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fomc | 1,977 | It certainly has bad psychological implications, and we will be monitoring this very carefully. | 16 |
fomc | 1,977 | Well, next. Mr. Eastburn, please. | 11 |
fomc | 1,977 | I want to give some support to Governor Lilly's comment on chemicals. One of our directors is in the chemical business, and he was extremely bullish the last time we had a go-around in our-- | 40 |
fomc | 1,977 | Because prices would be rising? | 6 |
fomc | 1,977 | Well, the volume of business he said was very strong, and then he expressed some concern about the price situation. | 23 |
fomc | 1,977 | I have a note before me from a member of our staff which reads "many chemical prices are scheduled to be raised in the second quarter." What the basis for that report is, I don't know. | 40 |
fomc | 1,977 | I think increase in demand. | 6 |
fomc | 1,977 | They've had annual increases. | 6 |
fomc | 1,977 | They've had a good bit of cost pressure and relatively little price relief from it. | 17 |
fomc | 1,977 | One difference between our projections and the Board's, particularly with respect to the unemployment rates--the Greenbook has this about a half percentage point lower than ours by the end of the year. Now this is partly because you have greater strength in the economy than we do, which is attributable largely to the c... | 120 |
fomc | 1,977 | The labor force growth that we have projected is still fairly substantial. It's 2 million, roughly, and involves a steady increase in the participation rate. It is not as rapid as the increase that we had in 1976, and we feel the major factor there is that the pressures from price increases and declines in real family ... | 134 |
fomc | 1,977 | And what follows, I suppose, is that, if you are underestimating price increases, this could have an upsetting effect on your labor force projections. | 31 |
fomc | 1,977 | It could, yes. | 5 |
fomc | 1,977 | Well, I thank you, Mr. Eastburn. Mr. Partee, please. | 18 |
fomc | 1,977 | Well I, of course, don't have a projection of the economy, Mr. Chairman. | 18 |
fomc | 1,977 | You say you do not? | 6 |
fomc | 1,977 | Oh no, just hunches, and I want to share both Governor Lilly's and President Volcker's concerns. As far as the physical side is concerned, it seems to me the outlook is very good. In fact, I could make a case that it could be stronger than the staff projection in the immediate quarters ahead. Not in the second [quarter... | 460 |
fomc | 1,977 | I would like to amplify Governor Partee's comments on prices. In the past four months, the price of cocoa has risen 40 percent, the price of coffee 82 percent, the price of orange juice 66 percent, soybeans 27 percent. An average for metals prices is up 17 percent, hides and rubber prices average up 17-1/2 percent, lum... | 111 |
fomc | 1,977 | Mr. Chairman in those lumber figures, I think maybe even that's conservative according to some of the builders, because they are almost quoting a $1,000 addition to the price of lumber in the average home in our area at the moment. So just the lumber alone is becoming a substantial deterrent in cost--particularly in ho... | 66 |
fomc | 1,977 | Mr. Chairman, if I may just chime in on this again, briefly. I reported that our price projections were the same as the Board's, but I also want to report on qualitative evidence. The kind of noise we are getting from the business community--certainly somewhat to my surprise, I guess, and maybe it shouldn't have been--... | 171 |
fomc | 1,977 | To what degree are businessmen concerned or somewhat nervous about the prospect of governmental controls over prices? Do you hear much about that? | 25 |
fomc | 1,977 | I've heard less of that just recently. | 8 |
fomc | 1,977 | I think it's faded, Mr. Chairman. | 9 |
fomc | 1,977 | I'm not sure we can say that, Mr. Chairman, because every time the Administration says that [they] are not interested, it surfaces again. So if they'd just quit saying "we are concerned," I think it will settle back down. But "the louder thou persisteth"--it seems to be coming through to the businessmen. | 67 |
fomc | 1,977 | Mr. Winn, we are ready to hear from you now, please. | 15 |
fomc | 1,977 | Two or three points, Mr. Chairman. First, in terms of prices, particularly in the building materials area, I just call your attention [to the fact] that home modernization repairs are estimated to exceed new building costs this year. | 47 |
fomc | 1,977 | You mean total outlay on buildings? | 8 |
fomc | 1,977 | That absorbs building materials and workers. That's really getting to be a very sensational-- | 16 |
fomc | 1,977 | Are you talking about the residential? | 7 |
fomc | 1,977 | Yes. The second point I'd make is that the psychological impact of the second quarter sales are likely to be quite bullish in view of last year's second quarter sales. But people don't always recognize that the downturn occurred in the second quarter last year, and then they get these sensational figures this year to g... | 63 |
fomc | 1,977 | Year-over-year? | 4 |
fomc | 1,977 | That's correct. Now, [number] three--the interesting price phenomenon has been the oil-based chemicals, [which] have been weak in price, and this has been a puzzle and may come back quite strong in view of oil costs, for basic stock. In a quite a different vein, Mr. Chairman, I have been spending some time talking to l... | 292 |
fomc | 1,977 | Well, I have been getting a good deal of mail from apparently lower-income people who are only semiliterate but who know that the substantial increase in congressional salaries has recently occurred, and they are quite bitter about that. More bitter mail like that than I have seen in quite a long time. | 59 |
fomc | 1,977 | Are any of these letters commending us for our actions, Mr. Chairman? | 16 |
fomc | 1,977 | Oh, there have been many, oh yes, though some blame the Federal Reserve Board for not stopping the increase in congressional salaries. Governor Wallich, please. | 32 |
fomc | 1,977 | I wonder whether we'd be helped in looking at the price situation by distinguishing between the macro and micro elements. I think our discussion has been in good part on micro aspects--particular prices, particular sectors. And while, in the past, I have always heard industry people predominately talk about the absence... | 231 |
fomc | 1,977 | Well, like you, my contact with businessmen has not suggested any great concern during 1977, at least. The possibility of impinging upon capacity--[there has been] some talk that that may occur in 1978, if things continue at a vigorous pace in selected industries. So that has not been a major concern here. In terms of ... | 312 |
fomc | 1,977 | Are there a lot of wage contracts in '78? | 11 |
fomc | 1,977 | This is a big year, so '78 should be a small year. This year is bigger than last year. It's about 4-3/4 million, and last year it was a little over 4, and then it's a three-year cycle--pretty much standard. | 56 |
fomc | 1,977 | Well, I do want to say a word about the macro side. For the past twelve months, M2 has risen by 10-1/2 percent and M3 by 12-1/2 percent. These figures hardly suggest a policy of strong monetary restraint. On the fiscal side, we are continuing to run large deficits, and the prospect is that these deficits will increase.... | 138 |
fomc | 1,977 | Could I just say to Governor Wallich, it is a question of confidence in the economy aside from governmental policy. And I do feel that one thing that hasn't been mentioned that ought to be mentioned is that I think the confidence in the economy is increasing rather rapidly, and in particular, confidence in the new Admi... | 148 |
fomc | 1,977 | Mr. Morris, please. | 6 |
fomc | 1,977 | Mr. Chairman, I would like to follow up on Governor Partee's question and ask, in terms of your flow of funds work, what is the implication of this projection for the flow of funds, particularly the external corporate demand for monies? What does that tell us about the likely behavior of interest rates? | 62 |
fomc | 1,977 | President Morris we continue to have no greater external demand for funds by corporations projected for 1977 than we have for 1976. In 1976, corporations were net borrowers, that is, in net assets less liabilities, they were net borrowers of around $25 billion in financial markets. This compared, say, with $70 billion ... | 259 |
fomc | 1,977 | Steve, to what extent are your flow of funds projections integrated with your overall economic projections? | 18 |
fomc | 1,977 | Well, we hope they're fully integrated--they're integrated with the Bluebook, and they're integrated with the housing starts and plant and equipment numbers that come from the economic projection. | 35 |
fomc | 1,977 | Well, does that mean that your flow of funds projections are revised every month? | 16 |
fomc | 1,977 | Yes, they are. | 5 |
fomc | 1,977 | I don't see them. | 5 |
fomc | 1,977 | No, you don't, but I'd be glad to have them forwarded to you. | 16 |
fomc | 1,977 | Well, yes, I certainly want to see them. I was under the impression that you do that once a year and then you stop. | 28 |
fomc | 1,977 | No, we get a printout monthly. | 9 |
fomc | 1,977 | Well, I think we ought to have a summary table in the Greenbook now that we're doing them monthly. I think that's a fairly recent development. | 30 |
fomc | 1,977 | Well, we could--I think a summary table. | 11 |
fomc | 1,977 | Let me start with them. | 6 |
fomc | 1,977 | I've been getting them monthly for some time. You know the exact-- | 14 |
fomc | 1,977 | '75. | 3 |
fomc | 1,977 | The manufacture of them-- | 5 |
fomc | 1,977 | [Unintelligible] our excellent staff has a way of hoarding treasures. | 17 |
fomc | 1,977 | If I may, Mr. Chairman, that very point bears on President Morris's question, because my thought was that there could be more inventory accumulation than is in the projection. There could be more plant and equipment, and there could be more inflation. All that would add to the nominal GNP, and it would also add to the ... | 109 |
fomc | 1,977 | An evaluation of the flow of funds doesn't find the normal kind of pressure points in credit markets that you often associate with it. That's one of the problems. | 31 |
fomc | 1,977 | And these flow of funds projections have been revised, but about the same time when the GNP, etcetera, projections were revised? | 27 |
fomc | 1,977 | Yes. I might add that we will be glad to work on a summary table and use them. I'm not sure--we won't have it in time for the Greenbook because of our schedule; we will either have to have it appended to the Bluebook or [provide] it separately on Monday, but we can forward it. | 66 |
fomc | 1,977 | Mr. Chairman, it seems to me that the analysis of velocity numbers for the third year of expansion would suggest extremely heavy pressures in the credit markets. Because the flow of funds numbers are giving us a contrary indication, it would be quite unique to have a third-year expansion with very little change in corp... | 70 |
fomc | 1,977 | You can say, using National Bureau [of Economic Research] chronology, that we will soon be entering the third year of a business cycle expansion. But you can also say that a new expansion started in the month of October. Now, I think business cycle analysis has to be flexible, and while the National Bureau scheme has g... | 101 |
fomc | 1,977 | I think also the fact that the recession was much more severe than most in the past is another dimension. | 21 |
fomc | 1,977 | I would add, Mr. Chairman, that we do have an indicator in the second half of 1977 that is often associated with credit market pressures, and by that time we do expect the banking system to be financing more of business than it did last year. That is, the trend, the last two months of '76 and early '77 of increased bus... | 244 |
fomc | 1,977 | If I may follow up on Frank Morris's point, I think these two things--the projected rise in velocity, which is really remarkable, and the contrary indication of business plant financing needs--do belong together. But maybe they belong together in a different way. Namely, that at a time when there is no great pressure f... | 118 |
fomc | 1,977 | Offsetting balances? | 4 |
fomc | 1,977 | At least this is a hypothesis. I am troubled and puzzled by this very high increase in velocity, including a high increase in V2, which supposedly does not move around that much. | 37 |
fomc | 1,977 | I think, Governor Wallich, [what] is being left out is that we are--we may be wrong, we have been wrong for two straight years--but we are projecting a rather substantial rise in interest rates. Now, it may turn out to be higher, but we are projecting a rise from about 4-1/2 percent for the bill rate to 7 percent. That... | 193 |
fomc | 1,977 | All right. Mr. Guffey, please. | 11 |
fomc | 1,977 | Yes, question, Mr. Chairman, to Jerry. As to the assumptions that the staff is building into your projections both on price and GNP with respect to the drought in the western part of the United States, and if that moderates for the better or gets substantially worse, will it make a substantial difference in your projec... | 66 |
fomc | 1,977 | Yes, we have built in an increase in the second half of '77 and early '78, which reflects the news that's come in--unfortunate nature of the weather in the West and Midwest. I think we are still on the relatively optimistic side of the range of forecasts. It's conceivable that if the news continues bad, if the weather ... | 118 |
fomc | 1,977 | Would it materially affect your GNP forecast? Is food that big of a component? | 17 |
fomc | 1,977 | Well, it certainly will affect the GNP forecast in the sense that this will be a tax on consumers for higher prices for food, and this has a negative effect in general--aside from the distinct possibility that it may erode consumer attitudes about the outlook for the economy and may be evident in a much more significan... | 70 |
fomc | 1,977 | With respect to your latter point, I think that is a very real consideration in our part of the world, in the sense that there is real pessimism yet with respect to the economy in the western--Tenth District, at least. | 48 |
fomc | 1,977 | Mr. Chairman, is that [pessimism] there because of low farm prices? Or high farm prices? | 24 |
fomc | 1,977 | It's a combination of high farm cost and low prices for the product. Coupled with the fact that they have been through a very difficult winter, and the outlook isn't very bright even yet. I should quickly add that a good rain or two would change that very quickly, and particularly when the sap begins to rise in the spr... | 71 |
fomc | 1,977 | Did you get a rainstorm the other day? | 10 |
fomc | 1,977 | Mr. Roos. | 5 |
fomc | 1,977 | In connection with this, just last week the head of one of our very large industries with significant activity in the western part of the nation said that, as important as the continued drought in that part of the country might be as an effect on food prices, they feel that there's a terribly serious possibility of a d... | 115 |
fomc | 1,977 | Thank you, Mr. Roos. Mr. Mayo, please. | 14 |
fomc | 1,977 | Mr. Chairman, I have never felt any confidence in the velocity projections. I asked my staff, though, to go back and chart the actuals of annual rates of change from one quarter to the same quarter a year later to see what it looked like, and I find the projections a little more comfortable with that background in mind... | 182 |
fomc | 1,977 | As interest rates go up. | 6 |
fomc | 1,977 | Yes. This is M1, though. | 9 |
fomc | 1,977 | Well, I haven't said a word about velocity. But I believe members of the Committee know my basic thinking. Interest rates play a role. But the predominant factor in changes in velocity is not the rate of interest but the state of confidence. And if those of us who believe that confidence is improving turn out to be rig... | 88 |
fomc | 1,977 | Well, I also have a comment about velocity. I'm glad that Bob came back to it, because it doesn't seem so far out of line--I think a lot of comments about velocity that I am hearing relate to M1 velocity, and they don't take into account what we believe to be the substitution process. That has been accelerating and may... | 233 |
fomc | 1,977 | Governor Partee, the increase in velocity that we have is high relative to past experience. In the third year of the 1970 expansion, M2 velocity rose at about a 2 percent annual rate, and in the third year of the '54 expansion at about a 3 percent annual rate, and what we have is about a 3 percent annual rate of rise. | 76 |
fomc | 1,977 | The M2 on President Volcker's chart projection looks a little stronger on the rise in velocity, and M3 doesn't look out of line. | 29 |
fomc | 1,977 | Velocity of M3--velocity is declining. | 9 |
fomc | 1,977 | Yes, and it seems to me quite possible. I might also say that I also have a great difficulty with M2 velocity when you remember what's in M2, that is, when you remember what commercial bank time deposits have been added in order to make M2. It includes state and local government deposits, it includes large CDs and nonn... | 143 |
fomc | 1,977 | Any other comment on the overall economic situation and prospects? I think it would be helpful to have a show of hands on the part of members of the Committee on your judgments about the economic prospect. If you feel that our staff projection is more or less in the ballpark, as far as the real economy is concerned, wi... | 78 |
fomc | 1,977 | Eleven. | 3 |
fomc | 1,977 | Thank you very much. I asked for that show of hands for a very definite reason. We now have a monthly detailed report of Committee deliberations, which is made public. And our staff has to [write it] on the basis of what is said at this table, and not enough has been said about the general economic outlook. And to aid ... | 86 |
fomc | 1,977 | Mr. Chairman, I did not raise my hand on that because I think the pattern is going to be different. | 23 |
fomc | 1,977 | Well, you've made that comment before, and I supported you, but I was thinking really of the-- | 21 |
fomc | 1,977 | Thinking of the-- | 4 |
fomc | 1,977 | --pattern, not the average for the year rather than the pattern. All right now, would anyone else like to speak? If not, this is as good a time as any to break for coffee. | 41 |
fomc | 1,977 | [Statement--see Appendix]. | 6 |
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