Regional President Speech

SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 1 I. INTRODUCTION A. THOUGHT I WOULD START OFF WITH SOME COMMENTS ABOUT THE ECONOMY -- 1. THE CURRENT SITUATION AS WELL AS A LOOK AHEAD AT LEAST THROUGH THE BALANCE OF THE YEAR. 8. MONETARY POLICY 1. SOME OF THE SIGNIFICANT COMPLEXITIES AND CHALLENGES THAT WE ARE DEALING WITH C. AND THEN BEFORE TAKING YOUR QUESTIONS, I'D LIKE TO END WITH SOME COMMENTS ABOUT THE FEDERAL RESERVE SYSTEM. 1. CLEARLY WE WILL BE DEALING WITH SOME IMPORTANT CHALLENGES TO THE STRUCTURE OF THE SYSTEM AND THE WAY IN WHICH WE CONDUCT MONETARY POLICY. II. STARTING WITH THE ECONOMY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 2 A. BUT BEFORE LOOKING AHEAD LET ME JUST QUICKLY REVIEW SOME OF THE EVENTS THAT HAVE BROUGHT US TO THE CURRENT SITUATION. 1. I'M NOT GOING TO SPEND ANY LENGTH OF TIME DISCUSSING THE DECADE OF THE '80s A. BUT IT WAS AN ALMOST UNIQUE PERIOD WHICH IN A CERTAIN SENSE HAS SET THE STAGE FOR THE WAY THE 1990s WILL PLAY OUT. 2. THE DECADE OF THE '80s WAS A PERIOD OF COMPARATIVELY STRONG GROWTH. A. THE AVERAGE ANNUAL GROWTH IN REAL GDP, FROM THE TURN IN THE 40 '82 ECONOMY IN THE THROUGH 20 '90, WAS SIGNIFICANTLY STRONGER THAN THE AVERAGE GROWTH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 3 EXPERIENCED OVER THE LAST 20-25 ~ YEARS. 2-.1/l..~<J B. I THINK WE ALL REALIZED AS WE WENT THROUGH THE PERIOD THAT IT WAS AN ECONOMIC EXPERIENCE THAT COULD NOT BE SUSTAINED. 3. BUT IT WAS ALSO CLEAR AS WE WENT THROUGH THIS PERIOD THAT SIGNIFICANT IMBALANCES WERE DEVELOPING IN THE ECONOMY. A. THE COMMON DENOMINATOR IN THESE IMBALANCES WAS THE EXCESSIVE LEVEL OF DEBT THAT WAS BUILDING UP THROUGH OUR FINANCIAL SYSTEM. B. IT WAS GENERALLY RECOGNIZED THAT WE WOULD HAVE TO GO THROUGH AN ADJUSTMENT PROCESS TO CORRECT THESE IMBALANCES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 4 (I) AND THAT THIS NECESSARY ADJUSTMENT~ WOULD INHIBIT THE LEVEL OF ECONOMIC ACTIVITY AS WE WENT THROUGH THE PROCESS. C. BUT WHILE WE HAVE BEEN GOING THROUGH THIS CORRECTIVE PHASE, WHAT WAS EASY TO STATE IN WORDS BECOMES VERY UNCOMFORTABLE IN REALITY 4. AND WE DID NOT FULLY FORECAST THE MAGNITUDE OF THE RESTRAINING EFFECT THAT THIS CORRECTIVE PROCESS WOULD HAVE ON THE LEVEL OF ECONOMIC ACTIVITY. As A. AN EXAMPLE, WHILE CERTAINLY IT WAS UNDERSTOOD· THAT IN ORDER TO DEAL WITH PROBLEM AND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 5 NON-PERFORMING LOANS, BANKS WOULD HAVE TO EXERCISE A HIGHER LEVEL OF CAUTION AND PRUDENCE IN THEIR CREDIT EXTENSION. B. BUT THERE WASN'T A FULL REALIZATION THAT THE TIGHTENING OF CREDIT STANDARDS WHICH, IF YOU THINK BACK TO THE CIRCUMSTANCES THAT EXISTED, SAY, TWO YEARS AGO, WAS ENTIRELY APPROPRIATE, THIS WOULD RESULT IN WHAT CAME TO BE KNOWN AS THE CREDIT CRUNCH AND THAT THIS, IN TURN, WOULD HAVE SUCH A SUBSTANTIAL IMPACT ON THE 1991 1992. ECONOMY OF AND C. THIS IS JUST AN EXAMPLE OF THE EFFECT THAT DEALING WITH THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 6 1980s IMBALANCES OF THE HAS HAD ON OUR MORE RECENT ECONOMIC EXPERIENCE. 8. BUT IMPORTANTLY, WE HAVE ALREADY MADE VERY SUBSTANTIAL PROGRESS IN RESOLVING 1980s THESE IMBALANCES OF THE WHICH SEEMED SO THREATENING AS THE DECADE CLOSED, BUT ARE NOW VERY SUBSTANTIALLY REDUCED. 1. CORPORATE BALANCE SHEETS HAVE BEEN SIGNIFICANTLY IMPROVED AND THIS POSITIVE CHANGE IS CONTINUING AT A GOOD PACE. 2. TAKING ADVANTAGE OF LOWER INTEREST RATES, CORPORATE DEBT IS BEING REFINANCED WITH NEW ISSUES WITH LONGER MATURITIES AND AT MUCH LOWER RATES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 7 A. THIS HAS HAD A VERY POSITIVE EFFECT ON CORPORATE CASH FLOW. 3. 198Os WHILE DURING THE WE SAW AN ABSOLUTE REDUCTION IN THE OUTSTANDING EQUITY OF NONFIN~clAL CORPORATIONS ON A CONSOLIDAT~ BASIS, THANKS TO THE RELATIVELY GOOD STOCK MARKET AND THE FLOW OF NEW ISSUES COMING INTO THE MARKET, WE ARE NOW SEEING A NET INCREASE IN EQUITY B. AN IMPORTANT IMPROVEMENT IN THE DEBT-TO-WORTH RATIO WHICH AT ITS PEAK HAD GOTTEN TO A WORRISOME LEVEL. C. BORROWERS AND LENDERS ALIKE HAVE RETHOUGHT THEIR ATTITUDES REGARDING THE DESIRABILITY OF Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 8 BURDENSOME LEVELS OF DEBT (I) WE ARE RETURNING TO THE BASICS. (II) AND THIS RENEWED CAUTION HAS HAD A RESTRAINING EFFECT ON ECONOMIC GROWTH. 4. THE SAME IS TRUE OF CONSUMERS. THERE IS A NEWFOUND ELEMENT OF CAUTION AND CONSERVATISM AMONG THE BORROWING PUBLIC. A. UNTIL RECENTLY, CONSUMER INSTALLMENT DEBT HAD BEEN REDUCED. (I) WHILE WE HAVE SEEN A SHIFT IN THIS TREND DURING THE LAST THREE MONTHS, CONSUMER DEBT LOADS ARE STILL WELL BELOW PEAK LEVELS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 9 B. RETAIL SALES IN DECEMBER WHICH, AFTER TWO VERY WEAK YEARS, REALLY SHOWED A RATHER STRONG IMPROVEMENT THIS.PAST CHRISTMAS SEASON -- C. THE FIRST SOLID EVIDENCE THAT CONSUMERS MAY HAVE REACHED A LEVEL OF COMFORT AS THEY HAVE REDUCED THEIR PREVIOUSLY VERY HEAVY DEBT POSITIONS, D. BUT WE WILL JUST HAVE TO GET FURTHER ALONG THE NEW YEAR TO SEE IF THIS NEWFOUND CONFIDENCE WILL BE SUSTAINED. (1) AND I'LL NOTE A CAVEAT IN A FEW MINUTES. 5. NET, I'D MAKE THE CASE THAT WE HAVE MADE VERY SUBSTANTIAL PROGRESS IN Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 10 WORKING OUR WAY THROUGH THE IMBALANCES OF THE 1980S ~ THE ADJUSTMENT PROCESS WILL BE LESS ;.. INHIBITING ON ECONOMIC GROWTH IN t._,f' -/'" ..,_ THIS NEW YEAR . r. ~.(A. v vt .,,,(j:;;;;::;: ll.. A. As A SPECIFIC NUMBER OR TWO TO ,. - M ~ SUPPORT THIS COMMENT, REAL GDP f' ~ rL..:4- ~ . GROWTH IN THE THIRD QUARTER OF ~v--X} ~ ~ LAST YEAR CAME IN AT~ >,'-{1v ~S CV'2-clL~ L SUBSTANTIALLY HIGHER THAN THE GROWTH RATES IN THE PREVIOUS FIVE QUARTERS. B. AND A PRELIMINARY ESTIMATE OF FOURTH QUARTER GROWTH, WHILE NOT AS STRONG AS PERHAPS THE THIRD QUARTER, NONETHELESS, IN THE SAME AREA OF MAGNITUDE. C. AND THAT FOR THE FULL YEAR, REAL Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM 22, 1993 - 11 JANUARY PAGE GROWTH IN GDP CAME IN AT 2%. ABOUT D. IMPORTANTLY AS THE YEAR CAME TO A CLOSE, THE BREADTH AND STRENGTH OF THE UNDERLYING ECONOMY WAS IMPROVING. (I) WE EXITED THE YEAR AT A 3%. GROWTH RATE OF ABOUT (11) THEREFORE, WE ENTERED THE YEAR ON A POSITIVE FOOTING. C. LOOKING AHEAD, WE WOULD EXPECT THESE POSITIVE TRENDS TO CONTINUE 1. AND ANTICIPATE THAT REAL GROWTH THIS YEAR (FULL YEAR) COMPARED TO LAST 2-1/2 YEAR WILL BE IN THE AREA OF 3% TO 2. AND THAT THE RISK OF FALLING BACK Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 12 INTO ANOTHER RECESSION HAS CONSIDERABLY DIMINISHED WITH THE PASSAGE OF TIME. III. AND IMPORTANTLY, THIS POSITIVE, ALBEIT MODEST ECONOMIC GROWTH, WILL TAKE PLACE WITH AN INFLATION OUTLOOK THAT HAS ALSO IMPROVED VERY CONSIDERABLY. A. As MEASURED BY THE CPI, THE RATE OF INFLATION LAST YEAR CAME IN UNDER 3% I 2.9% LOWEST LEVEL IN SIX YEARS. 1. WE WOULD EXPECT CONTINUED IMPROVEMENT WITH THIS CRITICAL ISSUE AND THAT THE INCREASE IN THE CPI THIS YEAR COULD PERHAPS BE EVEN FURTHER UNDER THE 3% LEVEL. 8. Ex THE FOOD AND ENERGY COMPONENTS OF THE CPI, WHICH AS YOU KNOW ARE RATHER VOLATILE, WE HAVE REALLY ESTABLISHED A Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 13 VERY CONSTRUCTIVE PATTERN OVER THE PAST FEW YEARS WHICH IS WORTH HIGHLIGHTING. 1. Ex FOOD AND ENER~ THE CPI S,Z-rv 5.j"U INCREASED BY IN.1990, 4-1/2% IN 1991 AND 3.3% LAST YEAR -- MOST MODEST INCREASE IN 20 YEARS. 2. WE WOULD EXPECT THAT THIS INDEX WILL COME IN SOMEWHAT UNDER 3% THIS YEAR AND THAT LOOKING AHEAD TO 1994, ADMITTEDLY A LONG WAY AWAY, THAT WE MAY SEE FURTHER PROGRESS, WITH A LEVEL THAT MIGHT APPROACH 2-1/2%. 3. EXACTLY WHAT WE HAVE BEEN TRYING TO ACCOMPLISH. C. THERE IS, THEREFORE, THE EXPECTATION THAT WE WILL EXPERIENCE POSITIVE ECONOMIC GROWTH OVER THE NEXT YEAR OR so. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 14 1. AT LEVELS PERHAPS LESS THAN OUR FULL POTENTIAL 2. BUT WITH IMPROVING RATES OF INFLATION AND WITH THE DISTINCT POSSIBILITY THAT WE WILL REACH A LEVEL OF REASONABLE PRICE STABILITY WITHIN THIS PERIOD. 3. IN POINT OF VIEW OF MONETARY POLICY, THESE ARE VERY SIGNIFICANT RESULTS. IV. BUT AS ALWAYS, A CAVEAT OR TWO. As A. WE MOVED ALONG IN THE FOURTH QUARTER OF LAST YEAR, CONSUMER CONFIDENCE IMPROVED CONSIDERABLY, AND REFLECTING THIS SHIFT, PERSONAL CONSUMPTION INCREASED. 1. THE COMPARATIVELY STRONG RETAIL SALES LEVELS AT THE MAJOR CHAIN STORES DURING THIS PAST CHRISTMAS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 15 I SEASON THAT NOTED ARE AN EXAMPLE OF THIS INCREASE IN PERSONAL CONSUMPTION. 2. BUT THE CONSUMPTION GAINS HAVE BEEN MOVING AHEAD AT RATES THAT ARE HIGHER THAN THE INCREASES IN PERSONAL DISPOSABLE INCOME. 3. THE HIGHER EXPENDITURES HAVE BEEN FINANCED OUT OF SAVINGS AS WELL AS TALLMENT DEBT. HIS LATTER ITEM IS SOMETHING ___ ,,, OF A SHIFT -- INSTALL~~T DECLINED AS WE WE ~ROUGH THE RESTRUCTURING NOTED EARLIER, BUT THIS REVERSED AND HAS INCREASED DURING THE LAST THREE MONTHS. 4. THE PERSONAL DEBT LEVELS ARE UNDER Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 16 THE PEAK POINTS REACHED EARLIER AND THEREFORE, THERE IS NOTHING THE LEAST BIT ALARMING ABOUT THIS. As A CONSEQUENCE, IT IS CLEAR THAT A GAP HAS DEVELOPED BETWEEN SPENDING AND DISPOSABLE INCOME. 5. WE WILL NEED TO SEE A CLOSING OF THIS GAP BEFORE WE CAN BE ASSURED THAT THE ECONOMIC EXPANSION CAN BE SUSTAINED. 6. AND, IN TURN, KEY TO THE DISPOSABLE INCOME ISSUE WILL BE GOOD, SOUND EMPLOYMENT GAINS DURING THE NEXT FIVE TO SIX MONTHS. A. WE WILL NEED EMPLOYMENT 150 INCREASES APPROACHING TO 200,000 PER MONTH DURING THIS PERIOD BEFORE WE CAN BE ASSURED Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 17 THAT THE MORE POSITIVE ECONOMIC GROWTH THAT I'VE COMMENTED ON CAN BE ACHIEVED. V. ONE REASON FOR HAVING A HIGHER DEGREE OF 1993 CONFIDENCE IN THE OUTLOOK FOR THAN WAS THE CASE LAST YEAR IS IMPORTANTLY BASED ON OUR MONETARY POLICY ACTIONS AS WE HAVE GONE THROUGH THIS RECENT PERIOD. A. IN THE PROCESS WE HAVE USED ALL OF THE POLICY TOOLS AVAILABLE TO US. 1. OVER THE LAST TWO AND A HALF YEARS WE HAVE REDUCED THE FED FUNDS RATE 18 TIMES. WE HAVE REDUCED THE DISCOUNT RATE SEVEN TIMES AND WE HAVE ALSO EASED POLICY THROUGH THE ELIMINATION OF RESERVE REQUIREMENTS ON SOME DEPOSIT ACCOUNTS. 2. BY ALL HISTORICAL EXTENTS IN A Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 18 MONETARY POLICY SENSE THIS HAS BEEN A PERIOD OF SIGNIFICANT ACTIVITY. A. DESCRIBE IT AS A HIGHLY RESPONSIVE MONETARY POLICY. 8. OUR POLICY MOVES IMPACT THE ECONOMY ON A LAGGED BASIS LONG AFTER THE FACT. 1. IF HISTORY IS ANY GUIDE (AND I WOULD NOT WANT TO BID AGAINST THE HISTORICAL RECORD) WE WOULD HAVE EXPECTED THESE FREQUENT POLICY MOVES TO BEGIN TO SHOW THROUGH IN TERMS OF ECONOMIC ACTIVITY. 2. AND WHILE ONE OR TWO QUARTERS DO NOT A SUSTAINED EXPANSION MAKE, NONETHELESS, THERE IS A BASIS FOR ANTICIPATING A GROWTH RATE ALONG THE LINES THAT I HAVE SUGGESTED TO YOU. C. IMPORTANTLY, WE HAVE HAD A VERY Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 19 SIGNIFICANT SHIFT IN INTEREST RATES AS WE HAVE GONE THROUGH THIS PERIOD. 1. OUR POLICY MOVES HAVE A PARTICULAR EFFECT ON SHORT-TERM RATES WHICH ARE DOWN BY SOME 500 BASIS POINTS AS WE HAVE GONE THROUGH THIS PERIOD. 2. BUT LONG-TERM RATES, CERTAINLY STICKIER THAN SHORT-TERM RATES, HAVE ALSO COME DOWN. 3. THE SPREAD BETWEEN SHORT- AND LONG-TERM RATES HAS BEEN CONTINUOUSLY AT HISTORICALLY HIGH I LEVELS AND THINK THAT IT IS A SAFE BET THAT THIS WIDE SPREAD WILL NOT CONTINUE. 0. BY LOWERING THE OVERALL INTEREST RATE ENVIRONMENT WE HAVE EASED THE DEBT SERVICING BURDEN FOR BOTH COMPANIES AND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 20 INDIVIDUAL CONSUMERS WHICH I THINK HAS BEEN VERY BENEFICIAL AS THOSE THAT WERE CARRYING HIGH DEBT LOANS MANAGED THEIR WAY THROUGH THE RECENT DIFFICULT ECONOMIC EXPERIENCE. 1. IMPROVED CORPORATE CASH FLOW AND INCREASED DISPOSABLE INCOME FOR CONSUMERS HAVE BEEN VERY BENEFICIAL. E. OUR MONETARY POLICY DELIBERATIONS HAVE BEEN CHALLENGING AS WE HAVE GONE THROUGH THIS PERIOD. 1. THE MONETARY AGGREGATES HAVE BEEN AN IMPORTANT POLICY TOOL IN OUR DELIBERATIONS. A. AND AS YOU KNOW, BY LAW WE ESTABLISH TARGET RANGES FOR THE AGGREGATES AND ON A SEMI-ANNUAL BASIS THE CHAIRMAN REPORTS TO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 21 THE CONGRESS ON OUR PROGRESS IN MEETING OUR OBJECTIVES AS WELL AS THE RESULTS IN TERMS OF ECONOMIC PERFORMANCE. 2. BUT WHILE WE HAVE GONE THROUGH PERIODS IN WHICH THE AGGREGATES WERE A RELIABLE POLICY TOOL AND COULD BE USED TO DEVELOP POLICY WITH CONFIDENCE, 3. THAT HAS NOT BEEN OUR RECENT EXPERIENCE. 4. BECAUSE OF A VARIETY OF REASONS, INCLUDING THE DEREGULATION OF THE 1980s, THE RESTRUCTURING THAT HAS BEEN AND THAT IS CONTINUING TO TAKE PLACE IN THE FINANCIAL SECTOR AND OTHER MAJOR CHANGES IN THE FINANCIAL SYSTEM, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 22 5. THE RELATIONSHIP OF THE AGGREGATES TO ECONOMIC ACTIVITY HAS BECOME VERY WEAK. 6. WITH THIS AUDIENCE IN PARTICULAR, I WOULD NOT WANT TO SUGGEST THAT THE AGGREGATES, IN A POLICY-DRIVING SENSE, ARE NOT AN IMPORTANT TOOL IN THE DEVELOPMENT OF POLICY. 7. BUT IT IS AT LEAST A FAIR COMMENT THAT WE HAVE BECOME MUCH MORE ECLECTIC IN OUR APPROACH TO THE MONETARY POLICY ISSUE. VI. LET ME CONCLUDE WITH SOME COMMENTS ABOUT THE FEDERAL RESERVE SYSTEM. A. ASSUMING THAT AT SOME POINT YOU HAVE ALL 101, HAD ECONOMICS I WON'T BORE YOU WITH A REVIEW OF THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 23 1. BUT WOULD REMIND YOU THAT THE SYSTEM HAS THREE SEPARATE PARTS 2. AND THAT THE INTERRELATIONSHIP OF THOSE THREE PARTS IS EXCEPTIONALLY IMPORTANT. B. THE SEVEN MEMBERS OF THE BOARD OF GOVERNORS IN WASHINGTON ARE PUBLIC OFFICIALS NOMINATED BY THE PRESIDENT AND CONFIRMED BY THE SENATE FOR 14-YEAR TERMS. 1. THE CHAIRMAN AND VICE CHAIRMAN ARE SEPARATELY NOMINATED AND CONFIRMED TO 4-YEAR TERMS. C. THE RESERVE BANK DISTRICTS, 12 IN ALL, ARE ORGANIZED ON A GEOGRAPHIC BASIS 1. AND THERE IS A SEPARATE RESERVE BANK IN EACH OF THE DISTRICTS. 2. THE RESERVE BANKS ARE GOVERNMENT Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 24 CORPORATIONS AND THE STOCK IN THE BANKS IS OWNED BY BANKS IN THE MEMBER DISTRICT. 3. I IMPORTANTLY, AND. WILL COME BACK TO THIS IN A MOMENT, THE PRESIDENTS OF THE RESERVE BANKS ARE APPOINTED BY THEIR LOCAL BOARDS OF DIRECTORS AND CONFIRMED BY THE BOARD OF GOVERNORS. A. THE PRESIDENTS, THEREFORE, ARE PRIVATE INDIVIDUALS, NOT PUBLIC OFFICIALS AND THIS IS A CRITICAL ELEMENT IN THE STRUCTURE OF THE ~ SYSTEM. D. I THE THIRD PART OF WHAT WOULD CALL THE IRON TRIANGLE IS THE FEDERAL OPEN MARKET COMMITTEE 1. WHICH IS COMPRISED OF SEVEN GOVERNORS AND FIVE OF THE RESERVE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM 22, 1993 - 25 JANUARY PAGE BANKS PRESIDENTS SERVING ON A ROTATING BASIS. 2. IT IS IN THAT WAY THAT THE PUBLIC/PRIVATE BALANCE THAT IS ESSENTIAL TO THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM AND THE DEVELOPMENT OF MONETARY POLICY IS BROUGHT INTO PLAY. I E. GO THROUGH THIS BECAUSE THIS IS AN ISSUE THAT HAS RECENTLY EMERGED IN A MAJOR SENSE. 1. FROM TIME TO TIME THE CONGRESS BECOMES LEERY OF PRIVATE INDIVIDUALS (WHO, IN THEIR VIEW, ARE NOT ACCOUNTABLE TO THE CONGRESS) DETERMINING MONETARY POLICY WHICH HAS SUCH AN ENORMOUS IMPACT ON THE DEVELOPMENT OF THE ECONOMY. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 26 2. JUST A FEW WEEKS AGO, A BILL WAS INTRODUCED IN THE HOUSE OF REPRESENTATIVES WHICH WOULD CHANGE THE STATUS OF THE RESERVE BANK PRESIDENTS AND WOULD MAKE THEM SUBJECT TO POLITICAL CONFIRMATION THUS CHANGING THE STATUS OF THE RESERVE BANK PRESIDENTS FROM PRIVATE INDIVIDUALS TO PUBLIC OFFICIALS. A. LEGISLATION THAT GOES AT THIS ISSUE DIFFERENTLY, BUT WITH THE SAME END RESULT, WAS INTRODUCED IN BOTH THE SENATE AND THE HOUSE LAST YEAR. B. THE INTENSITY OF THE HEARINGS DEALING WITH THIS SO FAR HAS BEEN A BIT UNNERVING. 3. DESPITE ASSURANCE TO THE CONTRARY, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 27 THIS RUNS THE RISK OF POLITICIZING MONETARY POLICY PROCESSES. A. PRESSURES OF THIS SORT WILL INEVITABLY PUSH FOR GREATER ECONOMIC GROWTH WITH LESS CONCERN ABOUT THE INFLATIONARY RESULTS. 4. HISTORY SUGGESTS THAT GOOD, SUSTAINED ECONOMIC GROWTH MUST BE BASED ON A CURRENCY THAT IS FREE FROM THE RUINOUS EFFECTS OF INFLATION. 5. IT IS FOR THIS REASON THAT THIS ISSUE IS SO CRITICALLY IMPORTANT NOT JUST AS IT APPLIES TO THE JOB DESCRIPTION OF A RESERVE BANK PRESIDENT, BUT MUCH MORE IMPORTANTLY BECAUSE THE ECONOMIC OUTLOOK FOR OUR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN UNIVERSITY OF CHICAGO GRADUATE SCHOOL OF BUSINESS EXECUTIVE PROGRAM JANUARY 22, 1993 - PAGE 28 COUNTRY IS BASED ON THIS. A. AND IT IS CURIOUS THAT AT THE SAME TIME THAT THE FED'S INDEPENDENCE SEEMS A BIT THREATENED. (I) SOME COUNTRIES, MOST SPECIFICALLY FRANCE, ARE CONSIDERING A HIGHER DEGREE OF INDEPENDENCE FOR THEIR CENTRAL BANKS. 6. I WHILE THINK THIS IS A CONTROLLABLE ISSUE, NONETHELESS, IT IS VERY I TOPICAL AND LEAVE IT WITH YOU AS SOMETHING YOU MIGHT WANT TO FOLLOW AS YOU GO THROUGH THE BALANCE OF THE SCHOOL YEAR. THANK YOU. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1993, January 21). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19930122_silas_keehn

@misc{wtfs_regional_speeche_19930122_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1993},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19930122_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}