Regional President Speech

SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" 20, 1994 - 1 JANUARY PAGE 1)./~~~ p,-vh~ ~f. I. INTRODUCTION A. PLEASED TO BE HERE 1. THOUGHT I WOULD SPEND A FEW MINUTES TODAY TALKING ABOUT THE CURRENT AND PROSPECTIVE ECONOMIC SITUATION. 2. AND LET ME START BY MAKING THE POINT THAT DURING THE PAST THREE YEARS, WE'VE HAD A VERY DIFFERENT ECONOMIC EXPERIENCE THAN ANY WE'VE HAD BEFORE, OR CERTAINLY IN RECENT DECADES. 3. CLEARLY SOMETHING VERY DIFFERENT HAS BEEN GOING ON HERE. II. STATISTICALLY, OF COURSE, WE HAVE NOW EXPERIENCED ELEVEN CONSECUTIVE QUARTERS OF POSITIVE ECONOMIC GROWTH -- ALMOST THREE YEARS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 2 A. BEGINNING WITH THE SECOND QUARTER OF 1991 WE HAVE HAD POSITIVE GROWTH THAT 2-1/2 HAS AVERAGED ABOUT PERCENT AT AN ANNUAL RATE. 1. BUT AS A NOTE OF CAUTION, THE AVERAGE LENGTH OF OUR PEACE TIME EXPANSION CYCLES HAS BEEN ABOUT 3-1/2 YEARS -- A POINT WE WILL REACH DURING THIS YEAR. 2. THOUGH THE LENGTH OF THIS CYCLE HAS BEEN SIMILAR TO OTHERS WE HAVE EXPERIENCED, THE STRENGTH OF IT HAS BEEN FAR MORE MODEST THAN THE OTHER POST-WAR CYCLES. 3. AND DESPITE THE FACT THAT WE HAVE NOW MOVED FROM THE RECOVERY TO AN EXPANSION, IT JUST HASN'T FELT THAT GOOD. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 3 4. 1992 FOR EXAMPLE, WAS A COMPARATIVELY GOOD YEAR WHICH ENDED WITH A VERY STRONG FOURTH QUARTER (5. 7%). A. YET WE DIDN'T GET A CHANCE TO ENJOY THAT YEAR UNTIL AFTER IT WAS ALL OVER, 1. LARGELY BECAUSE THAT STRONG QUARTER WAS IMMEDIATELY FOLLOWED BY THE VERY WEAK ECONOMY THAT WE EXPERIENCED AT THE OUTSET OF LAST YEAR. 8. WHILE IT WAS A LITTLE HARD TO UNDERSTAND WHAT WAS CAUSING THIS DIFFERENCE AS WE WERE GOING THROUGH THE PERIOD, THIS SHARP DIFFERENCE BETWEEN THIS CYCLE AND THE OTHERS THAT WE'VE EXPERIENCED OVER THE PAST 50 YEARS, Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 4 1. I LOOKING BACK, THINK SOME OF THE REASONS FOR THESE DIFFERENCES ARE BECOMING MORE APPARENT. Ill. IN ADDITION TO THE NORMAL CYCLICAL EXPERIENCE WHICH ALWAYS AFFECTS OUR ECONOMY, ~ A. WE~ DEALING WITH TWO VERY DIFFERENT CONSIDERATIONS. 1. FIRST, THE RESTRUCTURING OF OUR FINANCIAL ACTIVITIES, PARTICULARLY CORPORATE, INDIVIDUAL, AND GOVERNMENTAL BALANCE SHEETS AND 2. SECOND, THE GLOBALIZATION OF THE INTERNATIONAL ECONOMIES. 3. GIVEN THE IMPORTANCE OF THESE ISSUES, LET ME SPEND A FEW MINUTES COMMENTING ON EACH OF THEM. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 5 IV. THE RESTRUCTURING THAT WE HAVE BEEN GOING THROUGH BECAME ABSOLUTELY NECESSARY AS A 1980s. RESULT OF OUR EXPERIENCE DURING THE A. I SINCE IT IS NOW SUCH ANCIENT HISTORY, WON'T SPEND ANY TIME GOING BACK THROUGH THE NUMBERS IN ANY DETAIL. 1. '80s BUT YOU WILL REMEMBER THAT THE WERE CHARACTERIZED BY AN ECONOMIC EXPANSION THAT WAS BOTH VERY LONG AND VERY STRONG. 40'82 20'90; A. TO LONGEST PEACE +3.5% TIME -- ANNUAL RATE. B. BUT THIS VERY POSITIVE ECONOMIC EXPERIENCE WAS FUELED BY AN ENORMOUS BUILD-UP IN DEBT THAT RAN THROUGHOUT OUR ENTIRE FINANCIAL SYSTEM. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 6 1. '80s ON THE CORPORATE SIDE, THE WAS A PERIOD THAT WAS MARKED BY AN UNENDING SERIES OF MERGERS, TAKEOVERS AND OTHER EXAMPLES OF VERY ESOTERIC FINANCIAL ENGINEERING. 2. ALL TOO FREQUENTLY THESE TRANSACTIONS WERE FINANCED WITH DEBT AND IN THE PROCESS EQUITY RETIRED. 3. AND, THEREFORE, WE ENDED THE DECADE WITH A CONSOLIDATED CORPORATE BALANCE SHEET THAT WAS LEVERAGED TO AN UNNERVING LEVEL. 4. I DON'T THINK IT IS AN OVERSTATEMENT TO SUGGEST THAT WE WERE FACING THE POTENTIAL OF SOME DE-STABILIZING CIRCUMSTANCES IN THE CORPORATE SECTOR -- SOME VERY LARGE COMPANIES WERE VERY VULNERABLE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 7 C. THE SAME WAS EVERY BIT TRUE FOR INDIVIDUALS. 1. THE '8Os WAS A CONSUMPTION DECADE AND PERSONAL CONSUMPTION WAS ALL TOO FREQUENTLY FINANCED BY AN INCREASE IN INSTALLMENT DEBT AND OTHER FORMS OF PERSONAL BORROWING. 2. THESE DEBT LEVELS ALSO GOT TO VERY HIGH LEVELS AS WAS REFLECTED IN THE SIGNIFICANT INCREASE IN CLAIMS FOR PERSONAL BANKRUPTCIES. D. I As WE WENT THROUGH THE PERIOD, THINK WE ALL HAD A SENSE OF UNEASE. 1. THAT THE INCREASE IN DEBT WAS SIMPLY UNSUSTAINABLE 2. AND LIKE THE PARTY TOO WELL ENJOYED, THERE WOULD BE THE MORNING AFTER. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 8 3. IT REALLY WASN'T A QUESTION OF WHETHER OR NOT WE WOULD NEED TO GO THROUGH· THE RESTRUCTURING PROCESS - THAT WAS A GIVEN, A. THE QUESTION WAS WHETHER IT COULD BE ACCOMPLISHED WITHOUT EXPERIENCING DE-STABILIZING ECONOMIC PROBLEMS. 4. BUT WHAT WE PERHAPS FAILED TO FULLY APPRECIATE WAS THE RESTRAINING EFFECT THAT THIS RESTRUCTURING PROCESS WOULD HAVE ON ECONOMIC GROWTH. A. IT HAS SIGNIFICANTLY INHIBITED THE ECONOMY FROM ADVANCING WITH THE STRENGTH THAT HAS BEEN SO TYPICAL OF OUR OTHER POST-WAR RECOVERIES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 9 V. BUT MORE POSITIVELY, AS WE HAVE GONE THROUGH THE PAST SEVERAL YEARS, WE REALLY HAVE MADE SUBSTANTIAL PROGRESS AND THE ISSUES THAT WERE SO THREATENING AS WE CAME OUT OF THE '80s DECADE OF THE ARE NOW IN MUCH BETTER BALANCE., / W, l..1 / ,\, - ~ ~ ~ ~ A. ER INTEREST RATES HAVE ce=ERYAINLY FACILITATED THE PROCESS. B. COMPANIES HAVE USED THIS FAVORABLE RATE ENVIRONMENT TO REFINANCE THEIR DEBTS IN RECORD AMOUNTS. 1. THE VERY SHORT MATURITY AND HIGH INTEREST RATE LOANS THAT CHARACTERIZED THE CORPORATE 1980s TRANSACTIONS OF THE 2. ARE BEING REFINANCED WITH ISSUES WITH LONGER MATURITIES AND AT MUCH LOWER RATES OF INTEREST. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 10 3. 1992 $165 IN ALMOST BILLION WAS PUBLICLY ISSUED ON THE DEBT MARKETS 1993 A. AND IN THE NUMBER WAS EVEN LARGER, RISING TO A RECORD $196 BILLION. 4. IN ADDITION, COMPANIES ARE REPAYING SOME OF THEIR BURDENSOME DEBT WITH NEW EQUITY OFFERINGS. 1992 $50 A. IN OVER BILLION WAS PUBLICLY PLACED IN THE EQUITY MARKETS. B. AND LAST YEAR THE NUMBER WAS AN EVEN MORE IMPRESSIVE $67 BILLION -- AGAIN A RECORD NUMBER. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 11 5. ANY WAY YOU CUT IT, THESE ARE REALLY HUGE NUMBERS AND AS A CONSEQUENCE, THE CAPITAL STRUCTURE OF CORPORATE AMERICA IS NOW IN MUCH BETTER BALANCE THAN WAS THE CASE JUST A FEW YEARS AGO. C. THE FINANCIAL POSITION OF HOUSEHOLDS HAS ALSO IMPROVED AND 1. DEBT AS A PERCENTAGE OF DISPOSABLE INCOME, WHICH ROSE TO RECORD LEVELS 1980s, IN THE LATE HAS STABILIZED. 2. AND THE INTEREST RATE DECLINES HAVE ALLOWED INDIVIDUALS TO REFINANCE THEIR LOANS AT MUCH MORE ATTRACTIVE RATES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 12 3. THIS IN ITSELF HAS HAD THE POSITIVE EFFECT OF INCREASING THE AMOUNT OF MONEY AVAILABLE TO CONSUMERS FOR OTHER SPENDING PURPOSES. 4. WHILE, AS I SAY, THIS IMBALANCE HAS BEEN VERY SUBSTANTIALLY REDUCED, D. IT IS IMPORTANT TO EMPHASIZE THAT LOWER INTEREST RATES HAVE PROVIDED A GREATER PART OF THE IMPROVEMENT THAN THE ABSOLUTE REDUCTION IN THE LEVEL OF DEBT. 1. THOUGH THESE LOWER RATES HAVE CONSIDERABLY EASED THE DEBT SERVICING BURDENS OF CORPORATIONS AND INDIVIDUALS, BY NO MEANS HAS THIS PROCESS BEEN COMPLETED -- WE STILL HAVE A LONG WAY TO GO Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 13 2. WHICH SUGGESTS THAT THE RATE OF ECONOMIC GROWTH IN THE COMING YEARS WILL CONTINUE TO BE RESTRAINED AS WE MAKE FURTHER PROGRESS IN UNWINDING THE IMBALANCES. E. BANKING THE INDUSTRY ALSO HAS BEEN GOING THROUGH A RESTRUCTURING WHICH HAS FURTHER INHIBITED ECONOMIC ACTIVITY. 1. COMING INTO THE CURRENT DECADE THE BANKING HAD BEEN INDUSTRY VERY SUBSTANTIALLY WEAKENED. A. THE BUILD-UP IN BAD LOANS NECESSITATED HUGE PROVISIONS FOR LOAN LOSSES RESULTING IN SIZEABLE OPERATING LOSSES AND THE SUBSTANTIAL EROSION OF CAPITAL POSITIONS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 14 2. THERE WERE MANY INSTITUTIONS, SOME VERY LARGE, THAT WERE SITTING ON THE EDGE OF SOME VERY DIFFICULT PROBLEMS. As A REGULATOR, I CAN ASSURE YOU THAT THIS WAS A VERY UNNERVING PERIOD. 3. BUT HERE ALSO, LOWER INTEREST RATES HAVE PRODUCED A MARVELOUS RESULT. 4. BANK EARNINGS HAVE SUBSTANTIALLY IMPROVED A. AND FOR THE INDUSTRY AS A WHOLE, HAVE BEEN AT RECORD LEVELS. B. TROUBLED ASSETS HAVE STABILIZED AND ARE HEADING DOWN. C. IN MOST CASES, NOT ALL, BUT MOST, LOAN LOSS RESERVES ADEQUATELY COVER THE REMAINING PROBLEMS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 15 (I) INDEED, YOU ARE NOW SEEING REPORTS IN THE PRESS THAT IN SOME CASES BANKS MAY WELL HAVE OVER-RESERVED. (II) HAVE NEVER SEEN A RESERVE I DIDN'T LIKE. 5. CAPITAL POSITIONS WHICH HAD BEEN SO BADLY ERODED HAVE TURNED AROUND AND THE INDUSTRY IS NOW MUCH BETTER CAPITALIZED. 6. BUT, AS WE HAVE GONE THROUGH THIS CORRECTIVE PROCESS CLEARLY THERE HAS BEEN A RESTRAINT PLACED ON BANK LENDING A. RESULTING IN THE SO-CALLED CREDIT CRUNCH. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 16 7. BUT THIS ALSO IS LARGELY BEHIND AND BANKS ARE ONCE AGAIN OUT SEEKING CREDITS -- IN MANY CASES, RATHER AGGRESSIVELY BUT I'D EMPHASIZE GOOD CREDITS. A. AND THIS INCREASED LENDING ACTIVITY IN ITSELF SHOULD FACILITATE FURTHER ECONOMIC PROGRESS. VI. BUT TO REPEAT AND TO EMPHASIZE THE POINT, IN A STRUCTURAL SENSE, THE FINANCIAL SITUATION IS VERY SIGNIFICANTLY BETTER NOW THAN IT WAS 1990 -- IN, SAY, TO CHOOSE THAT YEAR AS THE TURNING POINT. A. AT THAT TIME, WE WERE FACING SOME VERY SERIOUS PROBLEMS, MANY OF WHICH HAD SYSTEMIC IMPLICATIONS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 17 ~/\lfi"\.JJ 1. BUT A-=r THIS PemT THESE ISSUES ARE LARGELY BEHIND US. 2. A SITUATION THAT SEEMED SO THREATENING JUST THREE YEARS AGO IS NOW MUCH MORE COMFORTABLE 3. AND THE IMPORTANT SECTORS OF OUR FINANCIAL SYSTEM ARE ON A MUCH SOUNDER FOOTING. P~0~ --==~ .._G ONTO THIS SOUNDER FOOTING HAS HAD A COST 1. IN TERMS OF THE RESTRAINING EFFECT THAT IT HAS HAD ON ECONOMIC GROWTH. VII. THE OTHER MAJOR DIFFERENCE THAT IS HAVING SUCH A PROFOUND IMPACT ON THIS PERIOD IS THE GLOBALIZATION OF THE WORLD'S ECONOMIES. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 18 A. WHILE INTERNATIONAL TRADE HAS ALWAYS BEEN AN IMPORTANT ACTIVITY AND WHILE THE PACE OF THE INTEGRATION OF WORLD TRADE AND FINANCE HAS BEEN INCREASING SINCE II WORLD WAR 1. CLEARLY THE IMPACT OF THIS PROCESS HAS BECOME FAR MORE APPARENT IN OUR CURRENT SETTING. 8. OVER THE PREVIOUS DECADE OR SO WE HAD BECOME MUCH LESS COMPETITIVE IN THE WORLD MARKETS 1. WHILE AT THE SAME TIME THESE MARKETS HAD BECOME INCREASINGLY IMPORTANT TO us. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 19 2. As THE PACE OF INTERNATIONAL TRADE ACCELERATED, SOME OF OUR FUNDAMENTAL INDUSTRIES, SUCH AS STEEL AND AUTOMOTIVE, WERE EXPOSED TO INTERNATIONAL ORGANIZATIONS THAT HAD BECOME FAR MORE COMPETITIVE C. As A CONSEQUENCE, IT BECAME ABSOLUTELY NECESSARY 1. To REDUCE COSTS BY STREAMLINING, BY BECOMING MORE EFFICIENT AND BY IMPROVING PRODUCTIVITY. 2. NOT ONLY HAS THE PRODUCTIVE PROCESS ITSELF BECOME FAR MORE COST EFFICIENT THROUGH AUTOMATION AND THE LIKE A. BUT ALSO LAYERS OF MANAGEMENT HAVE BEEN ELIMINATED. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 20 B. AND THIS IS THE FIRST TIME THAT WE HAVE SEEN SUCH VIGOROUS REDUCTIONS IN OUR WHITE COLLAR WORK FORCE. 3. WHILE WE STARTED THIS PHASE AT A COMPETITIVE DISADVANTAGE A. THIS HAS TURNED AROUND QUITE SUBSTANTIALLY AND WE HAVE BECOME A LOW COST PRODUCER. 4. PRODUCTIVITY HAS INCREASED SHARPLY. A. FOR EXAMPLE, MANUFACTURING PRODUCTIVITY, LET ME EMPHASIZE THAT I'M REFERRING TO MANUFACTURING PRODUCTIVITY NOT . ~..s,- TOTAL, ~ INCREASED BY;fIVE 0¥9J' PERCENT LAST YEAR. ~ Ci') , Jt·~--~ tL.o ~ ~ J < ~ t I<> 7 ~199- 'L Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 21 5. WITH THE DOLLAR AT ABOUT ITS CURRENT LEVEL WE ARE COMPETITIVE IN THE WORLD MARKETS A. AND THE RECENT LOCATION OF PRODUCTION FACILITIES OF FOREIGN U.S. AUTO MANUFACTURERS IN THE IS DRAMATIC EVIDENCE OF THIS VERY SIGNIFICANT CHANGE AND HOW MUCH HAS BEEN ACCOMPLISHED. 6. BUT YOU CAN SEE THE COST OF THIS CORRECTIVE PROCESS IN OUR EMPLOYMENT NUMBERS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 22 A. ANOTHER UNIQUE FEATURE OF THE '80s WAS THE ENORMOUS INCREASE IN EMPLOYMENT THAT WE EXPERIENCED -- AN INCREASE OF 230,000 SOME JOBS PER MONTH (ON AVERAGE) AS WE WENT THROUGH THAT PERIOD -- AN ALMOST EXPLOSIVE RATE OF GROWTH. B. OUR CURRENT EXPERIENCE IS VERY DIFFERENT AND IS A WORRYING PART IN THE OUTLOOK. (I) IN CONTRAST TO THE STRONG MONTHLY INCREASES THAT WERE SUCH A DYNAMIC ASPECT '80s, OF THE Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 23 (II) SINCE THIS CYCLE STARTED, THE AVERAGE MONTHLY EMPLOYMENT INCREASES HAVE BEEN A MUCH MORE MODEST 80,000 (III) AND UNTIL RECENTLY, MANUFACTURING EMPLOYMENT HAD CONTINUED TO DECLINE. (IV) WITH EMPLOYMENT GROWTH SO RESTRAINED, THIS CERTAINLY HAS A LIMITING EFFECT ON INCREASES IN DISPOSABLE INCOME SO NECESSARY TO FINANCE PERSONAL CONSUMPTION. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 24 C. WHICH IN TURN HAS RAISED SOME NAGGING CONCERNS ABOUT THE SUSTAINABILITY OF THE CURRENT EXPANSION. VIII. BECAUSE OF THESE TWO ISSUES I'VE HIGHLIGHTED, RESTRUCTURING AND GLOBALIZATION, OUR MONETARY POLICY DELIBERATIONS DURING THE PAST SEVERAL YEARS HAVE BEEN EXCEEDINGLY DIFFICULT. A. MONETARY POLICY HAS CERTAINLY PLAYED A KEY ROLE IN MOVING OUR ECONOMY THROUGH THIS VERY DIFFERENT ENVIRONMENT. 1. CLEARLY LOWER RATES HAVE BEEN FUNDAMENTAL TO THE SIGNIFICANT IMPROVEMENT THAT WE HAVE SEEN IN THE CORPORATE, HOUSEHOLD AND BANKING SECTORS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 25 8. WE BEGAN TO EASE POLICY IN MID-1989 BEFORE THE THEN DEVELOPING DOWNTURN BECAME FULLY EVIDENT. 1. As WE WENT THROUGH THE PERIOD, WE ADDED RESERVES AT A RAPID PACE AND IN 24 SEPARATE POLICY MOVES BROUGHT THE FED FUNDS RATE DOWN BY ALMOST 700 BASIS POINTS. 2. IN THE PROCESS WE REDUCED THE DISCOUNT RATE SEVEN TIMES 3. AND ELIMINATED OR REDUCED RESERVE REQUIREMENTS ON TWO OCCASIONS. C. WHILE ONE MIGHT QUESTION THE TIMING AND PERHAPS THE MAGNITUDE OF SOME OF THESE INDIVIDUAL MOVES Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 26 1. IT WOULD BE QUITE A STRETCH, I SAY WITH AN OBVIOUS BIAS, TO TRY TO MAKE THE CASE THAT MONETARY POLICY HAS NOT BEEN RESPONSIVE TO THIS VERY DIFFERENT AND DIFFICULT ECONOMIC ENVIRONMENT. D. OUR EXPERIENCE IN PRIOR PERIODS MIGHT HAVE SUGGESTED A QUICKER AND MORE VIGOROUS RESPONSE TO ALL THESE MOVES. 1. IN OTHER WORDS, WE COULD HAVE EXPECTED TO GET "MORE BANG FOR THE BUCK." 2. BUT WE HAVEN'T BECAUSE THE ECONOMY HAS BEEN OPERATING IN THIS VERY DIFFERENT ENVIRONMENT THAT I HAVE TRIED TO OUTLINE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, PAGE 27 1994 - 3. CHAIRMAN GREENSPAN, IN HIS EARLIER TESTIMONY, DESCRIBED THIS AS AN ECONOMY THAT HAD BEEN FACING 50 MILE-AN-HOUR HEAD WINDS. A. MORE RECENTLY HE HAS SAID THAT WHILE WE'RE STILL DEALING WITH THIS HEAD WIND ISSUE, THE VELOCITY HAS RECEDED. 4. BUT INTERESTINGLY, AT LEAST IN A MONETARY POLICY CONTEXT, WHILE THE THREE-YEAR PERIOD FOLLOWING THE INITIAL POLICY CHANGE IN MID-1989 WAS SO VERY BUSY, SINCE SEPTEMBER OF 1992, THE ECONOMY HAS DEVELOPED IN A WAY THAT HAS NOT NECESSITATED A CHANGE IN NOW OVER 15 MONTHS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" 20, 1994 - 28 JANUARY PAGE IX. AND THAT BRINGS ME TO WHAT I HOPE IS A LOGICAL CONCLUSION. WHILE I'LL ADMIT TO BEING AN OPTIMIST, I HAVE A GROWINGLY POSITIVE OUTLOOK FOR THE NEXT YEAR OR SO. A. AND I MUST SAY THAT THE DATA THAT WE HAVE SEEN OVER THE PAST SEVERAL WEEKS HAS SEEMED INCREASINGLY SOLID 1. AND MY CONFIDENCE LEVEL THAT THE GROWTH RATE, WHILE PERHAPS MODEST IN AN HISTORICAL CONTEXT, 2. SEEMS MUCH MORE ASSURED NOW THAN WAS THE CASE AT THIS TIME LAST YEAR. 8. I WOULD POINT OUT, INDEED EMPHASIZE, THAT THE IMPROVEMENT IN THE OUTLOOK FOR INFLATION IS ANOTHER PIECE OF THE PUZZLE THAT HAS FALLEN INTO PLACE. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 29 1. PEOPLE'S ATTITUDES ABOUT INFLATION HAVE CHANGED ENORMOUSLY AND ARE NOW SO VERY DRAMATICALLY DIFFERENT THAN, 10 12 SAY, OR YEARS AGO. 2. You WILL REMEMBER FROM THAT EARLIER PERIOD THAT HIGHER LEVELS OF INFLATION WERE SO EXPECTED THAT THEY BECAME A FUNDAMENTAL PART OF OUR BUSINESS THINKING -- THE EXPECTATIONAL FACTOR. A. AND WHILE CURRENT EXPECTATIONS ARE DRAMATICALLY DIFFERENT, B. NONETHELESS LURKING IN THE BACK OF MANY MINDS IS THE WORRY THAT WE'LL REVERT TO HIGHER LEVELS OF INFLATION AS OUR ECONOMY CONTINUES TO DEVELOP. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" 20, 1994 - 30 JANUARY PAGE 3. BUT IN THESE DAYS WITH COST CUTTING PRESSURES SO PERVASIVE, WITH THE IMPORTANT PRODUCTIVITY INCREASES I'VE NOTED AND WITH COMPETITIVE CONDITIONS ONLY INTENSIFIED BY OUR GLOBALIZED ECONOMIES, A. THESE ARE NOT THE CONDITIONS THAT ARE CONDUCIVE TO HIGHER INFLATIONARY PRESSURES. B. AND TO THE CONTRARY, IN MY VIEW, WE ARE NOW APPROACHING CONDITIONS OF REASONABLE PRICE STABILITY. C. LAST YEAR ON A DECEMBER OVER DECEMBER BASIS, THE CPI 2.7%, INCREASED JUST THE SMALLEST ANNUAL INCREASE IN SIX YEARS. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 31 (I) AND THIS YEAR, THOUGH THE 12-MONTH RATE MAY BE SLIGHTLY HIGHER THAN LAST YEAR, (II) THE CORE RATE, EXCLUDING THE VOLATILE FOOD AND tn. .s ~ ~ ~ 1 ~ 3, 2. Tu ENERGY SECTORS, WILL BE AT t,-..,_ OR EVEN A BIT LOWER THAN LAST YEAR'S CORE RATE. (III) LOOKING BACK OVER THE RECENT RECORD, WE REALLY HAVE MADE SIGNIFICANT PROGRESS WITH THIS VERY IMPORTANT ISSUE. 8. IN TERMS OF ECONOMIC GROWTH, TO CONCLUDE WITH A MINI-FORECAST, IT IS OUR EXPECTATION THAT THE ECONOMY WILL CONTINUE TO ADVANCE IN REAL TERMS AT AN 3 ANNUAL RATE OF ABOUT PERCENT THIS YEAR Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 32 1. AND THAT THE OUTLOOK FOR THE CONTINUATION OF GROWTH OVER A LONGER PERIOD AT ABOUT THIS RATE IS RATHER POSITIVE. 2. WHILE THIS RATE MAY BE LOWER THAN DURING THE VERY STRONG EXPANSION OF 1980s, I THE AS EARLIER POINTED OUT IT WOULD BE UNREALISTIC TO HAVE EXPECTED A REPEAT OF THAT EXPERIENCE AND, OF COURSE, WE PAID THE PRICE FOR THAT STRONG GROWTH WITH THE HUGE COSTS THAT WE HAVE BEEN DEALING WITH SINCE THEN. C. I FIND THIS A VERY REWARDING OUTLOOK AND AS WE GET FURTHER INTO THE DECADE IT IS ENTIRELY POSSIBLE THAT AT LONG LAST WE WILL HAVE ESTABLISHED THE BASIS FOR 1. SUSTAINED ECONOMIC GROWTH WITH RISING LIVING STANDARDS Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SILAS KEEHN GREATER AURORA CHAMBER OF COMMERCE "DEALING WITH THE HEAD WINDS" JANUARY 20, 1994 - PAGE 33 2. IN AN ENVIRONMENT OF REASONABLE PRICE STABILITY. D. AND ON THAT POSITIVE NOTE, LET ME CONCLUDE BY AGAIN EXPRESSING MY APPRECIATION FOR HAVING AN OPPORTUNITY TO SHARE A FEW OF MY THOUGHTS WITH YOU. THANK YOU. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis

Silas Keehn (1994, January 19). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19940120_silas_keehn

@misc{wtfs_regional_speeche_19940120_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1994},
  month = {Jan},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19940120_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}