The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
REfv11\RKS OF ROBERT P. ML\YO PRESIDENT, FEDERAL RESERVE BANK OF CHICAGO BEFORE DES fibINES, IowA ROTARY CLUB JUNE 17, 1976 I AM VERY PLEASED TO MEET TODAY WITH THE DES fvbINES ROTARY CLUB, IT GIVES ME AN OPPORTUNITY TO APPLAUD THE CONTRIBUTION WHICH YOU AND THE fvORE THAN 16,000 OTHER ROTARY CLUBS HAVE MADE ALL OVER THE FREE hDRLD, I HAVE ALWAYS BEEN IMPRESSED AS SO ML\NY, MANY OTHERS HAVE, THL\T YOUR GUIDING PRINCIPLE OF "SERVICE AsovE SELF 11 HAS, AND CONTINUES TO BE, A VERY REAL COfivlITMENT, PRAISE FOR COMPASSIONATE SERVICE TO SOCIETY IS ALL TOO FREQUENTLY TAKEN AS ML\WKISH SENTIMENTALITY, BUT I AM NOT CON- CERNED THAT SOME MAY INTERPRET MY REMl\RKS IN THAT WAY. l FEEL STRONGLY THAT IT IS THE INDIVIDUAL AND THE VOLUNTARY ENTHUSIASM OF PRIVATE GROUPS THAT MUST BE THE CENTER OF EFFORTS TO Ml\INTAIN AND EXTEND THE BENEFITS DERIVED FROM OUR UNIQUELY FREE AND PRODUCTIVE SOCIETY, MY VIEWS ON THE IMPORTANCE OF THE PRIVATE SECTOR ARE IN NO WAY INCONSISTENT WITH THE FACT THAT l COME FROM WHAT SOME CALL A QUASI-GOVERNMENTAL ORGANIZATION, IN FACT, THERE IS AT LEAST ONE Ml\JOR SIMILARITY BETWEEN YOUR ORGANIZATION AND MINE, WE ARE BOTH KEENLY INTERESTED IN SERVING THE PUBLIC INTEREST. BEFORE PLUNGING INTO THE TOPIC TOM CooPER SUGGESTED TO ME SOME rvoNTHS AGO--RECENT ECONOMIC DEVELOPMENTS--LET ME SAY A FEW WORDS ABOUT THE FEDERAL RESERVE SYSTEM AND ITS ROLE IN OUR ECONOMIC WELL-BEING. THIS SEEMS TO BE A PARTICULARLY GOOD TIME TO DO SO SINCE THE FED HAS BEEN GETTING A GREAT DEAL OF PRESS, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Nor ONLY HAS THE CONGRESSIONAL SPOTLIGHT 2 BEEN TURNED ON THE STRUCTURE OF THE FED, BUT THERE HAVE BEEN NUMEROUS QUESTIONS ABOUT OUR BANK SUPERVISORY AND REGULATORY FUNCTIONS, OUR PAYMENTS MECHANISM ACTIVITIES, AND THE APPROPRIATENESS OF OUR fvlONETARY POLICY ACTIONS, I WON'T ATTEMPT TO COVER ALL OF THE ISSUES THAT HAVE BEEN RAISED, BUT J DO WANT TO EMPHASIZE 1WO FUNDAMENTAL ASPECTS OF THE FED THAT ARE FREQUENTLY OVERLOOKED BECAUSE THEY SEEM SO OBVIOUS, YET, THEY ARE AT THE VERY ROOTS OF THIS SUCCESSFULLY FUNCTIONING CENTRAL BANK, THE FIRST I'VE ALREADY MENTIONED--THE FED EXISTS TO SERVE A PUBLIC INTEREST, THIS fVV\Y SEEM OBVIOUS SINCE THE SYSTEM WAS CREATED-BY THE CoNGRESS AND CAN BE fvDDIFIED AT ANY TIME THAT THE CoNGRESS WISHES, BUT, INTERESTINGLY, THAT HAS NOT BEEN THE WAY IN WHICH THE FED HAS BEEN VIEWED BY MANY IN OUR SOCIETY, BECAUSE OF ITS EXTENSIVE INTERACTION WITH ONE INDUSTRY--COt'1MERCIAL BANKING--THERE HAS BEEN A WIDESPREAD MISCONCEPTION BY THE PUBLIC, BUSINESSMEN, SOME MEMBERS OF CONGRESS AND EVEN SOME BANKERS THAT THE FED SERVES A PARTICULAR INDUSTRY INTEREST--AND IS THE HANDfv1AIDEN, OR EVEN A LOBBYING ORGANIZATION, OF THE BANKS--RATHER THAN SERVING THE PUBLIC INTEREST, WE HAVE BEEN VIEWED BY SOME AS A SPECIAL KIND OF CORRESPONDENT BANK, A TRADE ASSOCIATION, AND EVEN A FINANCIAL CABAL FOR THE PERSONAL AGGRANDIZEMENT OF A SECRET AND PERHAPS SINISTER FEW, IT IS HARD TO SEE HOW THESE VIEWS COULD HAVE BEEN GENERATED. THERE IS NO EVIDENCE TO SUPPORT THEM, IN FACT, THE CoNGRESS ITSELF HAS CON- TINUED OYER THE YEARS TO ASSIGN NEW RESPONSIBILITIES--NEW .e.u.BL.l.C. RESPONSIBILITIES--TO THE FED, AND SYSTEM OPERATIONS THEMSELVES OYER THE YEARS ATTEST TO ITS PUBLIC CHARACTER. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 As OUR SOCIETY HAS BECOME MORE CONCERNED WITH THE RESPONSIVENESS OF INSTITUTIONS TO PUBLIC NEEDS AND VALUES, THE FAILURE TO REMEMBER THAT 11-IE OBJECTIVE IS PUBLIC SERVICE HAS LED TO A GREAT DEAL OF CONFUSION AS TO WHAT THE FED IS AND HOW IT SHOULD BE EVALUATED, MucH OF THE CRITICISM, BE IT IN THE PAYMENTS MECHI\NISM AREA OR IN BANK SUPERVISION SPHERE, ARISES BECAUSE INDIVIDUALS ARE ATTEMPTING TO EVALUATE THE SYSTEM AS THJUGH IT WERE SERVING A PRIVATE INTEREST, THE SECOND FUNDAMENTAL ASPECT OF THE FED IS ITS UNIQUELY ftMERICAN FORM WHICH INSURES DISPERSION OF POWER AND REGIONAL REPRESENTATION, THE CoNGRESS, IN ITS CONCERN WITH THE CONCENTRATION OF FINANCIAL POWER AND WITH NARROW OR TRANSITORY POLICITAL PRESSURES NOT NECESSARILY REFLECTIVE OF THE NATION'S ECONOMIC PRIORITIES, SET UP A REGIONAL FEDERAL RESERVE ORGANIZATION WITH ITS ROOTS IN THE VARIOUS AREAS OF THE COUNTRY AND A fuARD OF GoVERNORS IN WASHINGTON INSULATED FROfvl NARROW POLITICAL PRESSURES BY APPOINTMENT FOR LONG TERMS--14 YEARS, THIS STRUCTURE HI\S SERVED THE COUNTRY WELL, BY BEING HERE IN THE MIDWEST, WE OBVIOUSLY HAVE A BETTER OPPORTUNITY TO SEE THE NEEDS AND TO SEE THE EFFECTS OF OUR ACTIONS, ONE EXAMPLE OF THIS IS OUR CHECK CLEARING OFFICE HERE IN DES ~OINES, THE FINANCIAL NEEDS OF THE MIDWEST ARE BEING rvDRE EFFICIENTLY SERVED AND THE PUBLIC HAS BENEFITED, J OBVIOUSLY AM A VERY STRONG SUPPORTER OF A REGIONAL SYSTEM. EVERYONE IS TOUCHED BY THE FED'S ACTIVITY, THE FED FOSTERS AND fv1A.INTAINS AN EFFICIENT AND VIABLE PAYMENTS MECHANISM, EVERYONE USES CHECKS, EVERYONE NEEDS CURRENCY AND COIN, THE FED PROVIDES FOR THE EFFECTIVE SUPERVISION AND REGULATION OF BANKS, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis EVERYONE USES A BANK, THE FED PROVIDES FISCAL 4 AGENCY FUNCTIONS FOR THE U,S, EVERYONE HAS FINANCIAL TRANSACTIONS WITH THE GoVERNMENT, \t-JHETHER THEY'RE BUYING BONDS OR PAYING TAXES, THE PERVASIVENESS OF FEDERAL RESERVE INFLUENCE REQUIRES REGIONAL REPRESENTATION IF THE PUBLIC INTEREST IS TO BE EFFECTIVELY SERVED, A RECOGNITION OF THE PUBLIC INTEREST ROLE OF THE FED AND THE IMPORTANCE OF ITS STRUCTURE IS NOT A FULL RESPONSE TO THE ISSUES CONCERNING THE FED. Bur I THINK IT DOES HELP TO PUT THE ISSUES IN PERSPECTIVE, IT IS A PER- SPECTIVE THAT WILL KEEP US FROM DEVELOPING COUNTER-PRODUCTIVE PROPOSALS FOR CHANGE--PROPOSALS THAT CAN ERODE THE FUNDAMENTAL STRENGTH OF THE FEDERAL RESERVE SYSTEM, RETAINING THE STRENGTH OF THE FEDERAL RESERVE SYSTEM IS PARTICULARLY IMPORTANT TO THE SUCCESS OF THIS NATION'S EFFORTS TO MOVE THIS ECONOMY BACK TO SUSTAINABLE PERFORML\NCE AT RELATIVELY STABLE PRICES AND HIGH LEVELS OF EMPLOYMENT, LET ME TURN TO THAT ISSUE NOW, WHERE ARE WE ON THIS PATH? WHERE ARE WE LIKELY TO BE GOING? WHAT HAS THE FED'S ROLE BEEN? WHAT SHOULD WE BE DOING IN THE rvDNTHS AHEAD? A HEALTHY ECONOMIC RECOVERY IS vJELL UNDERWAY. WE ARE LEADING THE FREE WORLD IN THIS REGARD, WE HAVE NOW HAD SOME FOURTEEN fvONTHS OF EXPANSION, ft)sT OF OUR INDUSTRIES ARE CONTINUING TO POST HIGHER RATES OF ACTIVITY, CONCERN THAT THE PACE OF RECOVERY IS TOO SLOW IS NOW LARGELY BEHIND US, UNTIL THE FIRST QUARTER OF ECONOMIC REBOUND WAS MODERATE, 1976, ONE COULD HAVE ARGUED THAT OUR THE PERCENT INCREASE IN REAL GNP--THE OUT- PUT OF GOODS AND SERVICES IN CONSTANT PRICES--DURING THE FIRST THREE QUARTERS OF RECOVERY WAS SOMEWHAT LESS RAPID THAN IN THE RECOVERIES FOLLOWING THE DEEP RECESSIONS OF THE FORTIES AND FIFTIES--ALTHOUGH IT COMPARED FAVORABLY TO THE RECOVERIES OF THE SIXTIES AND EARLY SEVENTIES, BUT THE https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 FIRST QUARTER EVIDENCE AND THE ECONOMIC READINGS SINCE THEN HAVE SUGGESTED A VIGOROUS EXPANSION, You HAVE ALL HEARD THAT THIS HAS BEEN A CONSUMER-LED RECOVERY, CONSUMER DID TAKE THE LEAD, THE WITH INCREASED CONSUMER LIQUIDITY, HIGHER INCOMES, THE ABILITY TO TAKE ON f'IORE DEBT AND INCREASED CONFIDENCE, THE CONSUMER WAS WELL PLACED TO fYtl\KE A fYtl\JOR EARLY CONTRIBUTION TO RECOVERY, As RECENT EVIDENCE INDICATES, INVENTORY GROWTH IS NOW BEGINNING TO BUTTRESS CONSUMER SPENDING, THE ECONOMIC DOWNTURN HAD BEEN ACCOMPANIED BY A SIGNIFICANT RUNDOWN IN INVENTORIES THAT HAD BEEN ACCUMULATED UNINTENTIONALLY AS THE DECLINE IN SALES PROCEEDED IN 1974. BY THE. END OF LAST YEAR fYtl\NY OF THE FIRMS IN THE NON-DURABLE GOODS AREAS HAD REDUCED THEIR INVENTORIES TO ACCEPTABLE LEVELS, SO WHEN SALES EXPANDED THEY fvOVED TOWARD RENEWED ACCUMULATION, IN THE DURABLES GOODS AREAS THE PROCESS OF LIQUIDATION TOOK SOMEV'-IHAT LONGER, AND FOR tvl.ANY, INVENTORY BUILDING IS ONLY IN THE EARLY STAGES, THIS TIME, THE UPTURN WAS NOT SPARKED BY AN UPTURN IN HOUSING, THIS FORCE FOR RECOVERY HAS BEEN DELAYED, DOWNTURN WAS SEVERE, THE IMPACT ON HOUSING FROM THE ExTENSIVE SPECULATIVE BUILDING, ESPECIALLY IN MULTI-FAMILY UNITS, IN THE EARLY 1970' S TURNED INTO OVERBUILDING, THE ADVERSE IMPACT ON THE BANKS AND OTHER LENDERS, AS WELL AS BUILDERS, WAS CHASTENING, Now, HOWEVER, THE PERFORMA.NCE IN HOUSING--f'IOSTLY IN THE SINGLE FAMILY AREA--HAS IMPROVED, HOUSING STARTS HAVE CLIMBED SUBSTANTIALLY FROM THEIR VERY LOW LEVELS LATE LAST YEAR, THE ADVERSE IMPACT OF OVER- BUILDING ON BOTH LENDERS AND BUILDERS IS GRADUALLY BEING OVERCOME, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BUT, 6 THE ENTHUSIASM FOR MULTI-FAMILY BUILDING REf'IIAINS DAMPENED. SPENDING.FOR BUSINESS EQUIPMENT APPEARS TO BE PICKING UP GRADUALLY, THIS HAS BEEN, AS I THINK YOU ALL KNOW, AN AREA OF CONCERN, THE SLOW RECOVERY OF BUSINESS INVESTMENT HAS BEEN SOMEWHAT PARADOXICAL SINCE ALL OF THE fVlAJOR DETERMINENTS OF CAPITAL SPENDING HAVE BEEN FAVORABLE--THE ACCELERATION OF OUTPUT, VASTLY IMPROVED PROFITS, GOOD CASH FLOW, AND LOWER INTEREST RATES, AN EXCESS OF UNUSED CAPACITY HAS BEEN ONE OF THE CONSTRAINTS ON CAPITAL SPENDING, BUT CAUTIOUSNESS IS ALSO STILL PLAYING A PROMINENT ROLE, BUT IN ANY EVENT, WE DO SEE SOME FAVORABLE SIGNS AND CERTAINLY NO DISTRESSING OMENS IN THIS AREA, THE NET RESULT OF THESE DEVELOPMENTS, OF COURSE, IS THAT WE HAVE rvDVED TO NEW HIGH LEVELS OF EMPLOYMENT, AND ALTHOUGH THE UNEMPLOYMENT RATE REMAINS HIGH BY HISTORICALLY STANDARDS, WE HAVE CONTINUED TO MAKE PROGRESS IN THE RIGHT DIRECTION, AND OUR LONGER RUN PROJECTIONS SHOW THE UNEMPLOYMENT RATE BEING REDUCED FURTHER, NOR, OF COURSE, SHOULD WE IGNORE THE PROGRESS THAT HAS BEEN fVlADE IN REDUCING INFLATION, THE RATE OF INCREASE IN PRICES IS STILL TOO HIGH BUT NO ONE COULD ARGUE RESPONSIBLY THAT A SIGNIFICANTLY FASTER RATE OF IMPROVEMENT COULD BE ACHIEVED, BY NOW, EVERYONE SI-OULD BE WELL AWARE THAT WRINGING OUT INFLATION IS A LONG DRAWN-OUT PROCESS, HAVE ALSO LEARNED THE IMPLICATION OF THAT FACT, HOPEFULLY, WE ECONOMIC POLICY CANNOT BE DESIGNED TO ACHIEVE RAPID REDUCTIONS IN UNEMPLOYMENT WITHOUT REGARD TO THE INFLATIONARY FORCES BEING PUT IN PLACE, TrDSE INFLATIONARY FORCES CANNOT BE INSTANTLY REVERSED, INDEED, BY THE TIME THEY ARE BEING REGISTERED IT IS ALREADY TOO LATE, You WHITES OF INFLATION'S EYES TO ACT, THE JUGGERNAUT CAN'T STOP, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CANNOT WAIT UNTIL YOU SEE THE 7 WHAT ABOUT THE PROSPECTS FOR A CONTINUATION OF THE AfJVANCE? AREASON- ABLE SCENARIO FOR A f'IORE EXTENDED PERIOD OF ECONOMIC EXPANSION INTO ISN'T HARD TO PUT TOGETHER, As 1977 THE UPTURN CONTINUES, AfJDITIONAL INVENTORY BUILDING APPEARS TO BE IN THE CARDS, HOUSING, AT LEAST IN THE SINGLE FAMILY AREA, WILL BE A LIKELY PLUS, INFLOWS OF FUNDS INTO HOUSING FI- NANCI NG INSTITUTIONS HAVE GROWN TREMENOOUSLY, \'J ITH THE LOW LEVELS OF HOUSING ACTIVITY SINCE MAND, 1972, STARTS ARE CONSIDERABLY BELOW POTENTIAL DE- CAPITAL GOODS INVESTMENT--WHILE STILL SLUGGISH--SHOULD BE BUILDING AS THE YEAR PROGRESSES, SLOWLY AT FIRST AND THEN f'IORE RAPIDLY ON INTO NEXT YEAR, RECENT RETAIL SALES FIGURES SHOWING SOME SLOWING IN CONSUMER EXPENDITURES HAVE CAUSED CONCERN IN SOME QUARTERS THAT THE EARLY RECOVERY LEADER MAY BE FALLING BACK, AT THIS JUNCTURE, I SEE NO REASON FOR CONCERN, ECONOMIC EXPANSIONS ARE USUALLY BUMPY, IN FACT, I AM STRUCK BY HOW IN- ORDINATELY SM:JOTH THE AfJVANCE UNTIL NOW HAS BEEN, A FEW VOICES ARE STILL RAISING THE ISSUE OF SLUGGISH PERFORfv1ANCE-PARTICULARLY IN REDUCING UNEMPLOYMENT AND HAVE SUGGESTED A VIGOROUS EXPANSIONARY POLICY ON THE PART OF THE FEDERAL GOVERNMENT, BUT THE PRESSURES FOR SUCH POLICIES HAVE NOT BEEN GREAT, AND I THINK IT IS IN LARGE PART BECAUSE OUR PERFORML\NCE HAS BEEN EXCELLENT, INFLATION IS STILL THE fv1AIN THREAT TO SOUND ECONOMIC GROWTH OVER THE NEXT FEW YEARS, INFLATION HAS BEEN THE OO~A.JNFALL OF ALL THE RECOVERIES AND THE EXPANSIONS SINCE THE MID 198:J's, OCCURRED, Bur CERTAINLY PRICE EASING HAS MUCH OF IT HAS CENTERED ON FOOD AND FUEL, FoR THE VOMENT, AT LEAST, FUEL PRICE INCREASES SEEM LESS LIKELY--EXCEPT FOR SLIGHTLY HIGHER GASOLINE PRICES--BUT FOOD PRICES REfV'AIN A QUESTION MARK, DEPENDING https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 SIGNIFICANTLY ON THE WEATHER BOTH HERE AND IN THE SoVIET UNION, PRICES OF WHOLESALE INDUSTRIAL COrvYIIODITIES CONTINUE TO BE UNDER PRESSURE, MANUFACTURERS COULD FOLLOW AGGRESSIVE PRICING POLICIES TO COVER INCREASED COSTS AND Ml\INTAIN OR WIDEN PROFIT Ml\RGINS, lABoR COST PRESSURES HAVEN'T DISAPPEARED EITHER, WITH SIGNIFICANT WAGE NEGOTIATIONS IN THE WORKS NOW OR COMING UP SOON, THIS HAS TO BE AN AREA OF CONCERN. MUCH DEPENDS, THEN, ON GOVERNMENT ECONOMIC POLICY. A fvDRE STIMULATIVE POLICY NOW, STRETCHING TO ATTAIN AN 8 OR 10 PERCENT REAL GROWTH RATE IN ORDER TO BEING THE UNEMPLOYMENT RATE OOWN fvDRE RAPIDLY COULD, l FEEL, BE A VERY COSTLY MISTAKE. THE IMPACT OF fYDRE EXPANSIVE EFFORTS NOW WILL BE FELT IN THE ECONOMY NEXT YEAR WHEN THE EXPANSION IS EVEN FURTHER ALONG, BUSINESSES AND CONSUMERS WERE SHELL-SHOCKED IN 1974 AND 1975 BY THE RAPID PRICE INCREASES, THEY DON'T NEED OR DESIRE WHAT SUCH A GOVERNMENT PRESCRIPTION CALLS FOR--ANOTHER DOSE OF DOUBLE DIGIT INFLATION, You CAN'T CURE THE ANEMIA OF UNEMPLOYMENT BY GIVING THE PATIENT THE HIGH BLOOD PRESSURE OF INFLATION, EVERY l;\ORKING Ml\N IN AMERICA HAS A VESTED, SELFISH INTEREST IN BRINGING INFLATION DOWN EVEN FURTHER, I THINK, HOWEVER, THAT THE ODDS FAVORING SOME fv10DERATION IN GOVERNMENT SPENDING ARE FAIRLY GOOD--EVEN AFTER THE NOVEMBER ELECTIONS, MEMBERS OF CoNGRESS ARE VERY SENSITIVE TO THE SIZE OF THE FEDERAL DEFICIT, THEIR NEW BUDGETING PROCEDURES SEEM TO BE HELPFUL, NEXT YEAR'S DEFICIT WILL STILL BE TOO LARGE BY PRUDENT STANDARDS BUT WILL REPRESENT A SIZABLE REDUCTION IN STIMULUS As I FAR AS MONETARY POLICY IS CONCERNED, IT HAS AND WILL CONTINUE TO BE DESIGNED TO INSURE ADEQUATE PERFORJ\W-JCE WITHOUT EXACERBATING INFLATION, THE THRUST OF THIS POLICY HAS BEEN LAID OUT PUBLICLY, THE FED WILL BE https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 ACTING TO PROVIDE THE BANK RESERVES NECESSARY TO INSURE GROvffH IN CREDIT AND f'/ONEY CONSISTENT WITH THAT GOAL, You WILL NOTE THAT I HAVEN'T STATED THIS POLICY IN TERMS OF INTEREST RATES, UNFORTUNATELY THE IMPACTS OF rvDNETARY POLICY ARE TOO FREQUENTLY CHARACTERIZED SOLELY IN TERMS OF THE FED SETTING INTEREST RATES TOO HIGH OR TOO LOW, l CANNOT STRESS OFTEN ENOUGH THAT THE FED DOES NOT SET INTEREST RATES, IT CAN AND OOES HAVE SOME INFLUENCE IN THE SHORT RUN ON SOME INTEREST RATES BUT IT CANNOT SET OR CONTROL THEM, INTEREST RATES ARE DETERMINED BY THE SUPPLY AND DEMAND FOR FUNDS IN THE MARKET, THE RECORD IS VERY CLEAR ON THIS POINT, ANY ATTEMPT TO KEEP INTEREST RATES LOW AS CREDIT DEM.A.NDS GROW IS A LOSING BATTLE, As BANK RESERVES ARE PUMPED IN TO KEEP RATES OOWN, THE fvDNEY SUPPLY GROWS MORE AND fvORE RAPIDLY, PRICES BEGIN TO RISE, EXPECTATIONS OF EVEN MORE RAPIDLY RISING PRICES MOUNT, AND INTEREST RATES GET ANOTHER PUSH UPWARD, IT BECOMES A VICIOUS CIRCLE OF RISING PRICES AND INTEREST RATES, WHY STRESS THIS? SIMPLY TO INDICATE THAT EFFORTS TO f'IIAINTAIN AN APPROPRIATE NONINFLATIONARY EXPANSION OFTEN MEANS SOMEWHAT HIGHER INTEREST RATES AT THE OUTSET, MORE CREDIT, As IN AN EXPANDING ECONOMY, PRIVATE BORROWERS NEED DEMANDS RISE, SOME INTEREST RATES, ESPECIALLY IN THE SHORTER TERM AREA, WILL ALSO RISE, UNFORTUNATELY, A MISUNDERSTANDING OF THIS PHENOMENON HAS LED TO CONCERN AT THE FIRST BLUSH OF INTEREST RATE INCREASES, YET SUCH EARLY ACTION WILL RESULT IN LESS RAPID INTEREST RATE ADVANCES LATER AND FEWER PROBLEMS IN MAINTAINING PRICE STABILITY, THERE HAS, l FEEL, BEEN AN OVERREACTION IN THE MARKETS RECENTLY, fuTH SHORT AND LONG-TERM RATE fv'OVEMENTS HAVE BEEN EXAGGERATED BY THE MARKETS, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis IN THE SHORT-TERM t-¾RKET IT HAS BEEN AN OVERREACTION TO 10 ANTICIPATED FED ACTIONS, lN THE LONG-TERM AREA, THERE APPEARS TO BE A MISINTERPRETATION OF THE IMPACT OF FED ACTIONS, ACTIONS TAKEN TO KEEP THE fv'ONETARY AND CREDIT AGGREGATES UNDER CONTROL THAT RESULT IN SOME SHORTTERM RATE INCREASES ALSO MEAN THAT THE LIKELIHOOD OF HOLDING OOWN FUTURE INFLATION IS ENHANCED, THAT SHOULD SERVE TO fVDDERATE INCREASES IN LONG-TERM INTEREST RATES SINCE INFLATION EXPECTATIONS ARE THE KEY FACTOR IN THE OUTLOOK FOR LONG-TERM RATES, THE COURSE OF OUR INFLATION FIGHT IS, THEREFORE, CRITICAL TO THE OUTLOOK FOR INTEREST RATES, •, ALL IN ALL, THEN, IT SEEMS TO ME THAT CONDITIONS DEVELOPING IN THE ECONOMY AND EMERGING ECONOMIC POLICY GIVE GOOD PROMISE OF THERE BEING A SOLID PERIOD OF ECONOMIC EXPANSION AHEAD OF US, THE LAST FEW YEARS HAVE NOT BEEN EASY ONES, BUT, l THINK THAT WE HAVE LEARNED FROM THE EXPERIENCE, BY THE END OF THIS BICENTENNIAL YEAR, WE WILL SEE IF WE HJ\VE OUR LESSONS WELL IN MIND AND HAVE ACTED ACCORDINGLY, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
@FedFRASER