Full text of Statements and Speeches of Robert T. Parry : Economic Activity and Inflation in the United States: Prospects and Risks : Community Leaders' Luncheon, Los Angeles, California

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

ECONOMIC ACTIVITY
AND INFLATION IN THE UNITED STATES:
PROSPECTS AND RISKS

Robert T. Parry
President
Federal Reserve Bank of San Francisco

Presented at
Community Leaders’ Luncheon

Los Angeles, California
June 24, 1986

-1
Cu r r e n t l y ,
CONTINUING

there

SLUGGISH

is

a

-

strikin g

contrast

U .S .

PERFORMANCE OF THE

MANY S IG NS OF A MORE ROBUST FUT URE.

between

ECONOMY AND THE

ALTHOUGH THE GROSS

NATIONAL PRODUCT ADJUSTED TO REMOVE THE E F F E C T S

INFLATION,

OR REAL SN P,

HAS GROWN AT AN ANNUAL

OF

RATE OF ONLY

TWO PER CE NT ON AVERAGE OVER THE PAST TWO YE A R S ,

REAL GROWTH TO BE STRONGER
AND

IN

IN THE SECOND HALF OF

I

EXPECT

T H I S YEA R

1987.

Apart

from

1984

MIDDLE OF

WHICH

the

GNP

actual

IS THE F I R S T

,

the

EPISODE

period

since

the

IN THE POST-WAR ERA

GROWTH AS LOW AS TWO P ER CE N T HAS P E R S I S T E D

LONG AS TWO Y E A R S .

CIVILIAN

recessio n s

L AR GE L Y BECAUS E OF

UNEMPLOYMENT RATE

S E V E N - A N D - A - H A L F PER CE NT ,

ACTUALLY D E C L I N E D .

BUT,

FOR AS

TH IS SLOW GROWTH,

HAS BEEN STUCK

HAS

THAT BY THE END OF
I

NEXT YEAR,

THE

ECONOMY WILL BE OPERATING CLOSER

EMPLOYMENT OF BOTH




LABOR

AND C A P I T A L .

THE

BETWEEN SEVEN AND

AND C A P A C I T Y U T I L I Z A T I O N

I AM O P T I M I S T I C

IN

TO FULL

2

-

Th i s

outlook

for

OBVIOUSLY

IS VER Y

APPEALING,

ECONOMIC

GROWTH,

NEED TO CONTINUE

higher

-

levels

BUT,

THE FED ALSO

PROBLEM AND WE MUST REMAIN

employment

IN A D D I T IO N TO PROMOTING

WILL BE THAT,

I N F L A T IO N

ONE

WITH THE

IS A P O T E N T I A L

A LE RT TO T H I S DANGER,

Fu n d a m e n t a ls

My

OP TIM ISM FOR THE R E A L ECONOMY R E F L E C T S

IN S E V E R A L OF

THE

SPECIFICALLY,

D E C L I N E S IN THE

D OLLAR,

o il

.

DECLINES

IN

These

IN

FUNDAMENTAL

INTER ES T

I N TE RES T

REAL GROWTH:

I N T ER N AT IO NA L VA LU E OF THE

MOST REC EN T LY ,

which

in

the

ECONOMIC

IN THE P R I C E

cases

RATES AND THE EXCHANGE

SUGGEST THAT

IN THE SECOND HALF OF

IMPROVEMENT

FACTORS A F F E C T I N G

RATES AND,

developments,

MORE THAN A YEAR,




and

MAKING PROGRESS TOWARD ST AB L E P R I C E S .

ECONOMY P O I S E D TO A CC E L E R A T E ,

of

output

MUST REMAIN S E N S I T I V E TO THE

OF THE THEMES OF MY REMARKS TODAY

The

of

of

the

RATE GO BACK

GROWTH W ILL P I C K

T H I S YEAR AND CONTINUE

INTO

1987.

UP

3

-

Si n c e

February

THE DOLLAR

U.S.

MARKETS

ABROAD,

WHILE

TO COMPETE

HOME “ B U I L T

THIS

,

PRODUCTS,

THE RE S U LT I N G

in te re s t

In

two y e a r s .

June

AND-A-HALF PERCENT;
Yi e l d s

O BL IG A T IO NS

perio d

.

TH

AS

value

of

IS DROP

MORE E F F E C T I V E L Y

IN OUR MARKETS.

WILL CO NTR IB UTE TO

.

international

FOREIGN PRODUCERS FIND

GNP

IN

IT MORE

WE S E L L

on

rates

1984,
NOW IT

MORE GOODS

EXPECT ATI ON S OF

THE

surveys

IN THE SECOND HALF OF

THROUGHOUT NEXT Y E A R .

have

fa lle n

sh a rp ly

m ortgage r a t e

bonds

and

BY S I M I L A R

of

INFLATION

SMALL ONE PE R CE NT D E C L I N E

IN OUR TRADE

in

the

la s t

was f o u r t e e n -

IS A FAR LOWER T E N - A N D - A - H A L F

corporate

HAVE D EC LI N ED

Mo r e o v e r ,

the

REDUCTION

GROWTH

YEAR AND MORE S I G N I F I C A N T L Y

percent

the

ABROAD AND MEET MORE OF OUR DOMESTIC NEEDS WITH

D o m estic




year

EXPORTERS TO COMPETE

AND S E R V I C E S

DEFICIT

last

HAS D E C L I N E D ALMOST T H IR TY P E R C E N T .

E N A BL ES

DIFFICULT

of

-

U .S.

AMOUNTS

busin essm en 's

RATE

Tr ea su r y

OVER THE SAME

longer

run

SHOW ONLY A R E L A T I V E L Y

FROM THE RATE THEY

EXPECTED TWO

n

-

YEARS

IN

AGO.

REDUCTION

IN

OTHER WORDS,

INTEREST

INFLATION-ADJUSTED
OF BORROWING

RATES HAS BEEN

RATES AND THUS

IN MORTGAGE

EXPANSION

UNUSED C A P A C I T Y

RATES,

APPEARS THAT MOST OF

A DROP

IN REA L OR

IN THE TRUE

RATES HAS PRODUCED A

IN HOME B U I L D I N G .

HOWEVER,

IN LONG-TERM INT EREST

AS THE ECONOMY EXPANDS AND S A L E S PR O SP ECT S
GREAT ER SPENDING

ACTIVITY,

has

a

n egative

influence

on

IMPROVE,

overall

B UT ,

I EXPECT

economic

INDUSTRY AND RELA TE D ENERGY

PRODUCERS HAVE HAD TO COPE WITH REDUCTIONS

IN THE P R I C E S OF

BUT LOWER O I L P R I C E S SHOULD BE 3 E N E F I C I A L

OVER THE LONG HAUL,




SP EN D I N G .

IN THE WORLD P R I C E OF O I L S I N C E

AS THE DOMESTIC O I L

THEIR PRODUCTS.

VACANCY

IN THESE A RE A S TOO.

THE D EC LI N E

had

OWING TO

RAT ES HAS NOT Y E T

S TI MU LA TED COMMERCIAL B U I L D I N G AND EQUIPMENT

February

EXPECTED COST

IN MANUFACTURING AND HIGH O F F I C E

THE D EC LIN E

SO FAR,

THE

FOR B U S I N E S S E S AND HOUSEHOLDS.

The DECLINE

SIGNIFICANT

IT

-

SINCE

THE

U.S.

IS A NET O I L

IMPORTER.

-

TO OBTAIN A G I V E N AMOUNT OF

U,S,

EXPORT FEWER

DOMESTIC U S E ,

5

-

IMPORTED O I L

PRODUCTS AND THUS HAVE MORE L EF T

LOWER ENERGY P R I C E S

TO THE DEMAND

OVER FOR

MEAN THAT CONSUMERS AND

CORPORATIONS HAVE A D D I T IO N A L SPENDABLE

ARE ADDING

WE WI LL HAVE TO

FUNDS THAT ALREADY

FOR DOMESTIC PRODUCTS.

Ou t l o o k

Al l

economy

—

of

these

factors

beginning

sometime

po int

in

to

the

an

acceleratio n

second

half

of

in

th is

the

year

PE R H A PS TO GROWTH R A T E S AS HIGH AS FOUR P E R C E N T IN THE

REMAINDER OF

Th i s

faster

1986
pace

AND T H R E E - A N D - A - H A L F PERCENT NEXT Y E A R .

should

bring

the

civilian

unemployment

DOWN TO AROUND S I X - A N D - A - H A L F PE R CE NT BY THE END OF

A GOOD DEAL OF UNCERTAINTY

HAPPEN TO I N F L A T I O N NEXT YEAR.

E X I S T S CONCERNING

U N T I L MAY,

CONSUMER P R I C E S HAD BEEN D E C L I N IN G

rate

1987.

WHAT WILL

BOTH PRODUCER AND

THIS Y E A R AS THE DRAMATIC

I

DROP

IN O I L P R I C E S

FALL

IN THE D O L L A R ' S V A L U E OVER THE LAST Y E A R - A N D - A - H A L F




FED THROUGH THE ECONOMY.

BUT

THE SHARP

HAS

-

6

-

BEGUN TO BOOST P R I C E S A S IMPORTED GOODS HAVE BECOME

MORE

EXPENSIVE.

Hi s t o r i c a l

evidence

suggests

that

TAKE ABOUT TWO Y E A R S TO HAVE THEIR

.

in flatio n

TO BE

FEEDING

EFFECTS

Thus,

Ho w e v e r ,

we

this

THROUGH

MORE R A PI D LY

OF THE D O L L A R ' S D E C L I N E

expect

THIS YEAR ,

PERCENT.

the

HOLDING

o il

shock

BUT NEXT YE A R,

I N F L A T IO N

"sh o c k s"

the

o il

THAN US UA L,

shock

seems

WHEREAS THE

SEEM SOMEWHAT DELAYED.

dominate

the

numbers

for

IN FL AT IO N TO AROUND T W O -A N D - A - H A LF

THE E F FE C T S. OF

DOLLAR W ILL EX ER T A LARGER

OVERALL

to

price

FU L L E F F E C T ON DOMESTIC

around,

time

such

IS

THE D E P R E C I A T I N G

I N F L U E N C E AND,

EXPECTED TO I NCR EAS E

AND-A-HALF

P E R C E N T RATE.

Ch a l l e n g e s

to

Mo n e t a r y

AS A R E S U L T ,

TO ABOUT A THREE-

Po l i c y

I AM CONCERNED THAT WITH THE ECONOMY APPROACHING A

F UL LE R U T I L I Z A T I O N OF

INEVITABLY




ITS

IS A R I S K THAT

RESOURCES NEXT YEAR ,

INFLATIONARY

THERE

P R E SS U R ES WILL R E -

7

-

EMER GE,

in

the

T hus

the

battle

to

period

elim inate

FUNDAMENTAL CHALLENGE

S U IT A B L E

is

especially

.

As

tricky

,

one

the

IS TO F IN D A

FOR THE GROWTH RATE OF

INFLATION.

IN FACT,

THAT WE NOT ONLY SHOULD AVOID LOSING

INFLATION,

usual

MONETARY P O L I C Y

CONCERN

FOR

an

inflatio n

FACING

BA LA N CE BETWEEN

ECONOMIC A C T I V I T Y AND

IS

ahead

-

MY OWN VIEW

GROUND AGAINST

BUT SHOULD CONTINUE OUR E F FO R T S

TO MAKE

FURTHER

PROGRESS TOWARD P R I C E S T A B I L I T Y .

Let

FACING

me

turn

THE FED

GROWTH WHILE

now

HOLDING DOWN

THEY ARE

MONETARY P O L I C Y .




specific

TH IS

problems

AGENDA OF

INFLATION.

PROBLEMS PL AGU E

O I L AND AG R IC U L T U R E .

SPECIFIC

some

IN R E A L I Z I N G

INDUSTRY-SPECIFIC

HOWEVER,

to

that

I

S U S T A IN IN G

FIRST,

A VA R I ET Y

THE ECONOMY,

see

REAL

OF

ESPECIALLY

S E R I O U S THOUGH THESE PROBLEMS ARE,

NOT AMENABLE TO FUNDAMENTAL

SOLUTION BY

OUR INSTRUMENTS CANNOT BE DIRECTED ONLY

I ND UST RI ES

IN

OR REGION S.

TO

-

Th e

Fed

INDUSTRIES,

is

sen sitive

AND

to

IT T R I E S

IF

B ut

I N D IV ID U A L

I ND US T RI ES WITH

THE RESULT

INEVITABLY

d ifficu lties

facing

of

SOURCE OF CONCERN:

GENERAL

SUCH

MONETARY P O L I C Y

MEASURES,

debt

INFLATION.

in

several

key

sectors

also

BURDENS,

AND MERGERS AND LEVERAGED 3 U Y - 0 U T S

HIGH,

OF THE CORPORATE SECTOR.

HAVE

RAI SED

SPENDING A S PEOPLE

AND B U S I N E S S E S ATTEMPT TO RE BU ILD

po ssib ility

.

A FUTURE C O N F L I C T

INTEREST




OTHERS ARGUE THAT A DEBT

So m e t i m e s

it

IS

is

suggested

CRISIS

that

THEIR

IS A

there

might

FOR THE FED BETWEEN THE NEED TO RA ISE

RAT ES TO REDUCE I N FL A T IO N A R Y

THE

SOME A NA L YS TS

ACCUMULATED DEBT MAY CAUSE REDUCED

SHEETS.

a

MANY FARMERS F A C E HEAVY DEBT

SUGGEST THAT TH IS

BALANCE

are

THE RATIO OF CONSUMER DEBT TO INCOME

ITS ALL-TIM E

RATIO

OF

WOULD BE TO "O V E R H E A T " THE ECONOMY AND

CLOSE TO

D E B T /E Q U IT Y

particular

WE ATTEMPTED TO SOLVE THE PROBLEMS

GENERATE A RESURGENCE OF

levels

-

TO AVOID EXACE RB ATI NG

PROBLEMS.

Hi g h

8

P R E SS U R ES ,

AND THE

be

-

CONCERN THAT
SEVERE

9

-

SUCH ACTIONS WOULD S U B J E C T MANY BORROWERS TO

F I N A N C I A L ST R E S S .

Al t h o u g h

risin g

P R 0 3 LEM FOR THE

debt

ECONOMY,

burdens

do

THERE ARE

represent

M I T IG A T I N G

STRONG UPWARD TRENDS IN THE BOND AND STOCK

ADDED S I G N I F I C A N T L Y

REDUCING

A D D I T IO N ,

a

po tential

FA CTO RS.

MARKETS HAVE

TO A S S E T VA LU ES AND NET WORTH,

THE DE TRIMENTAL E F F E C T S

THE

THEREBY

OF INCREASED DEBT.

IN

CORPORATIONS AND HOUSEHOLDS REC EN TLY HAVE

LENGTHENED THE MATURITY

OF T HEI R

DEBT,

THEREBY REDUCING DEBT

S E R V I C I N G BURDENS.

Ch o o s i n g

po licies

FU LL EMPLOYMENT

YEAR AND NEXT.

promote

a

INDUSTRY-SPECIFIC

3UT SE VER AL

FIRST,

IT

IS D I F F I C U L T

SINCE

U N C E R T A I N T I E S ON BOTH THE EXPENDITURE

IN

approach

INFLATION,

to

AND .

AND DEBT PROBLEMS,

FACTORS MAKE

OF F I S C A L P O L I C Y ON THE ECONOMY,




gradual

AND A FURTHER REDUCTION

AVOID EX ACE RB ATI NG
ALWAYS T R I C K Y ,

that

IT

IS

EVEN MORE SO TH IS

TO GAUGE THE E F F E C T

THERE ARE UNUSUAL

AND THE REVENUE S I D E S

10

-

OF

THE

FEDERA L GO VE RNM EN T'S BUDGET.

CONCERNING

IT

FEDER AL OU TLA YS WERE

WAS REPORTED BY

Co u r t

-

had

voted

P R O V I S I O N OF

UNCERTAINTIES

INTENSIFIED

LAST

WEEK WHEN

SOME NEWS SOURCES THAT THE U . S .

to

uphold

a

court's

lower

ruling

THE G r AMM-RUDMAN D E F I C I T - R E D U C T I O N

SUPREME

that

a

key

LEGISLATION

IS U N CO N ST I TU TI O N A L.

In

add itio n

SIGNIFICANT

the

Se n a t e

TAX

,

the

likelih o o d

REFORM PACKAG E

Finance

Co m m i t t e e

that

Co n g r e s s

T H IS YEAR

reported

out

INCORPORATING S I M I L A R B A S I C P R I N C I P L E S

TO THE A D M I N I S T R A T I O N ' S

INVOLVE

MOVING TO A MORE E Q U IT A B L E

INTERFERES LESS

CO N S ID E R A B L E

RESTRUCTURING

WITH

APPE AL

PR I V A T E

TO ME.




ESPECIALLY

a

a

bill

TO THE

THOSE

pass

INCREASED S I N C E

HOUSE B I L L

PRINCIPLES,

AND

WHICH

TAX SYSTEM AND ONE THAT

ECONOMIC D E C I S I O N S ,

HOLD

BUT THE E F F E C T OF A MAJOR

OF THE N A T I O N ' S

AND THE FEDERAL D E F I C I T

PREDICT,

PRO PO SAL .

HAS

w ill

TAX

LAWS ON TREASURY

IN COMING Y E A R S

BECAUSE THE S P E C I F I C

REVENUES

IS D I F F I C U L T

TO

FORM OF THE F I N A L

-11
BILL

IS NOT YE T KNOWN.

OF THE F e d

IN FORECASTING

THE ECONOMY AND,
MONETARY

PO LI CY

OF F I S C A L P O L I C Y

ON

IN CHOOSING AN A P PR OP RI AT E

I HAVE D I S C U S S E D ARE COMPOUNDED BY

OF THE F E D ' S

NARROW MONETARY AGGREGATE,

and

year

and

in fla tio n

T he n e a r l y
WELL ABOVE

R EV ISE D

ITS

12

so

far

MONETARY P O L I C Y ON THE

th is

seems to

EVEN A FT ER

P O T E N T I A L OF

SO THAT

normal

THIS

Ml

of

Ml

ECONOMY.

re la tio n s h ip

w ith

down.

Ml

la st

THE TARGET

RAPID

NOW STANDS

circum stances,

SUCH RAPID

its

have broke n

UPWARD AT M I D - Y E A R ,

Un d e r

year,

p e r c e n t grow th

TARGET,

SO FAR T H I S YE AR ,

target,

TH IS

HAS BEEN A S I G N I F I C A N T I ND ICA TO R USED BY THE

TO GAUGE THE IMPACT OF

But la s t




THE JOB

WHICH CO NS IST S OF CURRENCY AND CHECKABLE D E P O S I T S .

AGGREGATE OFTEN

GNP

REFORM C O M P L I C A T E S

IN THE NEAR TERM.

THE UNUSUAL BEHAVIOR

Fed

TAX

THE E F F E C T S

THEREFORE,

THE U N C E R T A I N T I E S

Ml,

THUS,

-

the

y e a r.p u t
ITSELF

it

WAS

GROWTH HAS CONTINUED

WELL ABOVE

ITS

1986

inflatio nary

GROWTH WOULD BE CAUSE

FOR ALARM.

12

-

But

the

RATE

accom panying

sharp d e c lin e

in

AT WHICH MONEY C I R C U L A T E S —

EVIDENCE

THAT M I ' S

HISTORICAL

CANNOT BE R E L I E D ON.

broader

m onetary

v e lo c ity

I S UNUSUAL,

M2

M3.

and

THAN Ml

MAY

BY THE

These

AND SEEM TO HAVE

GNP

MORE NORMAL R E L A T I O N S H I P S WITH

ECONOMY

THAT Ml

SEEMS TO BE CONFIRMED

aggregates,

— the

PROVIDING

THE P O S S I B I L I T Y

AGGREGATES HAVE GROWN MORE SLOWLY

EXHIBITED

Ml's

R E L A T I O N S H I P WITH THE

MOREOVER,

3E P R O V I D I N G A F A L S E S I G N A L

F e d 's

-

LA S T Y E A R AND

SO FAR T H IS Y E A R .

B ut

having

TO TOTALLY

said

th is

IGNORE M l ,

RELAT ION WITH

PRICES.

COME AT AN E S P E C I A L L Y

AND EXC HA NGE-RATE

RIGHT




WOULD BE

GI VE N

I

also

think

it

would

not

ITS H I S T O R I C A L L Y C L O S E,

U N C E R T A I N T I E S ABOUT M I ' S

INOPPORTUNE TIME BE CAU SE

SHOCKS TO P R I C E S MAKE

MEASURE THE UNDERLYING

CL EA RL Y

,

RATE OF

IT VERY

INFLATION.

be

w ise

LONG-RUN

RELIABILITY

THE O I L -PR ICE

DIFFICULT

ALTHOUGH

TO

IT

I N AP P RO PR IA T E TO CLAMP DOWN ON THE ECONOMY

NOW OUT OF FEAR OF

INFLATION,

IT WOULD BE

EQUALLY

- 13 I N A P P R O P R IA T E

TO D IS REG AR D THE R I S K

PROBLEM MIGHT RE -E ME RG E

Th u s,

conducting

REMAINDER OF T H IS

FIN D IN G

IF WE ARE

effective

YE A R AND

AND FOR

Ov e r

the

EMPHASIZE KEEPING

CONTINUING

YEA R,

as

past

THE

TO WATCH

the

OF COURSE,

years

INFLATION

economy

beg ins

,

it

was

FOR ANY SIG NS

to

accelerate

TO PROMOTE S U S T A IN A B L E

ECONOMIC

TOWARD P R I C E S T A B I L I T Y .

HAS

to

WHILE

OF TROUBLE,

later

this

TOWARD MORE EMPHASIS
I n TH IS

ENSURING

THE FED

appropriate

INFLATION,

THE SAME TIME

the

MANY TIM ES

ECONOMIC EXPANSION GOING,

OF RE- EM E RG IN G

BE P O S S I B L E




two

over

FOR THE RATE OF

SUCH A BALANCE

THE B A LA N CE W I L L NEED TO S H I F T

THE R I S K

po licy

NEXT Y E A R WILL REQUIRE

INFLATION.

FACED THE CHALLENGE OF FI ND IN G

Ho w e v e r ,

monetary

INTO

INFLATION

NOT C A R E F U L .

THE PROPER B A LAN CE BETWEEN CONCERN

ECONOMIC A C T I V I T Y

BEFORE,

THAT AN

WAY,

IT SHOULD

GROWTH,

THAT CONTINUED PROGRESS

ON

WHILE

IS MADE

AT