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fomc | 1,978 | But it would be in the context of this interim limit. | 12 |
fomc | 1,978 | How much leeway do you have? | 8 |
fomc | 1,978 | About $400 million, which is above the amount that we normally have--larger [than our holdings] can increase in the interim. | 28 |
fomc | 1,978 | It's a $300 million limit between meetings. | 9 |
fomc | 1,978 | We've got room. | 4 |
fomc | 1,978 | Let's see how it goes. [MR. HOLMES]. On September 29, Mr. Chairman, we transmitted to the Committee a memorandum on Dr. Gleske's proposals for revision of our swap arrangement [with the Bundesbank] which, along with other swap agreements, will be up for renewal in December. I really have nothing to add to that memorand... | 94 |
fomc | 1,978 | Let's have your recommendations. Then we'll have questions and [discuss] the recommendations. | 17 |
fomc | 1,978 | All right. I would propose, Mr. Chairman, that we accept the proposal that the current exchange rate be applied to swap renewals and the proposal that certain clarifications in the language of the existing swap arrangement be worked out. Any language change would, of course, be cleared with the Foreign [Currency] Subco... | 95 |
fomc | 1,978 | There were four proposals to the Committee. | 8 |
fomc | 1,978 | Right. | 2 |
fomc | 1,978 | You recommend that we go ahead-- | 7 |
fomc | 1,978 | That we go ahead on these two. | 8 |
fomc | 1,978 | And defer the other two at this point because of the problems that they would raise in terms of current perceptions of our swap arrangements. | 26 |
fomc | 1,978 | Right. Well, Mr. Chairman, on the 50-50 profit sharing, which is another proposal, and on changing the interest rate to the German rate-- | 33 |
fomc | 1,978 | We would defer that. | 5 |
fomc | 1,978 | But I would like to see if the Committee really goes along with that sort of approach because there may come a time, even before the end of this year, when the situation has changed enough so that the Treasury may have [no objection] and we might agree that we could go ahead with these, too. | 62 |
fomc | 1,978 | All right. The proposition for consideration is whether there is general concurrence on the two you recommend and whether there are instructions on the other two to work in that direction. I'd like to put it into context at this meeting that, whatever we decide, we authorize the Manager to negotiate these technical cha... | 102 |
fomc | 1,978 | Right. | 2 |
fomc | 1,978 | So that would be how we would proceed technically. Are there questions on those proposals? | 17 |
fomc | 1,978 | Just simply a clarification. In the interest of getting a sentiment: Would this be a reciprocal arrangement? If they were initiating swap drawings, they would expect to pay the Treasury bill [rate]? | 38 |
fomc | 1,978 | That's what they would do under the current swap lines. It's asymmetrical in that sense. [The proposal is that] they would pay our rate and we would pay their rate. | 36 |
fomc | 1,978 | Both of these are asymmetrical. The 50-50 sharing happens only when we draw; when they draw, they take 100 percent and the interest rate based on our bill rate. [For us] it's just reverse from what they do when they draw. Any questions or comments? Any viewpoints? | 61 |
fomc | 1,978 | I think the German proposal is very reasonable, Mr. Chairman. The existing arrangements were a heritage of the Bretton Woods days, and we ought to recognize that things have changed a lot since then. | 40 |
fomc | 1,978 | Let's first see--since there doesn't seem to be a groundswell of comments--if we can have your concurrence on the first two recommendations. Is there any objection to those two recommendations that Alan has made? Hearing none, we'll instruct you [to proceed]. Now, how about the other two, which Alan says the Treasury i... | 136 |
fomc | 1,978 | I agree with that, Mr. Chairman. I think that the analysis was put pretty well in the memorandum and that it makes sense in the long run. But I recognize the political problems involved, so I think we better defer to the Treasury in the short run. | 53 |
fomc | 1,978 | Phil. | 2 |
fomc | 1,978 | What would this do to the capacity of the Treasury to be our partner in these intervention efforts, given the limited resources that they have to do it with? If we went to a full loss here-- | 40 |
fomc | 1,978 | Well, I don't think the loss is the major problem for the Treasury. I think the status of the [Exchange] Stabilization Fund is their main problem. The fact is that at one point, as you mentioned, Congress was tending to require that there be an appropriation for the ESF to cover any possible exchange losses, which the ... | 143 |
fomc | 1,978 | In fact, Alan, I think it's possible that the way it would be worked out technically is that the interest rate differential might end up accruing to the ESF. So that in fact would improve its position because of the technical way it would be arranged to be handled [unintelligible] forward. | 62 |
fomc | 1,978 | It would historically; we don't know the future. Henry. | 12 |
fomc | 1,978 | Well, logically there's something to be said for the proposed change. Certainly the way things are now, where we share 50-50 in losses but pay the high interest rate, is altogether bad for us. At a minimum [if] we share 50-50 in losses, the interest rates should also be merged or split. As for giving up the 50-50 loss ... | 214 |
fomc | 1,978 | Sometimes it's the other way, yes. But it's the most logical expectation. Chuck. | 17 |
fomc | 1,978 | Well, I don't know. I'm still dubious about the proposition. It seems to me, as far as the interest rate differential is concerned, that it might have not held because a lot of times the foreign country, our partner country, might not be doing what is appropriate for it to do in terms of international dealings. Indeed,... | 394 |
fomc | 1,978 | Chuck, may I interrupt for a technical question? I may misunderstand, but as I understand it, under the charter of the IMF we're obligated to intervene to counter disorderly markets. | 36 |
fomc | 1,978 | Mr. Chairman, the question of what constitutes a disorderly market is-- | 15 |
fomc | 1,978 | I understand that's a debate, but when that debate comes up it's often just as much our urging somebody else to do something as somebody else urging us to do something. | 33 |
fomc | 1,978 | Well, my impression over the years has been that we have been under pressure to intervene. | 18 |
fomc | 1,978 | Mr. Chairman, if I may respond to that as well. That may well have been true in the past but I do think, as the Chairman noted, that the situation has changed now. We are more big boys on our own feet in this business. We do have certain obligations that we have to live up to. So I would think that would be less of a p... | 139 |
fomc | 1,978 | The bigger interventions are normally in the other market. | 10 |
fomc | 1,978 | By a foreign central bank. | 6 |
fomc | 1,978 | I realize that. | 4 |
fomc | 1,978 | Also, Chuck, you never hear from us about all the urgings we get from central banks where we do not intervene. We are constantly bombarded, particularly in times like this, [with requests] for us to intervene in other currencies like Belgian francs, Dutch guilders, Austrian schillings, and Scandinavian currencies. But ... | 75 |
fomc | 1,978 | That's precisely my point. My point is that there is a very strong interest on the part of other countries in our intervention. And when we do it, I think it's reasonable to say we do it on a 50-50 basis. | 48 |
fomc | 1,978 | Well, we do it in our own interest. | 10 |
fomc | 1,978 | Yes, in some sort of large sense, I guess we do. | 14 |
fomc | 1,978 | I fear the converse. If we're urging other countries to intervene, I don't want to see us taking 50-50 risks with them. That's the problem. And I think we've urged just as much intervention. In fact, the amazing thing is that the obligation is for the weak currency to intervene to counter disorderly markets and actuall... | 139 |
fomc | 1,978 | You may be quite right from the standpoint of [fairness]. Perhaps we've got an unfair advantage. My point simply is that I believe we're giving up an advantage. | 33 |
fomc | 1,978 | An unfair one. Let me ask this because I think we've spent the time we can spend on this issue today, since it's not up for action immediately. Chuck's comments are consistent with the comments I've heard from him since I've been here--so he at least has a consistency though I will not characterize it--but I've heard o... | 119 |
fomc | 1,978 | I just want to be sure the Treasury is still with us. | 13 |
fomc | 1,978 | Oh yes. | 3 |
fomc | 1,978 | I think Chuck has a good point. After all, the dollar is a world currency. We're supporting something which is of great interest to others. When Paraguay supports the guarani, that's of no interest to anybody except Paraguay. | 45 |
fomc | 1,978 | Well, we will continue to give you that guidance, Alan and Scott. Thank you very much. And, Phil, if it's still all right, we could put off your question until we come to Peter's report. Is that all right? Fine. Then we'll move on to [agenda] item 3, which is the economic and financial situation and outlook. Jim, you c... | 104 |
fomc | 1,978 | Thank you very much, Jim, Jerry, and Ted. We are open for general questions for the first part of our follow-up. After a period of questions, I would appreciate another go-around where I would ask each of you to comment on any variation [in your views] from the staff projections. | 61 |
fomc | 1,978 | Just as a matter of clarification, Jim, in the next to last table in your presentation, the 1972 unemployment [and other] rates are averages for the year? | 35 |
fomc | 1,978 | Yes, they are. | 5 |
fomc | 1,978 | And, of course, real GNP was growing rapidly during 1972, so the peak rate of GNP in '72 would have been quite a bit above the '72 average. The capacity utilization, however, is what--a quarterly peak? | 51 |
fomc | 1,978 | No, it is the peak rate in a month in 1973; and they were generally in late summer or early fall. | 26 |
fomc | 1,978 | The peak month. How do you account for the rather pronounced difference now compared with then in the materials industries as against overall manufacturing? I hadn't had the impression that capacity had expanded that much in paper, pulp, steel, aluminum, and other basic materials industries. | 52 |
fomc | 1,978 | There has been a considerable amount. Between 1975 and 1976 we estimate about 3-1/4 percent expansion in materials capacity and around 3 percent in 1977. And in the first three quarters of this [year] we have an estimate of about 3-1/4 percent. So there has been a fair gain in materials capacity since that time. There ... | 120 |
fomc | 1,978 | Doesn't the lack of a worldwide boom also come into this? | 13 |
fomc | 1,978 | Oh yes, that's quite important in our assessment of the reading of these numbers. We are not in a period currently of substantial demand abroad; internationally traded commodities are not in short supply. So, I think in reading the degree of ease or tightness here, the international situation is a real plus. | 60 |
fomc | 1,978 | John Balles. | 4 |
fomc | 1,978 | I just have one other point of clarification. I just want to be sure. | 16 |
fomc | 1,978 | Excuse me, Chuck, I didn't mean to cut you off. | 14 |
fomc | 1,978 | Do I understand that the base projection for 3.3 percent real growth over the next five quarters assumes a bill rate of 8-1/4 percent? | 33 |
fomc | 1,978 | Yes, it's the low end of the federal funds rate range in the Bluebook under alternative B. We key off our interest rates from that, which is an 8-1/4 percent bill rate--not very far from where we are today. | 51 |
fomc | 1,978 | It was 8.21 yesterday. | 8 |
fomc | 1,978 | Yes. So implicit in this forecast is very little change in interest rates from current levels. | 18 |
fomc | 1,978 | John Balles. | 4 |
fomc | 1,978 | Thank you, Mr. Chairman, I'd like to ask Ted Truman about the outlook that he presented for the United States and other leading countries. One encouraging factor that I see in your charts, Ted, is that in effect you're saying that in 1979 you expect some convergence in the growth rates of real GNP in the United States ... | 242 |
fomc | 1,978 | Well, I did, but it may have been so parenthetical that it wasn't entirely clear. I keyed off from the third quarter to try to keep it in that framework. Our best guess is that you've had through the third quarter of this year about 3-3/4 percent--or 3-1/2 to 4 if you want to use the range--real growth abroad. We expec... | 452 |
fomc | 1,978 | All right, I guess my next question then is: Are consumer prices really the most relevant price gauge for measuring with respect to currency given the fact that there's a lot of stuff in the CPI that doesn't get traded abroad? | 44 |
fomc | 1,978 | Well, there's a long and technical debate about that and we have in the October Bulletin an article coming out on that subject. As far as the United States is concerned, the various measures show approximately the same thing. One of the problems [relates to] unit labor costs and export unit values. For unit labor costs... | 203 |
fomc | 1,978 | Bones Kimbrel. | 5 |
fomc | 1,978 | Mr. Kichline, [regarding] liquidity measures, at an investment seminar in Atlanta this last week a vice president of Prudential was quoted as suggesting that Prudential was committed through 1979 with no additional opportunity. That came as something of a surprise. Is that reasonable or are we hearing any of these type... | 71 |
fomc | 1,978 | I think that company may be, from the limited reports we have, tighter than most insurance companies. But we are getting to the point of the year where they like to be reasonably committed for next year. The insurance industry with regard to a liquidity measure is actually running with a fairly high volume of cash and ... | 73 |
fomc | 1,978 | Bones, was he talking overall or as to some particular segment of their business? | 16 |
fomc | 1,978 | I don't know. He may have been talking about their decision to commit X amount in private placements or something. I really was not there and did not hear [what was said]. It was just a quote that came up that suggested that they were-- | 50 |
fomc | 1,978 | It sounds out of touch doesn't it, Jim? | 10 |
fomc | 1,978 | It sounds too tight. | 5 |
fomc | 1,978 | It does. Yes, that is my point. | 10 |
fomc | 1,978 | They might be tighter than other companies. | 8 |
fomc | 1,978 | It could be one company. Mark Willes. | 10 |
fomc | 1,978 | Thank you. Jim, [my question relates to] the last table where you run the simulations that we get from time to time. The work that we've done with models like the one you use--we haven't done it with yours and I don't think we can--suggests that if you build in some mechanism for rational expectations, you get quite di... | 119 |
fomc | 1,978 | Yes. We have work going on now to try to incorporate in the various parts of the model a better expression of expectations than is now captured in the model. It's clearly a weak point of the model now. I guess my own judgment would be that perhaps we wouldn't get as strong a response as the results of your work in this... | 135 |
fomc | 1,978 | It can change substantially the perceived impacts of policy alternatives. | 11 |
fomc | 1,978 | It can. | 3 |
fomc | 1,978 | But this is based on historical experience isn't it, Jim? It's not based on some new theory but on historical experience. | 24 |
fomc | 1,978 | That's right. | 3 |
fomc | 1,978 | No, but the point is that even-- | 9 |
fomc | 1,978 | Based on experience that didn't have the kinds of inflation rates that we are now failing to enjoy. | 19 |
fomc | 1,978 | My point is a different one than that. If you take the same models and construct them just a little bit differently and then apply them to the same data, you get a substantially different perception of policy impacts than if you do it the way the model is currently constructed. You can fit it-- | 59 |
fomc | 1,978 | But I still think, Mark, the test of the pudding is in the replication of the past. Again, no matter what your theory is, it has to be a model that-- | 37 |
fomc | 1,978 | It's got to be proved throughout the cycle. | 9 |
fomc | 1,978 | To show it works, and this one is based on the past. | 14 |
fomc | 1,978 | The only point I'm making is that you can have a model which fits historical data just as well and yet generates dramatically different future time paths. That's the only point. It is not a question of whether it fits history well, because it fits history just as well. | 53 |
fomc | 1,978 | Bob Mayo. | 3 |
fomc | 1,978 | Mr. Chairman, I found the international charts more than usually exciting this time. I think the staff did an excellent job on them. One of the phenomenon in here that I think is sort of fascinating, but was only partially brought out in the presentation, relates to the comparative inflation rates here and abroad. A go... | 176 |
fomc | 1,978 | It's a little bit sad to count [on]. I think you're right [about] the oil, and there are other dollar-denominated international commodities. The fact that the dollar has gone down has made them cheaper in foreign currencies, especially in Japan but in the U.K. and a number of other countries as well, and has helped the... | 117 |
fomc | 1,978 | You have made no attempt have you, Ted, to do an analysis of what these indexes would look like if the price of oil were abstracted from them? It becomes pretty much of an academic exercise, I suppose, because of secondary effects. | 49 |
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