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REM\BKS OF MB RoBERI p K\YQ
PRESIIENI, t-EDERAL KESERVE HANK QF CHICAOO
TO 11-£ lAL~ A~EA lWBUSTBIAL liM'1ISSION
DECEMBER ~-' 19/9
I
I
IT IS A PLEASURE FOR rlf TO BE HERE TODAY IN WHAT I COBSIDER TO BE
THE INDUSTDAL HEARTI..AND OF 0-fICAGO AND 11-IE MIJMEST, THIS GROUP REPRESENTS SQYE OF 1HE r,,osT Ir-t'ORTANT INDUSTRIES AND FIRMS IN TI-IE COUNTRY,
l HAVE AND WILL LEARN
Ml.Oi FRQ'J!
YOU ABOUT OUR ECONG1Y--1't>RE n-tAN I'LL
EVER BE ABLE TO LEARN FRCl'1 11-fE STATISTICS,
WE COLLECT A LOT OF NLMBERS
IN 11-f IS COlM"RY Bl.Tr ll-lEY NEVER lELL 'THE \-'IHOL..E STORY AND FREQl£NTLY OON' T
TELL lHE RI GIT STORY.
IT IS lliROUGH MEETINGS Sl.Oi AS TH IS lliAT
MJST VALUABLE INR:>RMA.TION,
So BE
OF MY Tit'E M\KING FORMAL RErAARKS,
I GET MY
FOREWARNED, l'M f'OT OOING TO SPEND ALL
I I-OPE THAT WE
WILL HI\VE AMPLE TIME
FOR YOU TO aJ,tENT ON BUSINESS CONDITIONS AS YOU SEE 11-fEM AS WELL AS MY
RESPONDING TO YOUR QUESTIONS,
MJsr PEOPLE ¼Ol.LD AGREE
TODI\Y ARE
VERY
THAT lHE STATISTICS ON ECOr\OMIC CONDITIONS
PUZ7..LI NG IF OOT
OOflNR IGHT
CONFUSING, So~ OF TI-fE NLMBERS
SUGGEST THAT TI-IE ECOffl-1Y IS !EAKENING, PERHAPS VERY RAPIIl.Y, THE LEAJ)ING
INDICATORS SOOGEST ™AT AtrrIVITY IS DECLINING, Dl.RABLE crons ORDERS ARE
SOFTENING, AUTO SALES AT LEAST FOR JXM:STIC CARS ARE NOT OOING VERY WELL
AND f-OLGING IN 11-iE MIJJMEST, AS SOME OF MY REALTOR FRIENDS DESCRIBE IT,
HAS COUAPSED,
Bur ON 11£ OTHER IIIE WE ARE
STIU.. r.oVING
AHEAD,
TOLD THAT CAPITAL EXPENDITURES ARE
CCJIMERCIAL CONSTRLCTION IS
STRONG,
RETAIL SALES
PI CK8J UP IN f'hVEMBER AND 'THE ll'JErvPLOYMENT RATE DECLINED, AAE WE OR ARE
WE f'OT IN A RECESSION OR r,,rJVING INTO A RECESSION?
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-2-
AA 11-fE WALL STREET JouRNAL ARTICLE !ESTERDAY SUGGESTED,
THE Mt\JORilY
OF FORECASTERS HAVE ACCEPT8) TiiE VIEW THAT lHE EcorfflY IS IN A SLlW,
BUT
IF YOU RFAD THE Wf-OLE ARTICLE YOU HAVE TO CONCLUDE lHAT MJ\VBE ll-lE MAJORITY
ARE srnE AND r~YBE ll-fEY AREN'T.
Ecot01ISTS HAVE BEEN ACCl.5ED FOR MANY
YEARS OF BEi NG lWJ ARMED-ON ll-lE ONE HAND BUT ON lHE OTHER 1-WID,
NOA#
I
ITTfilER IF ECOOOMISTS S1-Dl.lD l'l>T BE ACCUSED OF BEING OCTOPUSES--THEY SEEM
TO HAVE SO M\NY HANDS,
THIS IS TOUTED
PERHAPS SO,
flf>
niE ~T WIDELY RJRECAST In'INTURN IN
IT WAS NITICIPATED IN EARLY
978,
U.S.
HISTORY,
THEN FORECASTS FOR MID-d978,
1978, A SOLID PROJECTION FOR EARLY 1979, CLEARLY
IN PLACE IN THE SlfflER OF 1979, WELL, Ml\YBE THE FALL OF 1979, A HIGH Pf{)BABILilY BY THE END OF lHIS VF.AR AND ro, M'\YBE IT \'ON 1 T REAU.Y s1-rn UP IN
A srnE BET IN THE FALL OF
11-E Nll'1BERS, l.NTIL TI-IE FIRST QUl\RTER OF
il.980, IF YOU MUST FORECAST, FORE-
CAST OFTENf
J OON 1T WANT TO BE TOO HARD ON EC0f0.11STS, FoRECASTING IS A DIFFICLLT ART EVEN IF SOM:: SHROUD 11-EIR ART
wrrn
Hll'll:REDS OF EQUL\TIONS AND
H)lRS OF mPUTER TIME--AND BESIDES, I'M AN ECOtmIST TOO,
HELP BUT FEEL TI-IAT MANY EOOf'mlSTS HAVE FALLEN INTO
TI-()
Bur I CAN'T
TRAPS,
ONE, THE
FEELING lliAT 1l-EY ARE ONLY l.SEFlL AND SLCCESSFUL ~EN 1l-lEY IDENTIFY A
RECESSION--S0'1ETirES DEFINED AS Thn QU'\RTERS OF DECLINE IN THE REAL our-
PITT OF (:(ODS AND SERVICES IN THE ECOra-1Y-REAL
GNP,
TOTAL OlJTPUf ADJUSTED
FOR PRICES, AND SECOND, MANY EOOf0.1ISTS HAVE f'OT ADJUSTED TO THE FACT TiiAT
HISTORY IS NOT REPEATING ITSELF WI"ll-lOUT ~-'ODIFICATION; TI-iAT IS, lHINGS ARE
DIFFERENT mMY BECAUSE WE ARE BEING AFFECTED BY
TION,
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Federal Reserve Bank of St. Louis
15 YEARS
OF RISING INFLA-
-3-
Now THE
FIRST POINT, THAT ECOtffilSTS ARE TRYING TOO HARD TO SPOT
Bt.rr
WHAT EVERYONE ELSE \.'OlLD AGREE IS A RECESSION MAY SEfM l.NIMPORTANT,
IT ISN'T, SorvE ECDrrnl STS HAVE BEEN LOOl<I NG SO HI\RD FOR TI£ TREES THAT
THEY HAVE FORGOTTEN lliE FOREST,
THEY
HAVE BEEN LOOKING SO HARD FOR
1W)
GNP THAT THEY HAVEN'T e,J>HASIZED
QUI\RTERS OF NEGATIVE FIGLRES IN REAL
ENOUGH WHAT Hf\S BEEN HARAENING THROLGIOlIT THIS YEAR, As A RESlJ..T THEY
H.l\VE GIVEN POLITICIANS AND BUSINESSMEN TI-IE IMPRESSION THAT ONLY SCJ£11-ilNG
IDENTIFIED AS A RECESSION IS IMPORTANT, OBVIOUSLY, THAT ISN'T TRUE,
I WOULD
SUC,PECT TI-fAT ~ONE OF YOU
CARE
FR0'1 THE
STANDPOINT OF YOUR BUSI-
NESS WHEniER OR NOT THE ECO~ IS IDEIITIFIED BY lHE OFFICIAL ARBITER
OF Sl.0-f MATTERS, 11~E NATIOML
A RECESSION,
You ARE
Bl.REAU
OF ECDf'nMIC RESEARCH, AS BEING IN
U'IDERSTANDABLY t,ORE INTERESTED IN TI-IE STRENGTI-1 OF
D8'-wID IN YOUR MI\RKETS, WHETHER LIKELY TO WEAKEN OR IMPROVE IN THE r-DJlHS
CERTAINLY, AN 0VERAU.. WEAKNESS IN THE ECONCNf WITH 00 Gfnffii IN
AHEAD,
REAL OlJfPlJf IS If-'PORTANT TO YOU BlJr ~I-IAT TAG SQ\1EONE PlffS ON IT IS NOT,
THE FACT IS-EMPHASIZED ONLY RN~ELY BECAUSE OF THE SEARCH FOR
SCJ,E-
TI-f I NG TO ~IHICH TI-IE NAME RECESSION CAN BE ATTAOiED--TI-iAT WE HAVE BEEN
LIVING IN A SLtr:JGISH ECOf'01Y TiiR0UG-IOLrr TI-HS YEAR,
PB\L ECDrmlC
OF ~JUST OVER ONE PERCENT AT AN ANNU\L RATE FOR THE FIRST NINE
GR<MrH
~
OF
11-tE YEAR IS HARDLY THE PICTLRE OF A STRONG ECOtav1Y, AN ECON0-1Y, WHERE
IN SPITE OF WEAKNESS, PRICES CONTINUE
SCM:lH I NG TO
ms~ AND ACCELERATE IS HARDLY
APPLAUD,
THESE ARE 11-IE DEVELOPMENTS
THAT
HAVE ENTERED INTO V0LR PLANNING AND
ACTIVITIES, AND TiiESE ARE TiiE DEVELOPMENTS TI-fAT CONCERN US AT THE FED,
r~r
w--fETI-fER OR f't>T WE SHJULJ) PlIT A NAME
HAD
ONE
OR lWO Ql.AATERS
TAG ON THEM, Nor WHElrlER WE'VE
OF NEGATIVE GRO,ffit, Bur RATI-IER
l-lCM
OOES ONE PRO-
CEED TO CORRECT w-iAT APPEARS TO BE A LONGER TEF?1 PROBLEM FOR Ol.R SOCIElY,
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Federal Reserve Bank of St. Louis
- 4lJNFORT~TELY, FOCUSING ON TI-IE TAG OF RECESSION CAN LEAD US ASTRAY,
SlOi A TAG OOES TEND TO BE IMPORTANT IN THE HALLS OF CoNGRESS AND IN 11-IE
h'HITE tnUSE,
/\Nn
REACT I
Wt-EN A SL~I IS tW1ED AS A RECESSION POLHritlANS TEND TO
TO REACT IN TRADITIONAL TERMS OF STI MlLATI NG TifE EC0tVMY I
THEY OPT FOR FASTER GRCWTI-i MEANING A HIGHER RATE OF INFLATION,
1-v\RDLY
Sot£ni I NG NEEDED,
I CAN'T
KEEP EC0~ISTS FROM US I NG THE TERM RECESS 1~,
\1-tAT B01HERS
ME IS lliAT lHE NJ1ME RECESSION BECOfvES A CONCEPT, AN IDEA, 11-IAT INFLlENCES
TI-IINKING BY POLITICIANS MID ECOtO"1ISTS ALI KE ABOt.rr WHAT ll-lE PATTERN OF
ACTIVITY WILL BE OVER TI-IE PERIOD AHEAD, THE ~ATTI:RN THAT GET LOCKED IN
IS lliAT IF WE ARE fvOVING INTO A RECESSION, ACTIVITY ~"ILL DECLINE, UN8'1-
PLOYMENT RISE, PRICE PRESSUP.ES r,r.JDERATE AND THEN TI-IE ADJUSTrlfNT
TI1E WAY, ACTIVITY WILL INCREASE, AND cMPLOYMENT RISE,
our OF
IN OTHER \«JRDS,
AN INTERRUPTION TO 0l.R ECOf'rnV--SOMETHING TEMPORA.RY,
I THINK
"IW\T lHIS IS THE WRONG WAY TO LOOK AT IT,
WE NEED TO TAKE
A LONGER LOOK AT WHAT IS GOING ON IN OUR ECO~. WE WIU. 00 ASTRAY
ESPECIALLY IN PBBLIC Ecor·l.lMIC POLICY IF WE SIMPLY CONTINUE TO LOOK FOR
11-iE iEMPORARY DlSRLATION OF A RECESSION AND USE THAT AS A BASIS FOR OUR
ACTIONS,
11-iAT
WE ARE
J THINK
LIVING IN A DIFFERENT \'llRLD,
Arm
ECOt01I STS HAVE FALL.EN INTO,
httY ALL
nfAT IS TiiE SECOND TRAP
OF THESE ERRONEOl.S
PROJECTIONS OF A RECESSION? BECAUSE lHE OLD RELATIONSHIPS Ar'-'ONG EC0t01IC
VARIABLES OON'T HOLD IN 11-fE SAME WAY, AND TI-IE~ REASON FOR THIS IS
THAT OUR EC0r-OMIC LIFE HAS BEC°'1E INCREASINGLY DISTORTED BY TI·fE RAVAGES
OF A i15 YEAR INA.ATION,
Ecot-rnISTS HAVE HAD DIFFICll.TY IN IDENTIFYING A RECESSION BECALSE
THE 6 ~ 1lil\T WAS OCCURRING AROUND THEM DID OOT HAVE TI-IE USUAL SIGN-
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 5POSTS, THERE HAVEN'T BEEN LARGE INm:NTORY FLLCTUiffJONS INIU:ED BY
SPECULATION,
THERE HADN'T BEEN A FIXED INVESiMENT BCOM WHICH WOLLD LEAD
J-bus ING,
TO A lnlNTlRN,
ltITI L RECENTLY AND EVEN THEN ONLY IN SCATTERED
LOCALITIES, WAS HJLDING tP WELL--AFTER ALL
ISN'T EAD,
1.8
MILLION HOUSING STARTS
THE UNEMPLOYMENT P.ATE WASN'T RISING: IN FACT, EMPLOYMENT
CONTINUED TO GROW,
So
YOU COULDN'T BE IN OR HEADING INTO A RECESSION,
n-tlNG WAS VF.RY WRONG,
ECOt01Y,
Bur YET SQ\1E-
INFLATION, Ir HASB:EN THE ~R PROBLEM FOR 11-iE
IT HAS BEEN THE CAUSE OF WEAKNESS--DJSGUISED TO rWN BECAUSE,
IN OOLI.AR TEf?t'lS, 11-tINGS WERE OOING WELL.
RECORDS IN OOLI.AR TERM~ •
Bur f'l>T
Au-nsT
1N REAL TERMS •
EVERYONE MA.KING NEW
UJNSU-1:R SPENDING
AFfER AD.JUSlM:NT RlR PRICE INCREASES 114S BEEN MJVING OOWN ALL YEAR, REAL
Pl.Ra-tASING POWER
HAS BEEN Il:CLINING, NOT FROM A SLIPPAGE OF 8~PLOYMENT
OR A DECLINE IN r£JMINAL INCOME, BlIT FR(lv1 INFLATION,
ONE CAN
ONLY GlESS ~A--IAT 11-tE Ir-PACT OF INFLATION HAS BEEN ON OUR
ECOr-DMIC BEHAVIOR, THERE IS NO WAY OF MEASlP.ING
11--IE
DISTORTIONS
m OLR
IECISIONS, OUR EFFORTS TO PROTECT OURSELVBS, OR THE TRUE VALUE OF THE
ASSETS WE I-IAVE TRIED SO HARD AS BLSINESSMEN AND INDIVIDl.14.LS 1t> OBTAIN,
Bt.rr, rn
SPITE OF TI-IE ca'1PLEXITIES OF 11-IE INFLATION PHEtOM:OON,
I
HAVE 00 OOUBT 1HAT IT IS TiiE PRIMARY R>RCE LEADING TO TI-iE PERCEIVED WEAKNESS IN OUR ECOtf1''1V,
AND IT IS TI1E COURSE OF INFLATION lHAT WILL BE 11-IE
MAJOR IETERMINANT OF OUR ECOtflvlIC HEALTI-1 IN lrlE t,Otm-lS AND YEARS AHEAD,
r'™ WHERE OOES ALl_ OF 1H IS LE'AIJ us?
THE ECON0-1Y HAS BEEN WEAKEN I NG
AU. YEAR AS A RESt:LT PRIMARILY OF INFLATION,
MJRE PRONOL.l'JCED AS WE ffiVE INTO
FIRST HALF OF NEXT YEAR,
O)lU)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
THAT WEAKNESS Will.. BECCJ--1E
1900 AND "1AY WELL CONTINLE
THROUGt 11-iE
LEAVING ASIIE DEVELOPMENTS IN TI-fE MIDEAST, w-iI0-1
CHANGE 11-iE WttJLE PICTIJRE--t-1)ST LIKELY R)R 11-iE hORSE, llHS
- 6PATTERN IS PRETTY MOCH IN PLACE,
\!iERE WE 00 FROM THERE IS SIGNIFICAITTLY
1
RELATED TO \+IAT KIND OF PUBLIC ECOf'O~IC POLICY WE TURN TO,
lF WE
REACT TO A "RECESS ION," AS
I MENTIONED
EARLi ER, AND ATT81PT
m STIMULATE ne.wm TI-IROlliH
PUBLIC POLICY, WE Will. GET SOME OlITPt.rr GAINS
Bur, 1N MY v1 EW, ooT MLCH,
THE OLD TRADEOFF Is 001 LIKELY To BE n1ERE.
WE WILL GET ffiRE INFLATION BOTii ACTIJl\LLY AND ANTICIPATED,
So
fvV\YBE A
RESPITE IN THE FALL OF 19[-I) AND TI-IEN OFF AND R~NING TO A r1>RE SERIOUS
Slm\TION IN
19~1 AND
BEVOtID,
WE HAVE TO MJVE TO ~URE LONGER TERM, TO M:lRE FORWARD LOOKING
ECONO~IC POLICIES,
THE BASIC ENVIRONMENT Ht\S CHf\NGED,
WE ARE ~ LIVING
IM A SOCIETY IN wHI0-1 RESOLRCE CONSTRAINTS ARE VERY REAL, OUR GRO'tm-1,
Ol.R EXPANSION IS SUPPLY (l)NSTRAIN8J, OIL IS ll-fE MJST OBVIOUS, THE INCREASES IN PRICE THAT HAVE OCCLRRED HAVE a-fANGED TI-IE CAPITAL VALUE OF
OUR EXISTING PRODLCTION PROCESSES, WE ARE ALL POORER--IT COSTS US "°RE
IN REAL RESOURCES
PRODLCTIVITV,
m r£T THE
SAM: OUTPlIT.
J\Nn WE ARE CONSTRAINED BY OUR
THE PERFORrW·JCE HAS BEEN MISERABLE IN THIS AREA,
WE HAVE A SECULAR ~T /1. CYCLICAL PROBLEM,
INFLATION, OIL AND PRO-
DICTIVIlY ARE ALL LEADING TO SLCMER GR<JtlTH IN OUR ECOl'[)M'(,
THIS IS WHAT
WE MUST TACKL.E-OOT AS A RECESSION PEEN0'-1ENONBJT AS A LONG TERM ISSLE,
THESE ARE BUDGETARY AND TAX DECISIONS TO BE Ml\DE IN WASHINGTON.
Bur WHAT
ABOt.rr r.-ONETARY POLICY? HERE
I AM
TALKING ABOUT Ol.R NEEDS
FOR OlHER TYPES OF Ecorf.Jv1IC POLICIES Wllmlff SAVING A W)RD AOOLIT 11-iE ONLY
REAL POLICY ACTION IN TOWN-TI-iE ECOfffllC POLICY AREA PRAISED OR C0~8)
BY Al.M)ST EVERYONE,
r•bNETARY POLICY HAS AN ESSENTIAL ROLE TO PLAY IN CORRECTING w-il\T
l
IBAVE IJDENIJIFIED AS lrfE M/\JOR INITIATOR OF TiiE WEAKENING ECOl'[)M'(--INFLATION.
THE ACTIONS TAKEN ON 0croBER 6 AND SO WIIELY PLBLICIZED AND DISCUSSED ARE
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
-7NEITI-ER MYSTERIOI.J:, toR OB.~CURE,
THE FEDERAL RESERVE SYSTEM IS ACTING TO
BRING IXMN TI-IE RATE OF f\'ONETARY GROITH WHIOi, IN lliE LONG TERM,
MlU)R ELEMENT IN OUR INA.ATION,
SLPPLYING FEWER
OF
REnt.eING THE RATE
fvDNETARY GROffii BY
TO THE BANKING SYSTEM HAS MEANT AN
RESERVES
INTEREST RATES SINCE THE IEM,c\ND FOR MOO
HAS
THE
IS
IN
INCREASE
EXCEEDED 11-iE RATE AT WHICH
11-iEV ARE SUPPLIED,
WE HAVE ALREADY SEEN SCM:
IN lliE RATE OF t1>NETARY
r-'OIERATION
GROffi-1
At,ID IN THE FACE OF A WEAKENING ECOtn'1Y, INTEREST RATES HAVE ALREADY
W~ I LE
BACKED OFF FROM 11-IEI R PREVIOUS HIGHS,
lHE IRRNIAN
INTEREST
CR I SES tAAY CAUSE
RATES
TEMPORARY FACTORS SLCH AS
TO JI..MP
UP AGAIN, 11-E LONGER
TERM TREND WITH THE MJNETARY AGGREG\TES GROWING AT A SUMER PACE AND
ECOf0',1IC ACTIVITY LESS VIOOROUS, SHOULD BE~. BECAUSE INFLATION OOES
AFFECT
INTEREST RATES, ll-lE EXTENT OF TI-fE DECLINE WILL
BE
CONSTPAIN8)
BY
THE PROGRESS ntAT IS MADE ON INFLATION,
rnNETARY POLICY HAS BEEN
ERRONEOIBLY
ECO~HC OOWNTURN,
rhJESENSE! As
LONG BEFORE OCTOBER
6,
THAT
REAL Ecort)MIC ACTIVITY,
I
ACCUSED
OF PRECIPITATING TI-IE
INDICATED, TI-IE SLOWING WAS UNIERWAY
OUR "'ORE RESTRICTIVE ACTIONS WILL IMPACT ON
I OON'T DENY BUT IBEY ARE NOT OF SUFFICIENT MAGNI-
TUDE TO PRECIPITATE A SEVERE IXMNTI.RN OOR W:>1.l.D TI-IEY REW\IN
IN TiiE FACE OF A SIGNIFICANT At-ID SHARP
r1>NETARY
POLICY
REVERSAL
OF OUR
CANNJT, BY ITSELF, BE 11-iE TOTAL
AS RESTRICTIVE
ECON<Jt11C FORTIJl'liS,
SOUJrION
PROBLE~-IN A REALISTIC SENSE OOT EVEN THAT OF INFLATION, Ir
THE
SLPPORT
OF OUR 011-iER TOOLS OF PUBLIC
POLICY,
TO OUR
REQUIRES
J3ur WHAT WE HAVE PUT
IN
Pl.ACE IS A SET OF POLICIES IN 11-IE rvoNETARY SPrERE 11-iAT ARE CONSISTENT WITH
A SOLUTION TO
AT LEAST
TIE
CAN BE BROLG-IT INTO LINE,
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Federal Reserve Bank of St. Louis
INR.ATIONARY
My
CONCERN
IS
PROBLEM IF 0~ OTHER PUBLIC POLICIES
TI-IAT
lHE LIMITED PROGRESS WE HAVE
-8MA.DE IN MJNETARV POLICY AND TiiE ATTENMNT, ALBEIT lNil:SIRABLE, \\'EAKENING
IN ll-lE ECOf'Of{, WILL l.£AD THOSE IN PLBLIC LIFE TO TI-IE DECISION THAT WE
HAVE OONE AU. WE CAN IN SOLVING OUR EC000\1IC PROBLEMS,
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Federal Reserve Bank of St. Louis
I 1-DPE
OOT,
@FedFRASER