST THROUGH THE EIGHTH YEAR ABOUT TWICE THE AVERAGE LENGTH. B. NOT ONLY LONG, ALSO PERIOD OF VERY STRONG GROWTH. ---~1. AVERAGE ANNUAL INCREASE IN REAL FROM C. GNP 3.8% 1983-1989. ALL THE MAJOR INDICATORS OF ECONOMIC GROWTH REACHED RECORD LEVELS. D. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BUT CERTAINLY AN UNEVEN EXPERIENCE -GEOGRAPHICALLY. 1. SOUTHWEST. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 5 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis E. 2. NEW ENGLAND. 3. MIDWEST. AND INDIVIDUAL COMPONENTS OF OUR ECONOMY HAVE ALSO HAD A VERY UNEVEN EXPERIENCE. 1. AUTOMOTIVE SECTOR RESTRUCTURING MARKET CHANGES. 2. 3. CAPITAL GOODS STEEL. CONSTRUCTION, BOTH COMMERCIAL AND RESIDENTIAL f. A. ENJOYED TOO MUCH SUCCESS B. FOR TOO MUCH MONEY -- FOR TOO LONG. BUT DESPITE THIS UNEVENNESS, IN A BROAD AGGREGATE SENSE 1. AND IN A MONETARY POLICY CONTEXT, 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. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 6 IV. WE TRIED TO FORGET SOME OF THE PROBLEMS AND IMBALANCES, OR AT LEAST PUT THEM IN THE BACK OF OUR MINDS. ' A. BUDGET DEFICIT -- A PROBLEM THAT SPEAKS FOR ITSELF. 1. 8. You'vE HEARD ME BEFORE ON THIS. TRADE DEFICIT 1. A HISTORY OF RUNNING OUR TRADE ACCOUNTS WITH A SLIGHT SURPLUS -- FELL OVER THE EDGE OF THE CLIFF IN 2. 1982. 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. C. A MASSIVE BUILD-UP OF CORPORATE DEBT CORPORATE RESTRUCTURINGS. 0. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PERSONAL DEBT LEVELS ROSE TO A RECORD POINT. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 7 E. As A CONSEQUENCE OF THESE TRENDS, WE ENDED THE DECADE IN A VERY LEVERAGED POSITION WITH HIGH LEVELS OF DEBT THROUGHOUT OUR FINANCIAL SYSTEM. 1. To A CONSIDERABLE EXTENT THE SIGNIFICANT INCREASE IN DEBT THAT WE EXPERIENCED FUELED THE STRONG EXPANSION OF THE 1980s. 2. REALISTICALLY, WE COULDN'T HAVE EXPECTED IT TO LAST FOREVER -- AND IT DIDN'T. V. EARLY TO JUDGE, BUT 1990-91 MAY WELL TURN OUT TO BE A TRANSITIONAL PERIOD -- WE ARE BEGINNING TO CORRECT THESE IMBALANCES. A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CORPORATE DEBT -- ALREADY SHOWING SIGNS OF IMPROVEMENT. 1. WE ARE RETURNING TO THE BASICS. 2. BORROWERS AND LENDERS ALIKE HAVE RECOGNIZED THAT EQUITY AND CAPITAL DO MATTER. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 8 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. 8. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As I HAVE NOTED, CONSUMER DEBT LOANS ARE VERY HEAVY. 1. THIS IS WORRYING AND IF UNEMPLOYMENT RISES EVEN MORE AND DISPOSABLE INCOME CONTINUES TO DECLINE SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 9 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2. WE ARE GOING TO HAVE SOME TROUBLE THERE WILL BE SOME LOSSES. 3. BUT ULTIMATELY THE CONSUMER IS PRETTY CAUTIOUS AND CAREFUL A. AND I WOULD EXPECT TO SEE SOME RETRENCHMENT IN PERSONAL BORROWING. B. INSTALLMENT CREDIT AS A PERCENTAGE OF DISPOSABLE INCOME HAS LEVELED OFF AND HOPEFULLY IT WILL BEGIN TO DECLINE. 4. 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. B. WILL TEMPER THE STRENGTH OF THE RECOVERY. C. THERE HAVE BEEN SOME IMPROVEMENTS ON THE INTERNATIONAL FRONT. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 10 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1. THE LOWER DOLLAR, WHICH ADMITTEDLY HAS SOME NEGATIVE ASPECTS, HAS HELPED OUR ~ _,.· EX~pRTS. 1 ,~~ ~~ 2. ~ / OUR MANUFACTURING F~ •P:R HAS ACHIEVED GOOD PRODUCTIVITY GAINS. A. THE OVERALL PRODUCTIVITY NUMBERS ARE BLURRED BY THE SERVICE COMPONENT. B. THE PRODUCTIVITY GAINS IN MANUFACTURING DURING THE 1980s, WHILE PERHAPS LOWER THAN WE ACHIEVED IN THE 1960s, HAVE STILL COME ALONG QUITE WELL. C. AND MY IMPRESSION FROM TALKING TO PEOPLE WHO RUN MAJOR MANUFACTURING OPERATIONS IS THAT WE HAVE ONCE AGAIN BECOME COMPETITIVE IN THE WORLD'S MARKETS. I. 3. STEEL EXPORTS -- JAPAN. AND THIS IS SHOWING UP IN AN IMPROVEMENT IN THE TRADE NUMBERS (EX-OIL IMPORTS). SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 11 VI. 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. A. DESPITE THE TRAUMA OF LAST YEAR'S NEGOTIATIONS 1. CLEARLY THIS IS A PROBLEM THAT IS STILL WITH US. 8. THE U.S. BUDGET WILL CONTINUE TO BE A MAJOR ISSUE -- FORECASTED DEFICITS LOOK VERY LARGE. 1. THE CONTINUED PRESENCE OF THE TREASURY IN THE CAPITAL MARKETS TO FINANCE THE DEFICIT PUTS UPWARD PRESSURE ON OUR INTEREST RATE STRUCTURE A. AND IN ITSELF, THIS IS AN INHIBITOR OF ECONOMIC GROWTH. 2. MAJOR DETERMINANT OF OUR EXPERIENCE IN 199Os. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 12 VII. SUCCESSFUL TRANSITION WILL BE DEPENDENT ON OUR PROGRESS TOWARD PRICE STABILITY. A. AN INFLATIONARY ENVIRONMENT WON'T HELP THE ADJUSTMENT PROGRESS. 1. WILL ONLY EXACERBATE THE DEBT PROBLEMS 2. AND CREATE NEW PROBLEMS ON THE INTERNATIONAL SIDE. 8. DESPITE RECENT DISCOURAGING PPI/CPI INCREASES 1. UNDERLYING SITUATION IS BETTER. 2. NON-RECURRING ITEMS A~ 3. ----- ~ \;>~ VIII. NEXT FEW MONTHS CRITICAL. EXPECT A. 4% OR LOWER BY YEAR-END. EIGHT QUARTERS GROWTH UNDER 2%. ALSO EXPECT MEASURABLE IMPROVEMENT IN ECONOMIC GROWTH BY MID-YEAR. A. IMPROVEMENT IN CONSUMER ATTITUDES 1. 8. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CONFIDENCE INDICES. RETAIL FLOW TRAFFIC 1. SMALL TICKET/BIG TICKET. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLEi TENNESSEE APRIL 3, 991 - PAGE 13 C. D·. AUTO 1. DEALER ATTITUDES. 2. ORDER RATE. BUT THE OTHER NUMBERS DON'T SUPPORT THE IMPROVED ATTITUDES. 1. MAY EVEN GET WORSE BEFORE GETS BETTER. 2. EMPLOYMENT/UNEMPLOYMENT. 3. NOT UNUSUAL FOR THIS PHASE OF ECONOMIC CYCLE. E. BY MID-PART OF THE YEAR 1. SHOULD MOVE BACK TO POSITIVE GROWTH RATE. 2. IX. BY END OF YEAR GROWTH UNDER 1% 40 TO 40. CERTAINLY MONETARY POLICY HAS BEEN RESPONSIVE TO WEAKENING ECONOMY OVER PAST SEVERAL MONTHS AND WITH A LAGGED EFFECT SHOULD PRODUCE STRONGER GROWTH. A. 2 B. 225 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis REDUCTIONS IN DISCOUNT RATE BP REDUCTION IN FED FUNDS 3 MONTHS 6 MONTHS. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 14 C. IN A POLICY CONTEXT -- PRETTY AGGRESSIVE RESPONSE. 0. THE EXCRUCIATING DILEMMA -- 1. WE GET THE ECONOMIC GROWTH 2. BUT THE RATE OF INFLATION DOESN'T COME DOWN. 3. NOT HOW WE SEE IT -- WOULD POSE VERY DIFFICULT SET OF OPTIONS. A. AGAIN -- NEXT FEW MONTHS EXCEPTIONALLY IMPORTANT. X. To CONCLUDE AND TO ANSWER THE QUESTION THAT I ASKED AT THE BEGINNING DIFFERENT THAN THE LEAST IN A A. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1980s 80s WILL THE 90s BE PROBABLY, YES, AT CONTEXT. BUT FRANKLY, THAT MAY NOT BE ALL BAD. 1. OUR RECENT GROWTH RATE HAS BEEN IN EXCESS OF THE POTENTIAL OF OUR ECONOMY TO OPERATE WITHOUT INCURRING RISING LEVELS OF INFLATION. SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 15 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A. THE POST-WORLD WAR II GROWTH HISTORY -- 3% BUT SUBDIVIDES INTO 3-1/2% AND 2-1/2%. B. THE LATE 198Os RATE OF 3.8% -- WELL OVER. 2. THE PARTY COULD NOT HAVE GONE FOREVER. 3. IT WOULD HAVE BEEN UNREALISTIC TO HAVE EXPECTED THAT IT WOULD. ~ 4. IF WE SUCCESSFULLY GO THROUGH THE TRANSITION -- CONTINUE TO MAKE PROGRESS ON IMBALANCES. 5. SETTING THE STAGE FOR PERIOD OF SUSTAINED ECONOMIC GROWTH. 6. VERY LIKELY NOT IN THE MAGNITUDE OF THE 198OS -- THAT PARTY REALLY IS OVER 7. BUT GROWTH IN A MAGNITUDE MORE CONSISTENT WITH OUR EXPERIENCE OVER THE LAST 8. 4 OR 5 DECADES. ON THAT POSITIVE NOTE -- THAT'S HOW SEE THE 199Os. I SILAS KEEHN VANDERBILT UNIVERSITY LUNCHEON REMARKS NASHVILLE, TENNESSEE APRIL 3, 1991 - PAGE 16 8. AT ANY RATE, BACK 1990S THANK YOU. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I WILL LOOK FORWARD TO COMING IN THE YEAR 2000 WITH YOU THEN. AND REVIEWING THE 

Silas Keehn (1991, April 2). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19910403_silas_keehn

@misc{wtfs_regional_speeche_19910403_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1991},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19910403_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}