Regional President Speech

SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 1 I. INTRODUCTION A. I WILL START OFF BY MENTIONING SOME OF THE LEGISLATIVE ISSUES THE FEDERAL RESERVE SYSTEM IS DEALING WITH, THEN NOTE OUR RECENT MONETARY POLICY ACTIONS AND CONCLUDE WITH SOME COMMENTS ON THE ECONOMY. II. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LET ME START OFF WITH THESE LEGISLATIVE ISSUES. A. FOR REASONS THAT ARE A LITTLE HARD TO UNDERSTAND (LATER ON I'LL NOTE THAT IN AN ECONOMIC CONTEXT THE SITUATION IS DEVELOPING VERY WELL), WE SEEM TO BE UNDER A GREAT DEAL OF LEGISLATIVE PRESSURE, BOTH WITH REGARD TO THE FUNDAMENTAL STRUCTURE OF THE FEDERAL RESERVE SYSTEM AS WELL AS THE FEDERAL OPEN MARKET COMMITTEE'S OPERATING SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 2 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PROCEDURES AND SHOULD ANY OF THESE CHANGES BE ENACTED, THEY COULD IMPINGE ON THE LEVEL OF INDEPENDENCE THAT IS SO FUNDAMENTAL AND NECESSARY TO THE MONETARY POLICY PROCESS. 1. FOR EXAMPLE, BILLS HAVE BEEN INTRODUCED IN BOTH THE SENATE AND THE HOUSE THAT WOULD SIGNIFICANTLY ALTER THE ROLE OF THE RESERVE BANK PRESIDENTS. A. ONE VERSION WOULD CONVERT RESERVE BANK PRESIDENTS FROM PRIVATE INDIVIDUALS TO PUBLIC OFFICIALS AND ANOTHER VERSION WOULD TAKE THE PRESIDENTS OFF OF THE OPEN MARKET COMMITTEE AS VOTING MEMBERS. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 3 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2. EITHER VERSION DRAMATICALLY CHANGES A STRUCTURE THAT IN SOME RESPECTS HAS BEEN IN PLACE FOR 80 YEARS, AND IN OTHER RESPECTS FOR ALMOST 60 YEARS, A STRUCTURE AND A BALANCE THAT HAVE SERVED THIS COUNTRY VERY WELL OVER THIS LONG PERIOD OF TIME. 3. WHILE AT THE END OF THE DAY I DON'T THINK THAT CURRENT CONGRESSIONAL SENTIMENT FAVORS MAKING THESE CHANGES, GIVEN THE POTENTIAL THREAT THAT THEY POSE TO OUR ABILITY TO DEVELOP MONETARY POLICY IN AN ENVIRONMENT FREE FROM POLITICAL INFLUENCE, THESE ARE RISKS TO WHICH WE ARE VERY ALERT. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 4 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B. OF MORE IMMEDIATE CONCERN IS THE ADMINISTRATION'S PROPOSAL TO CONSOLIDATE THE FEDERAL FINANCIAL REGULATORY SYSTEM INTO A SINGLE REGULATORY BODY. 1. WHEN FIRST INTRODUCED, THIS PROPOSAL HAD SOME INITIAL APPEAL -- THE CURRENT STRUCTURE IS VERY FRACTIONALIZED AND CERTAINLY NEEDS TO BE SIMPLIFIED. 2. BUT THE ADMINISTRATION'S PROPOSAL WOULD TAKE THE FEDERAL RESERVE SYSTEM OUT OF THE SUPERVISORY BUSINESS ALTOGETHER AND WE FEEL VERY STRONGLY THAT THIS WOULD BE ABSOLUTELY WRONG. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 5 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A. WE NEED TO HAVE A DIRECT HANDS-ON SUPERVISORY INVOLVEMENT IN ORDER TO DEAL WITH OUR MONETARY POLICY RESPONSIBILITIES. 3. IT IS MY VIEW THAT THE FEDERAL RESERVE, AS THE NATION'S CENTRAL BANK, HAS THE OVERRIDING RESPONSIBILITY FOR THE INTEGRITY OF THE FINANCIAL SYSTEM. A. IF PROBLEMS DEVELOP WITHIN THE SYSTEM, EVEN IN THOSE PARTS WHERE WE DO NOT HAVE SPECIFIC SUPERVISORY AUTHORITY, WE NEED TO BE ABLE TO DEAL WITH THEM AND IT IS OUR SUPERVISORY ROLE THAT PROVIDES THE VEHICLE FOR THIS RESPONSE. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 6 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4. WHILE I HAVE BEEN AT THE CHICAGO FED, I HAVE EXPERIENCED MANY EVENTS, PARTICULARLY IN 1987 AND 1989, WHEN PROBLEMS THAT COULD HAVE BECOME SYSTEMIC IN NATURE BEGAN TO EMERGE. A. OUR SUPERVISORY AUTHORITY ENABLED US TO RESOLVE THESE PROBLEMS BEFORE THEY BECAME PUBLIC AND EXPLODED ONTO THE SCENE. 5. SINCE THE INTRODUCTION OF THE ADMINISTRATION'S PROPOSAL, THERE HAS BEEN A CLEAR SHIFT IN MOMENTUM AND IT IS MY SENSE THAT THE FINANCIAL MARKETS AND THE VARIOUS SEGMENTS OF THE BANKING INDUSTRY THOROUGHLY SUPPORT THE FED'S POSITION AND THE COUNTER PROPOSAL THAT WE HAVE MADE. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 7 A. OUR PLAN WOULD SIGNIFICANTLY SIMPLIFY THE SYSTEM AND WOULD ELIMINATE THE UNNECESSARY DUPLICATION YET WOULD MAINTAIN OUR SUPERVISORY ROLE IN A WAY THAT WOULD ENABLE US TO DEAL WITH OUR MONETARY POLICY RESPONSIBILITIES. 6. WHILE IT IS HARD TO JUDGE JUST HOW THIS ISSUE WILL ULTIMATELY EVOLVE, I DO THINK THAT THERE IS A GOOD OPPORTUNITY TO GET LEGISLATION PASSED THAT WILL DEAL WITH OUR CONCERNS BUT AT THE SAME TIME RESULT IN A MUCH BETTER SUPERVISORY STRUCTURE FOR THE FINANCIAL SYSTEM. III. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis WITH THAT AS BACKGROUND, LET ME SHIFT TO SOME COMMENTS ABOUT OUR RECENT MONETARY POLICY ACTIONS. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 8 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A. As YOU KNOW, ON FEBRUARY 4, THE FEDERAL OPEN MARKET COMMITTEE MADE A POLICY CHANGE TOWARD GREATER RESTRAINT AND IN AN UNPRECEDENTED MOVE, WE IMMEDIATELY ANNOUNCED THE CHANGE. 1. THE MARKET REACTION WAS, I THOUGHT, UNEXPECTEDLY ADVERSE. 2. JUST SHORTLY BEFORE THAT CHANGE, CHAIRMAN GREENSPAN HAD TESTIFIED BEFORE A CONGRESSIONAL COMMITTEE. A. I READ THE TESTIMONY CAREFULLY AND IT SEEMED TO ME THAT IT PROVIDED A CLEAR INDICATION THAT THERE MIGHT BE A NEAR-TERM POLICY CHANGE. B. BUT YET, IN THE EVENT, THE MARKETS SEEMED SURPRISED. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 9 C. THE FEDERAL OPEN MARKET COMMITTEE AGAIN ADJUSTED POLICY ON MARCH 22, JUST ABOUT THREE WEEKS AGO AND AGAIN MADE AN ANNOUNCEMENT AT THE TIME OF THAT MOVE. 3. THE IMMEDIATE REACTION TO THE SECOND CHANGE WAS QUITE POSITIVE BUT THEN SUBSEQUENTLY THERE WAS AGAIN AN ADVERSE REACTION. C. WHILE IT IS DIFFICULT TO KNOW JUST WHY THE MARKETS HAVE RESPONDED IN THE WAY THAT THEY HAVE, IT SEEMS TO ME THAT THERE ARE SEVERAL ISSUES THAT MAY ACCOUNT FOR IT. FIRST Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1. FOLLOWING A FIVE-YEAR PERIOD DURING WHICH OUR POLICY MOVES HAD BEEN TOWARD EASE, THIS WAS THE INITIAL TIGHTENING MOVE. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 10 A. DESPITE THE ANTICIPATION THAT MANY MAY HAVE HAD, A CHANGE IN DIRECTION ALWAYS COMES, IF NOT AS A SURPRISE, THEN AT LEAST AS A REMINDER THAT THE DIRECTION OF POLICY HAS CHANGED. SECOND Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2. THERE SEEMS TO BE A CONSIDERABLE LEVEL OF UNCERTAINTY ABOUT OUR FUTURE POLICY ACTIONS AND THERE ARE MANY CONFLICTING VIEWS IN THE MARKET. A. WITH THIS VARIETY OF VIEWS, THERE ARE BOUND TO BE SOME THAT WILL BE SURPRISED BY THE CHANGES BECAUSE THEIR EXPECTATIONS HAD BEEN QUITE DIFFERENT. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 11 THIRD 3. WHILE HARD TO QUANTIFY, IT IS CLEAR THAT SOME MARKET PARTICIPANTS HAD HIGHLY LEVERAGED POSITIONS AS WE WENT INTO THIS PERIOD WHICH HAD TO BE UNWOUND. A. AND IN THAT PROCESS THE UNSETTLED MARKET CONDITIONS WERE ONLY EXACERBATED. B. AND THIS SERVED TO AMPLIFY THE MAGNITUDE OF THE MARKET ADJUSTMENT. FOURTH Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4. THE FOREIGN EXCHANGE MARKETS MAY HAVE PLAYED A ROLE IN THIS; FOR EXAMPLE, AGAINST THE YEN, THE DOLLAR HAS BEEN UNDER A GREAT DEAL OF PRESSURE. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 12 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A. BECAUSE THE VALUE OF SOME OF THE FOREIGN HELD DOLLAR DENOMINATED PORTFOLIOS HAVE DEPRECIATED WITH THE FALL IN THE VALUE OF OUR CURRENCY, B. THIS HAS PROMPTED SOME OF THE PORTFOLIO MANAGERS TO REDUCE THEIR POSITIONS, ADDING FURTHER TO THE DOWNWARD PRESSURE ON PRICES PARTICULARLY IN THE BOND AND STOCK MARKETS. 5. FINALLY, THE ECONOMY HAS BEEN ADVANCING AT A SOLID RATE AND WHILE THE CURRENT DATA DOES NOT REFLECT UPWARD MOVEMENT IN PRICES, SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 13 A. THERE ARE AT LEAST QUESTIONS BY SOME AS TO WHETHER OR NOT THE CURRENT CONDITIONS OF REASONABLE PRICE STABILITY CAN BE SUSTAINED. IV. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AND THAT ISSUE LEADS TO SOME CONCLUDING COMMENTS ABOUT THE ECONOMY. A. IT'S AN UNDERSTATEMENT TO SAY THAT 1994 HAS STARTED OFF FAR DIFFERENTLY THAN WAS THE CASE LAST YEAR. 1. You WILL REMEMBER THAT 1992 ENDED ON A COMPARATIVELY STRONG NOTE. 2. BUT THEN AS WE GOT INTO THE EARLY PART OF 1993, THERE WAS A VERY CONSIDERABLE FALL-OFF IN ECONOMIC ACTIVITY. ~ o't ;z2_, v½lt SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 14 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3. AT THAT TIME WE WERE STILL GOING THROUGH THE CORRECTIVE PROCESS OF RESTRUCTURING OUR FINANCIAL SYSTEM AND THAT CORRECTIVE PROCESS WAS INHIBITING ECONOMIC GROWTH. 8. WITHOUT SPENDING A LOT OF TIME GOING BACK OVER NOW VERY OLD GROUND, AS WE CAME OUT OF THE DECADE OF THE '80s, THAT PERIOD OF VERY LONG AND VERY STRONG GROWTH, 1. WE HAD BUILT SOME SIGNIFICANT FINANCIAL IMBALANCES INTO THE SYSTEM THAT WERE REALLY QUITE THREATENING. 2. THE NECESSARY CORRECTIVE PROCESS THEN ENSUED 3. AND THAT WAS THE PERIOD DURING WHICH CHAIRMAN GREENSPAN FREQUENTLY REFERRED TO THE STRONG HEADWINDS SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 15 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THAT WERE RESTRAINING THE INCREASE IN ECONOMIC ACTIVITY FROM THE KINDS OF GROWTH RATES THAT HAD BEEN SO TYPICAL OF OUR OTHER POST-WWII RECOVERIES AND EXPANSIONS. C. BUT A GREAT DEAL HAS BEEN ACCOMPLISHED DURING THE LAST FEW YEARS TO RESOLVE THESE IMBALANCES AND, TO CONTINUE THE ANALOGY, THE VELOCITY OF THE HEADWINDS HAS DIMINISHED CONSIDERABLY. 1. AND THAT'S ONE REASON WHY THIS YEAR HAS BEEN SO DIFFERENT FROM LAST YEAR. 2. CERTAINLY THERE ARE SOME - SIMILARITIES -- LAST YEAR ONCE AGAIN ENDED ON A VERY STRONG NOTE (THE SEVEN PERCENT GROWTH RATE EMPHASIZES THAT POINT). SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 16 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3. AND THOUGH THE FIRST QUARTER OF THIS YEAR CERTAINLY WILL NOT HAVE EXPERIENCED GROWTH IN THAT MAGNITUDE, A. NONETHELESS, IT WILL HAVE BEEN A GOOD QUARTER AND THIS STRENGTH IS CONTINUING INTO THE SECOND QUARTER. 4. THE CURRENT UNDERLYING LEVEL OF ECONOMIC ACTIVITY IS REALLY VERY STRONG AND THAT'S PARTICULARLY TRUE HERE IN THE MIDWEST. A. FOR EXAMPLE, THE AUTOMOTIVE SECTOR, SO IMPORTANT TO OUR P"~,-(l/~ ~ , IS A STANDOUT IN THIS REGARD AND BECAUSE OF THE IMPORTANCE OF THIS ONE SECTOR TO THE OVERALL ECONOMY, IT HAS SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 17 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CERTAINLY BEEN A MAJOR ELEMENT IN THE CURRENT LEVEL OF ECONOMIC STRENGTH. (I) WHILE THE INCREASE IN SECOND QUARTER DOMESTIC AUTO PRODUCTION SCHEDULES IS LOWER THAN THE FIRST QUARTER, IT STILL REPRESENTS A GOOD INCREASE OVER LAST YEAR. (II) IN SOME CASES THE SMALLER INCREASE RESULTS FROM CAPACITY SHORTAGES WITH SOME OF THE BETTER SELLING MODELS. (III) THIS CAPACITY ISSUE IN THE AUTO INDUSTRY IS CERTAINLY A NEW AND VERY DIFFERENT ELEMENT. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 18 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (IV) AFTER YEARS OF THE UNENDING SERIES OF ANNOUNCEMENTS OF LAYOFFS AND PLANT SHUT DOWNS, (v) Now THE INDUSTRY IS STRUGGLING TO ADD CAPACITY TO ADEQUATELY PROVIDE FOR A HIGHER LEVEL OF PRODUCTION (VI) AND LARGE CAPITAL PROGRAMS WILL BE AN IMPORTANT PART OF THE SOLUTION. B. THE HEAVY TRUCK INDUSTRY IS ALSO EXPERIENCING STRONG GROWTH WITH THE DISTINCT POSSIBILITY THAT THIS WILL BE A RECORD YEAR. C. AND, IN TURN, MOTOR CARRIERS ARE FACING A CAPACITY SHORTAGE -- SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 19 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (I) THERE JUST AREN'T ENOUGH QUALIFIED DRIVERS AVAILABLE. (II) TRUCK TRAILERS ARE IN SHORT SUPPLY AND I AM TOLD THAT DELIVERY TIMES HAVE LENGTHENED OUT TO APRIL 1995. D. GIVEN THE STRENGTHf- IN THESE TWO SECTORS, OTHER SEGMENTS OF THE MIDWEST'S MANUFACTURING ACTIVITY THAT SUPPLY THESE INDUSTRIES, NOT SURPRISINGLY, ARE REALLY DOING VERY WELL. fOR EXAMPLE, THE STEEL INDUSTRY IS OPERATING AT HIGH LEVELS, REALLY ALMOST FLAT OUT, WITH EXPECTATIONS THAT SHIPMENTS THIS YEAR COULD REACH 90 MILLION TONS. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 20 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (I) IRONICALLY, THE VOLUME OF STEEL THAT WILL BE IMPORTED WILL RISE QUITE SIGNIFICANTLY THIS YEAR BUT FOR A DIFFERENT REASON -- DOMESTIC STEEL COMPANIES WILL BE IMPORTING A HIGHER LEVEL OF SEMI-FINISHED PRODUCTS BECAUSE OF THEIR OWN CAPACITY LIMITATIONS. D. SHIFTING TO THE RETAIL SECTOR, SALES HAVE ALSO BEEN INCREASING AT A GOOD RATE. (I) DESPITE THE ADVERSE WEATHER THAT WE EXPERIENCED IN FEBRUARY, SOME RETAILERS ENJOYED SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 21 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SOLID DOUBLE DIGIT SALES GAINS ON A COMPARABLE STORE BASIS. (11) AND THE RETAIL SALES pJ;:.. +HJMPZRS FOR MARCH RELEASED YESTERDAY, WHILE MORE MODERATE THAN THE FEBRUARY NUMBERS, WOULD CERTAINLY INDICATE THAT THIS STRENGTH HAS BEEN SUSTAINED. 0. WITH MANY OF OUR BASIC INDUSTRIES DOING SO WELL AND IN SOME CASES DEALING WITH CAPACITY CONSTRAINTS, IT'S VERY LOGICAL TO SHIFT ONE'S THINKING TO THE INFLATIONARY CONSEQUENCES OF ALL OF THIS. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 22 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1. So FA') THE DATA WOULD NOT SUGGEST THAT PRICE PRESSURES ARE BEGINNING TO BUILD UP. A. AND THE IMPORTANT MARCH INFLATION MEASURERS THAT WERE RELEASED THIS WEEK DO NOT ~r,-c INDICATE AN\CHANGE IN THE MODERATE TRENDS THAT WE HAVE BEEN EXPERIENCING. 2. BUT THIS TYPE OF DATA, OF COURSE, REFLECTS THE SITUATION AFTER THE FACT AND IN TERMS OF MONETARY POLICY, OUR JOB IS TO ANTICIPATE PRICE PRESSURES BEFORE THEY GET IMBEDDED INTO THE NUMBERS. 3. AND I WILL SAY) THAT AS I TALK WITH PEOPLE IN THE DISTRICT, I DO HAVE A SENSE THAT AFTER A LONG PERIOD OF SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 23 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PRICE DECLINES WE ARE SEEING SIGNS OF AT LEAST PRICE STABILIZATION. 4. BUT IT IS IMPORTANT TO NOTE THAT LABOR COSTS CONTINUE UNDER GOOD CONTROL. A. UNION CONTRACTS THREE TO FOUR YEARS IN LENGTH ARE STILL BEING NEGOTIATED WITH WAGE INCREASES THAT ARE MANAGEABLE BY THE VERY LARGE GAINS IN PRODUCTIVITY THAT WE HAVE BEEN EXPERIENCING. B. IF YOU LOOK AT THE PRODUCTIVITY GAINS THAT THE MANUFACTURING SECTOR HAS AND CONTINUES TO ACHIEVE, THE NUMBERS ARE REALLY IMPRESSIVE AND REASSURING SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 24 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C. AND LABOR COSTS ARE AN IMPORTANT COMPONENT OF THE COST OF THE OVERALL MANUFACTURED PRODUCT. 5. OFFSETTING THE POTENTIAL CAPACITY PRESSURES THAT WE MAY BE SEEING IN THE DOMESTIC MANUFACTURING SECTOR, IT IS IMPORTANT TO REMEMBER THAT WITH THE ADVENT OF GLOBALIZED COMPETITION, DOMESTIC CAPACITY RESTRAINTS TAKE ON A DIFFERENT PERSPECTIVE -- DOMESTIC COMPANIES JUST DON'T HAVE THE PRICE LATITUDE THAT THEY USED TO. A. ADDITIONALLY, PRICE PRESSURES IN THE SERVICE SECTOR ARE CLEARLY MODERATING. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 25 B. FOR MANY YEARS PRICE INCREASES FOR SERVICES SUCH AS HEALTH CARE, ETC., WERE VIEWED AS BEING ABSOLUTELY INTRACTABLE. C. ~/~ CURRENT DATA SUGGESTS THAT lll£.¥= {llrf\~CA..Sa. ARE #8T AND THAT THIS IMPORTANT PART OF OUR ECONOMY IS EXPERIENCING THE SAME TYPE OF RESTRUCTURING THAT WAS THE CASE IN THE MANUFACTURING SECTOR IN THE MID-8O's AND THAT THE MARKET PROCESS IS PLACING A HEAVY RESTRAINT ON SERVICE SECTOR PRICE INCREASES. V. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . 1/J IN CONCLUSION, IT SEEMS TO ME THAT WE ARE~ pUt,J'Od..,t' ONE OF THOSE WHEN EVERYTHING IS GOING JUST ABOUT RIGHT. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 26 Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A. As I SUGGEST, THE ECONOMY IS STRONG AND SUSTAINABLY SO AT AN ANNUAL RATE THIS YEAR APPROACHING 3-1/2%. 1. AND WHILE WE MUST BE ALERT TO RENEWED PRICE PRESSURES, OUR OUTLOOK FOR INFLATION CONTINUES TO BE CONSTRUCTIVE WITH THE CONSUMER PRICE INDEX AT THE END OF THE YEAR A LITTLE OVER 3%. 2. IMPORTANTLY, THE FEDERAL OPEN MARKET COMMITTEE'S RECENT MONETARY POLICY MOVES SHOULD SERVE AS A REMINDER TO THE MARKETS OF OUR CONTINUING AND OVERRIDING COMMITMENT TO PREVENT THE REOCCURRENCE OF THE VIRULENT INFLATIONARY CONDITIONS THAT SO DOMINATED THE LATE 197Os AND THE EARLY YEARS IN THE 198Os. SILAS KEEHN KALAMAZOO COUNTY CHAMBER OF COMMERCE PERCOLATOR CLUB KALAMAZOO, MICHIGAN APRIL 14, 1994 - PAGE 27 8. GIVEN ALL OF THIS, IT DOES SEEM TO ME THAT WE MAY WELL HAVE ESTABLISHED THE CONDITIONS FOR A PERIOD OF GOOD, SUSTAINED ECONOMIC GROWTH FOR SOME PERIOD OF TIME AND AN IN ENVIRONMENT OF REASONABLE PRICE STABILITY AND THAT, I WOULD SUGGEST, IS ABOUT AS POSITIVE A PROJECTION AS ONE CAN MAKE 1. THANK YOU. Digitized for FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AND IS A NICE WAY TO FINISH OFF. 

Silas Keehn (1994, April 13). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19940414_silas_keehn

@misc{wtfs_regional_speeche_19940414_silas_keehn,
  author = {Silas Keehn},
  title = {Regional President Speech},
  year = {1994},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19940414_silas_keehn},
  note = {Retrieved via When the Fed Speaks corpus}
}