mr. meyer looks at issues in financial modernization in the united states remarks by mr. laurence h. meyer, a member of the board of governors of the us federal reserve system, at the seventh annual conference on financial structure in annandale - on - hudson, new york, on 10 / 4 / 97. it is my pleasure to take part in what has become an important annual meeting on financial policy issues. it is my job to get you warmed up for a reception and dinner. our hosts have a curious view that a discussion of financial modernization will whet your appetite for food. maybe so, but it will almost surely increase your thirst. it seems that people have been talking about financial modernization for a long time. indeed, in the short - run it is easy to become discouraged about how often we talk, but how rarely we do anything, about financial modernization. however, if we step back and look over the last twenty years, it seems to me remarkable both how much progress has been achieved and how much the concerns of financial modernization have changed. two decades ago we still had regulation q, the glass - steagall act was widely viewed as requiring a virtual prohibition of combinations of commercial and investment banking, interstate banking and branching were barely fantasies even at the state level, and combinations of banking and insurance were off most people ’ s radar screens. today, many of the issues of 20 years ago have, blessedly, been resolved. but some remain, and new ones have inevitably appeared. the contemporary concerns of financial modernization include repeal of glass - steagall, expanded insurance activities for banking firms, the entry of insurance and securities firms into banking, the possibility of unlimited mixing of banking and commerce, and ongoing technological changes and financial innovations. tonight i would like to address some aspects of these concerns. i will suggest to you that while financial modernization is still, as it was twenty years ago, a necessity, it is also the case that in an uncertain world characterized by rapid change caution is not a dirty word. i will begin with what for me is the easiest topic : banking and commerce. the separation of banking and commerce has a long history in english - speaking countries. indeed, the policy can be traced back to the founding of the bank of england in 1694. it appears that commercial firms were concerned that the bank ’ s monetary powers would give it a competitive advantage in mercantile activities if there were no separation of banking and commerce. the young american state governments adopted, at least

it could happen, and they say it isn't yet clear how banking terms and conditions will evolve. there are a wide range of estimates trying to map this expected credit tightening into policy rate hikes. as of today, it isn't clear to me what the effect on the economy will be. 3 / 5 bis - central bankers'speeches implications for monetary policy let me turn to the implications for monetary policy. there is a lot of discussion about the next step for policy. there are three options : hike, skip, or pause. let me outline reasons why each of these options may be appropriate. one might lean toward hiking by focusing on the economic data and interpreting it to suggest that inflation and economic activity are not consistent with significant and ongoing progress toward the fomc's 2 percent inflation goal. based solely on the data we have in hand as of today, we are not making much progress on inflation. if one doesn't believe the incoming data will be much better, one could advocate for another 25 - basis - point hike as the appropriate action in june. alternatively, one might view the current and incoming data as supporting a hike in june but believe that caution is warranted because there is a high level of uncertainty about how credit conditions are evolving. another hike combined with an abrupt and unexpected tightening of credit conditions may push the economy down in a rapid and undesirable manner. this possibility is the downside risk of an additional rate hike in the current environment. if one is sufficiently worried about this downside risk, then prudent risk management would suggest skipping a hike at the june meeting but leaning toward hiking in july based on the incoming inflation data. there is a little over a month between the june and july fomc meetings, and during that time we will learn more about how credit conditions are evolving. over four months will have passed between the silicon valley bank failure and the july meeting. by then we will have a much clearer idea about credit conditions. if banking conditions do not appear to have tightened excessively, then hiking in july could well be the appropriate policy. lastly, one might want to pause hikes at the june meeting, meaning that the target range is at its terminal rate, if the current stance of policy is thought to be enough to bring inflation down over time. between policy lags and possible tightening credit conditions, the current stance of monetary policy may be seen, at that point, as sufficiently restrictive to move us toward the dual mandate