speeches · October 16, 2008
Regional President Speech
Charles L. Evans · President
O ce of the President Money Museum
Last Updated: 12 01 09
Unprecedented Times in our Economy
Fond du Lac Area Association of Commerce
Fond du Lac, WI
Introduction
Good afternoon and thank you for inviting me to speak today It's always a pleasure to have the opportunity to visit Wisconsin,
and I am delighted to be here Let me start by thanking the Fond du Lac Chamber of Commerce and Mike Burch, of National
Exchange Bank and Trust, who helped arrange my visit
Today I'd like to share some thoughts on the extraordinary events that have occurred in the nancial markets over the past
several weeks I will also discuss the national and regional economies Before we begin, though, let me note that the views I
express today are my own and are not necessarily shared by my colleagues on the Federal Open Market Committee
Turbulent Times
Over the past year, we have witnessed the deteriorating performance of mortgages and mortgage-backed securities spill over to
other segments of our nancial markets Market participants have reassessed the risk pro les of other similarly structured
assets, and prices of these securities have declined as well This cascading process of re-pricing has had a detrimental impact on
liquidity and capital positions in a wide range of nancial institutions and markets in the United States and around the world
And over the past few weeks we have witnessed large-scale disruptions to our nancial services industry Policymakers,
nancial institutions, and non nancial borrowers and lenders are struggling with how best to respond to the stressed markets
and support economic growth We are, undoubtedly, in the midst of extraordinarily turbulent times
The disruptions to nancial markets have made credit more costly and more di cult to obtain for many households and
businesses Banks are reluctant to lend to one another because of concerns over counterparty risk and the desire to preserve
liquidity This has resulted in large increases in the London interbank o ered rate, or LIBOR—the common benchmark for the
interest rate charged on short-term interbank lending Many banks set their interest charges on loans to households and
businesses as a markup over their cost of funds, as measured by LIBOR Increases in LIBOR, no doubt, have translated into
higher bank borrowing rates for those of you operating a business today Before this nancial turmoil began, the 30-day
LIBOR rate was typically hovering about 10 basis points above the level of the fed funds rate that would be expected to prevail
1
over the term of the loan Since the summer of 2007 the spread has risen substantially—and in recent weeks it jumped as
high as 300 basis points
In the commercial paper CP markets, di culties over some nancial services rms' ability to roll over their CP have also
strained the markets for other types of CP This, of course, is a ecting both the availability and cost of funding through the CP
market to some non nancial rms
As a result of the restrictive lending procedures of banks, and the strains in other credit markets, consumers and businesses
have experienced reduced and more costly access to credit This, in turn, has weighed on overall spending In addition, the
protracted weakness in the housing markets, along with elevated prices for energy and other commodities, continues to be a
drag on the economy; these economic conditions have also reduced the spending capacity of households and businesses
And so, as a consequence of these factors, job creation, consumer spending, and industrial production, have all weakened
Payroll employment declined again in September, bringing the cumulative year-to-date job losses to 760,000 There also has
been a sharp rise in the unemployment rate this year—in September it was 6 1 percent, a full percentage point above the level
many view as being consistent with "full employment "
Weak labor markets and high consumer prices have held back growth in real incomes, contributing to marked weakness in
consumer spending The average level of real personal consumption expenditures for goods and services in July and August was
down more than 2 percent at an annual rate from the second quarter And the latest data on retail sales point to another
decline in spending on goods in September
Conditions in labor markets and high consumer prices also have impacted some manufacturing industries Industrial
production has fallen nearly 2 percent since last December The most recent information indicates a 3 percent drop in
production for the month of September as compared to August And after changing very little for about a year, the Institute for
Supply Management manufacturing purchasing managers' index was down sharply last month One bright spot for the U S
economy has been exports In August, real exports were up 10 percent from the previous year However, the turmoil in global
nancial markets is reducing the growth of many of our trading partners So, looking ahead, it may be di cult to maintain the
recent pace of export growth
We also are concerned about the increased rate of in ation In ation has risen partly because of earlier spikes in commodity
prices—particularly energy prices Another reason has been soaring food prices Even excluding food and energy, so-called core
in ation for personal consumption expenditures was up to 2 6 percent year-over-year in August In my opinion, this rate has
been high Looking ahead, commodity prices have fallen from their peaks Also, the dollar has regained ground from its
previous lows, which should moderate import prices Furthermore, the increased slack in the economy will likely reduce more
general cost and in ationary pressures This channel de nitely seems stronger today Although some risks to the in ation
outlook remain, a forward-looking assessment would put less weight on in ation concerns than earlier this summer
With that in mind, the outlook for real economic activity likely will result in production, spending, and labor markets being
very sluggish in the second half of this year and well into 2009 I expect that such activity will then pick up as the housing and
nancial markets gain headway in working through their problems Such progress would be signaled by stabilization in
construction and improvement in credit ows
There is, of course, a level of cloudiness in any economic forecast In the current situation, the substantial stress in the nancial
markets has led to an unusually high degree of uncertainty This is because it is extremely di cult to assess how the turmoil
will in uence markets and how policy responses to address the economic unrest will play out over time
Last week, after considering all of the issues, the Federal Open Market Committee decided to lower the federal funds rate—the
primary instrument of monetary policy—50 basis points to 1-1 2 percent This brings the cumulative decline in the funds rate
since last September 2007 to 375 basis points We at the Federal Reserve continuously reevaluate the stance of monetary
policy in light of current and forecasted conditions, as well as our assessments of the risks to our long-term objectives of
maximum sustainable growth and price stability Currently, these risk assessments must factor in the substantial uncertainties
in the outlooks for growth and in ation that I just described These uncertainties certainly pose di cult challenges for
policymakers
In addition to lowering the fed funds rate, we have also implemented a number of policies aimed at supporting the ow of
liquidity through the nancial system Our most recent moves have been to institute lending facilities to support money market
mutual funds and the commercial paper market Collectively, these actions are designed to increase market liquidity by
lengthening lending terms, reducing the cost of borrowing relative to the fed funds rate, expanding the range of eligible
counterparties, and enlarging the pool of eligible collateral These actions also have targeted liquidity to those systemically
important markets that are experiencing large-scale disruptions in their operations
Of course, other important policy decisions also are being made Two weeks ago Congress enacted, and the President signed,
the Emergency Economic Stabilization Act And earlier this week the Treasury announced details of a plan that would inject
signi cant capital into the banking system These actions are unprecedented in scope to address the di culties we face as a
nation I believe they will help unlock lending capacity and will move us toward nancial stability I will be happy to address
questions on this topic after my remarks, but let me now turn away from "breaking news" and spend a little time on the health
of the regional economy and its importance to the national economy
Regional Economy
Turning to our region's economic performance, the agriculture and manufacturing sectors are of great importance to us in the
Seventh Federal Reserve District Our District includes Iowa and the larger parts of Illinois, Indiana, Michigan, and Wisconsin
This region makes up 13 percent of both the U S population and our gross domestic product It produces nearly 30 percent of
America's vehicles; more than a third of America's steel; more than half of its farm machinery; and almost half of our corn,
soybeans, and pork So, of course, we at the Federal Reserve Bank of Chicago closely monitor the agriculture and
manufacturing sectors
Wisconsin is one of the most diverse agricultural production states in the nation, and it's one of the top ten agriculture states
More than half of the land in our ve-state region is either cropland or pasture The agriculture industry in Wisconsin
2
produces nearly $52 billion annually and employs more than 12 percent of the state's labor force
Given Wisconsin's strong agricultural tradition, it is not surprising that we at the Chicago Fed are interested in measures of
innovation in agriculture that promote increased productivity and an economic boost to the region Of particular interest are
areas that transform agriculture through modern science and signi cantly improve production operations and overall e ciency
One reason that agriculture has been so successful has been the tremendous growth in productivity in the sector Research and
development activities related to agriculture have led to tremendous output growth Over the past forty years, corn yields in
the District have more than doubled, and milk production per cow has increased almost 150 percent Continued investment in
technological innovations and in research and development will, no doubt, result in further production e ciencies, better
products, and higher return on investments for agriculture in the Midwest
Manufacturing continues to be the bellwether industry for Wisconsin and for much of the Midwest As measured by personal
income, the Midwest economy derives 60 percent more of its annual gross product directly from manufacturing companies as
compared with the remainder of the U S
Of course, manufacturing performance varies sharply from sector to sector Currently, you will not be surprised to hear that
production of transportation equipment—which in the Midwest largely means the automotive industry—shows steep declines
In contrast, our machinery sector—which builds a host of capital goods—is holding up much better By historical standards this
deviation is somewhat unusual It largely re ects strong economic growth by our international trading partners that are
demanding items we make, such as tractors, construction equipment, medical devices, generators, and mining equipment
Di erences in the concentration in speci c industrial sectors have in uenced the economic performance among the states in
the District Since 2000, the automotive-intensive states of Indiana and Michigan have experienced deteriorating labor markets
relative to the national average In contrast, several metropolitan areas in Illinois, Wisconsin, and Iowa with machinery-
intensive manufacturing operations have held up better than in the past We have a "tale of two industries" within the District,
with signi cant stress in many of our automotive-dominated metropolitan areas, but also continued prosperity in many of our
machinery-concentrated areas
Much like the broader region itself, parts of Wisconsin's economy continue to be tied to the automotive industry The Janesville
area has been adversely a ected by high gasoline prices and slowing auto sales This will, undoubtedly, have a downward e ect
on other Wisconsin companies that supply parts and machinery to the automotive industry However, in comparison to the
manufacturing sectors in Michigan, Indiana, and Ohio, Wisconsin's is more concentrated in capital equipment rather than in
motor vehicles Wisconsin is an important producer of machine tools construction and farm machinery, food processing
equipment, electronic control systems, and diagnostic medical systems
Sales growth in these sectors has been holding up well in recent years, as U S manufacturers have expanded markets to both
customers across the nation and, increasingly, customers around the world Over the two-year period ending in 2007,
Wisconsin's export goods expanded by over 28 percent, reaching over $19 billion annually as of 2007 Nonelectrical
machinery topped the list of export product categories for the state, with over $6 billion 2007 , followed by electrical
machinery and scienti c medical instruments Nonelectrical machinery grew at a pace of 10 percent annually from 2005
through 2007; the second highest category of exports, electrical machinery, grew by over 20 percent annually
Wisconsin's capital goods orientation largely re ects a national restructuring that has seen a steady shift in the specialization of
U S manufacturers producing goods and services; it also re ects a continued export growth Today, The U S produces more
than 20 percent of the world's manufactured goods—the largest output in the world—with less than 5 percent of the global
population In 2007, manufactured exports made up 6 6 percent of the nation's output—and an estimated 8 percent of the
output of the Seventh Federal Reserve District
Wisconsin's long-standing investment in academic excellence is also beginning to spawn new industries The University of
Wisconsin at Madison ranks in the top 20 in receipt of National Institutes of Health funding for health and life sciences
research, and the University produces prodigious numbers of graduates in related elds As a result of this activity, along with
close attention to tech transfer and economic development, over 250 biotech, health, agriculture, and life sciences rms are up
and running in the footprint of the University around Madison By their nature, biotech goods and services serve wide national
and global markets While the dollar export levels do not yet approach Wisconsin's mature machinery industries,
pharmaceutical products now rank 30th among state export categories, after rising over 3 5 times since 1996
Conclusion
Currently, the economy faces serious challenges The housing market is a continuing strain, and we are experiencing
disruptions in worldwide credit markets that are without precedent in the post-World War II era Such challenges call for
innovative and vigorous scal and monetary policy responses In response, the Fed and other central banks have implemented a
number of nonstandard facilities for injecting liquidity into strained markets, and they have made a coordinated reduction in
their monetary policy interest rate targets Fiscal authorities also have responded to economic challenges In the U S , we
enacted the Emergency Economic Stabilization Act and instituted programs to insure some debt of nancial institutions These
actions complement e orts by other nations to recapitalize their banking systems and facilitate interbank lending
I believe these e orts will be of great help in unlocking lending capacity, enhancing the ow of credit to consumers and
businesses, and moving us toward nancial stability But bringing credit markets back into full functionality won't happen
overnight And when normality is ultimately restored, the "new normal" will likely operate through di erent channels and
under di erent constraints than before the nancial turmoil Yet, the "new normal" will represent a substantial improvement
from where we are today
As credit ows do begin to improve, the risks to growth will diminish, and we will be able to concentrate again on our
traditional policy tools, using them in ways that help the economy achieve maximum sustainable growth and price stability
Notes
1
The expected fed funds rate can be measured by the overnight index swap OIS rate
2
Wisconsin Farm Bureau Federation, 2008, web site, available online
Note: Opinions expressed in this article are those of Charles L Evans and do not necessarily re ect the views of the
Federal Reserve Bank of Chicago or the Federal Reserve System
Cite this document
APA
Charles L. Evans (2008, October 16). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_20081017_charles_l_evans
BibTeX
@misc{wtfs_regional_speeche_20081017_charles_l_evans,
author = {Charles L. Evans},
title = {Regional President Speech},
year = {2008},
month = {Oct},
howpublished = {Speeches, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/regional_speeche_20081017_charles_l_evans},
note = {Retrieved via When the Fed Speaks corpus}
}