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fomc | 1,980 | Unthinkable. | 4 |
fomc | 1,980 | Well, I'd like to make one general comment. The experiment in terms of results has worked very well. I have no quarrel with that, certainly. But I think it continues to lay us open to the risks of unexpected and unexplainable declines in interest rates that can give us great trouble internationally. Now, we can always ... | 196 |
fomc | 1,980 | The alternative is that we go back to unpredictable changes in the money supply. | 15 |
fomc | 1,980 | Well, that bothers me less. | 7 |
fomc | 1,980 | I think one of the two has to be unpredictable. | 11 |
fomc | 1,980 | That is very true. But the greater danger is on the interest rate side. | 16 |
fomc | 1,980 | They both would be [unpredictable] in varying combinations. | 13 |
fomc | 1,980 | But, Henry, when we adopted this procedure we were all perfectly aware of the fact that interest rates could decline under it and that they would be determined by market factors. I think it's more a problem of your educating your foreign compatriots about the procedure. | 51 |
fomc | 1,980 | Well, we're working hard at that. Every speech contains the same things that I said just now. And sometimes I almost believe them! [Laughter] | 31 |
fomc | 1,980 | Well, I don't think this is absolutely black and white. For purposes of moving ahead at the moment, [let's assume we will do] something like what we've been doing and let's get to Phil's question and maybe some others. But in the broader sense, I take it there's a consensus at the moment. SEVERAL. Right. | 69 |
fomc | 1,980 | Now, I don't know whether we want to deal with Phil's particular question. It's a matter of judgment as to whether or not a big enough adjustment is being made that it should be brought back to the Committee. I wouldn't anticipate adjustments as big as you're suggesting. If we're going to meet as frequently as we've be... | 132 |
fomc | 1,980 | Well, we could have limits similar to what we do on foreign currency [operations]. | 17 |
fomc | 1,980 | Similar to the international. | 5 |
fomc | 1,980 | The only trouble is that I don't have any sense at this point of what those limits ought to be; and I think it would take a staff paper to indicate what might be the tendencies. | 38 |
fomc | 1,980 | Well, we could be very arbitrary and say that in some basic sense we are interested in something like total reserves now but the operating [variable] tends to be nonborrowed reserves. We can make a path for nonborrowed reserves at the time of the Committee meeting and say we can't deviate from it by more than "x" witho... | 84 |
fomc | 1,980 | What's a reasonable "x"? | 6 |
fomc | 1,980 | But with nonborrowed it's zero. The big deviation is in borrowing and-- | 16 |
fomc | 1,980 | No, nonborrowed is zero after they've made an adjustment. | 13 |
fomc | 1,980 | Mr. Chairman, I think the solution is that the Committee's directive should be on the basis of total reserves, and the Manager should be allowed to vary the nonborrowed objective in order to achieve the total reserves. | 44 |
fomc | 1,980 | That's basically the way I interpret it now. That is the presumption under which we're operating but, of course, the total reserves are not very controllable and the nonborrowed reserves are. The question is how much we should change the nonborrowed to try to produce the total, which is the basic variable that affects ... | 69 |
fomc | 1,980 | We could have a situation in which the borrowing reverses its present course and jumps up to $1.8 billion. Then would you cut back on the net borrowed path by $1 billion? I strongly doubt that the Committee would want to do that right away, but-- | 55 |
fomc | 1,980 | Well, you're making an assumption that the borrowings go up, the reverse of the present [situation], and that they go up without interest rates increasing particularly in the process. Now they are going down without interest rates decreasing. If borrowings go way up without rates increasing, just reverse the staff's ju... | 112 |
fomc | 1,980 | I guess you're crossing the bridge that there is a good explanation as to why the borrowings dropped from $1.7 billion down to $800 million. That's a $1 billion drop and I'm not at all sure that the-- | 46 |
fomc | 1,980 | Well, it's not the drop in borrowings itself. The borrowings would come out where they estimated, assuming they have a correct estimate of total reserves with lagged reserve accounting; and [if] they got on the path of nonborrowed reserves, eventually the borrowings would be forced up. But the borrowings were running l... | 78 |
fomc | 1,980 | Mr. Chairman, we've gone three months and only had problems in the last month. Like Governor Partee, I have no idea what the limit should be. I suggest we go another month, to the next FOMC meeting, see what we encounter and get some idea of how much the variation is going to be. | 65 |
fomc | 1,980 | Yes, I'd do that too, but we still don't know what the limits are. I don't think we know the magnitude of the problems yet and at what point the problems become a policy decision rather than a technical adjustment. | 44 |
fomc | 1,980 | I agree with you. Well, is that a satisfactory way to proceed? I do think that we ought to put on the table, if not now--and this is under continuing review--any ideas about it. It's all within the present technique, but we might change the technique a bit. It's quite possible. | 63 |
fomc | 1,980 | I would point out, Mr. Chairman, that the element of luck and coincidence in here has a lot to do with lagged reserve accounting. I may be safeguarding the staff's view because what happens to deposits this week does not have an awful lot to do with what we do with reserves this week. It has something to do with intere... | 100 |
fomc | 1,980 | Presumably the staff, despite Mr. Axilrod's predilections, is busily working in a neutral and unbiased way to present us with some recommendations on lagged reserve accounting. That will be before the next meeting or about the time of the next meeting. | 54 |
fomc | 1,980 | [The issue] will be before the Board before this month is out. | 15 |
fomc | 1,980 | I'd just like to indicate that I have a lot of sympathy for what Governor Coldwell was saying. I think we need to try to get a feel for what the limits are; and the only way to do that is somehow to decide which of the reserve targets is really relevant. If you think total reserves is the relevant reserve target, then ... | 93 |
fomc | 1,980 | But it can't be. The dilemma is that the relevant target is total reserves but it's not operational. | 20 |
fomc | 1,980 | It is operational, but it's not-- | 8 |
fomc | 1,980 | Not in the short run. It's operational in a larger sense, but we can't make that zero because we don't control it to zero. | 27 |
fomc | 1,980 | Well, we don't control it because of the way things are apparently set up. We can change things and set it up so we can control it. | 30 |
fomc | 1,980 | We'd have to shut the discount window; then it's controllable. | 14 |
fomc | 1,980 | Well, I don't think that's right at all. All I'm trying to say, though, is that there is no arithmetic exercise that one can go through to figure out these limits. One has to [understand] the dynamics of the system and what we really want to try to fix and what we're willing to adjust in order to keep the other things ... | 79 |
fomc | 1,980 | Even if we did close the window, we still could be thrown off by currency or by float. | 20 |
fomc | 1,980 | Well, it's operational factors plus closing the window that make reserves-- | 13 |
fomc | 1,980 | Yes, but it makes a whole lot of difference in terms of where we come out, not just in the period between [meetings of] the Open Market Committee but beyond, how much nonborrowed is thrown into that package. And if the staff, or you, or whoever else is guiding this operation is throwing an extra billion dollars in the ... | 115 |
fomc | 1,980 | Well, it simply implies, does it not, that total reserves is our overriding target? And if that's true, then it seems to me that it doesn't present any great problem to accept a response by the staff on nonborrowed for the purpose of trying to move toward what we want on total reserves. | 61 |
fomc | 1,980 | But I'm saying that if [the staff is] going to enlarge the nonborrowed path because of a shortfall on the borrowing side, some money will have been put in that at the next Open Market Committee meeting we're not likely to get out. | 50 |
fomc | 1,980 | Governor Coldwell, the effective constraint on that--the way it's structured now--is the funds rate. That is, the funds rate constraint stops us. In my view Mr. Sternlight probably couldn't have raised the total reserves in this last [period beyond] that $400 million [in] nonborrowed because he would have been stopped ... | 78 |
fomc | 1,980 | In the sense of the bottom end of the constraint? | 11 |
fomc | 1,980 | Or the top, either way. You could interpret the present directive as the Committee's saying: "Here's where the constraint is; it's on the funds rate." Now, that might [not] be sufficient for you. But that is how it is at the moment. | 54 |
fomc | 1,980 | I would doubt strongly that Peter couldn't have put in another $400 million in this period if he had fed it in slowly. | 25 |
fomc | 1,980 | Well, I don't know if you're speaking of the whole period or just this current week. | 18 |
fomc | 1,980 | Yes, I'm talking about the whole period, an intermeeting period of a month. | 17 |
fomc | 1,980 | Well, we don't know because Steve is saying that if he had, slowly or fast, the funds rate would have been down at the lower limit. | 30 |
fomc | 1,980 | I doubt that. | 4 |
fomc | 1,980 | Well, that may or may not [have happened] but that is the effective constraint that stops us at some point. | 24 |
fomc | 1,980 | Well, it stops you at some point, but [where]? | 13 |
fomc | 1,980 | I assume that expresses the Committee's will. If the Committee wants to express itself in another way, that is of course its privilege. But at the moment that seems to me how the Committee expresses its will with regard to how much the Manager is free to do. | 53 |
fomc | 1,980 | I don't mean to disagree with you, Phil; I think it's something that has to be looked into. I would disagree with you, Ernie, in that I think we are concerned about nonborrowed as well as total because we have preconditions [bearing on how the operations affect] the circumstances for the next meeting. But that all has ... | 74 |
fomc | 1,980 | Peter, would you have done anything differently if we had had a 10 to 17 percent funds rate range for this past week? | 27 |
fomc | 1,980 | Not in this recent period. | 6 |
fomc | 1,980 | I thought that would be your answer. | 8 |
fomc | 1,980 | I guess there are always divergent views among the staff; I would have given a somewhat different answer to be frank about it. We discuss these things all the time. And [my] answer would be that if the Committee were willing to see the funds rate drop as much as that, I woud have been tempted to put in even more nonbor... | 138 |
fomc | 1,980 | Mr. Black. | 4 |
fomc | 1,980 | Mr. Chairman, the physicists have always had a rather neat way of dealing with problems such as this by saying: Well, that's an engineering problem. In a sense, I think there's a good parallel here in that the Committee decides what rate of growth it wants in the aggregates--that's the problem for the physicists--and t... | 138 |
fomc | 1,980 | Well, we obviously will be returning to the engineering problems as well as those of the physicists from time to time. I think we have an understanding on how to proceed in the rest of the discussion. | 41 |
fomc | 1,980 | Well, our engineers will be working on the problem continously, and I didn't mean to suggest otherwise. | 21 |
fomc | 1,980 | I thought you were going to quote the Heisenberg [uncertainty] principle. That merely states that if you observe it, you automatically change it by the act of observation and, therefore, you can't possibly know what it actually is. | 49 |
fomc | 1,980 | Catch-22. | 4 |
fomc | 1,980 | [Let's turn] to the question of the new monetary aggregates, on which a memorandum has been distributed. Mr. Axilrod, I presume, is prepared to make a few summary remarks on the subject, including telling us why the different measures have more substantial deviations from each other in the past than in the projections ... | 67 |
fomc | 1,980 | Mr. Chairman, I might add that Mr. Simpson, who is well versed in these measures, is here and is-- | 25 |
fomc | 1,980 | You probably were going to say this, but let me just make one introductory comment. We ended up with the M-1A and M-1B [measures] to allow for [negotiable order of withdrawal] NOW accounts and [automatic transfer services] ATS. As it turns out, in the current estimates there isn't very much difference. But we still ant... | 216 |
fomc | 1,980 | Mr. Chairman, I'm not sure that I have anything extremely helpful to add to this statistical material before the Committee. I was going to point out particularly tables 4 and 5 on pages 6 and 7 of the material that we sent out earlier. The remarkable thing to me was that the numbers for the new aggregates came out with... | 770 |
fomc | 1,980 | Will you weigh the two of them equally? | 9 |
fomc | 1,980 | Well, under the current system, I think M-1A would get the same weight that M1 now gets. That's how I would tend to interpret it. | 33 |
fomc | 1,980 | Every time we discuss this, I get very nervous about this great targeting. Is this all comprehensible? Do we have comments or [questions]? | 29 |
fomc | 1,980 | I have one question on M2. I presume, Steve, that in setting your compatible ranges for M2 for 1980, you're assuming that short-term rates will not get down low enough to produce any great reflow of funds into the thrifts? | 52 |
fomc | 1,980 | Exactly. That's right. | 5 |
fomc | 1,980 | If you look at 1975, say, which was a year of recession, a year comparable to 1980 [as projected], M2 went up by 12.3 percent even though I think our 1975 policy was not too expansionary. | 53 |
fomc | 1,980 | I think we still have short rates and even short coupons high relative to the fixed rate ceilings on deposits, so we'll still be getting the funds into these alternatives mainly in the fluctuating rate ceiling deposits. We're not assuming substantially different behavior for now--some increase, but it would be very mod... | 59 |
fomc | 1,980 | But of course in '75 [rates] fell below the fixed rate ceilings. So even the passbook rate was affected. That obviously is not in the projection; it couldn't be. | 37 |
fomc | 1,980 | Mr. Balles. | 5 |
fomc | 1,980 | I just wanted to say, Mr. Chairman, since I was one of those who was rather unhappy with the then-proposed M2 the last time we met and discussed this subject, that I think the newly adopted M2 is a great improvement. Certainly, the inclusion of small time deposits, which are now incorporated into the new M2, is going t... | 219 |
fomc | 1,980 | For similar reasons you would object very strenuously to M3. | 14 |
fomc | 1,980 | That's right. | 3 |
fomc | 1,980 | Well, Mr. Chairman, just to start this part of the discussion going, it seems to me-- | 21 |
fomc | 1,980 | I thought it was just finishing! | 7 |
fomc | 1,980 | --that we're better advised this time around with these new measures coming out to settle on, say, M-1B and adjust it if necessary later on rather than try to straddle an average of M-1B and M2 because we don't know about nationwide NOW accounts. I think it would be cleaner and easier to explain if we just settled on o... | 92 |
fomc | 1,980 | I don't think that is the reason that we're straddling. We're not looking at an average. It's just that we presumed at the time that NOW accounts would be enacted and that that would produce a strikingly high M-1B figure as it's now defined, which would have been very difficult to explain. Indeed, from our own standpoi... | 125 |
fomc | 1,980 | Well, I think that's true. But I'm arguing a little different point: That if we get into placing a lot of reliance on M2, a considerable part of which we would have no control over, it will give the wrong public image, too. | 51 |
fomc | 1,980 | I think it's more M-1A and M-1B that we're comparing, Bob. The bigger the growth of NOW account-type deposits, some of which will be drained from M-1A and some from M2--maybe something like 50-50--the bigger the divergence between M-1A and M-1B, so we thought we needed both. The one, M-1A, will be running too low to re... | 118 |
fomc | 1,980 | That may be all right. Certainly no one in the preceding discussion has suggested that we average nonborrowed reserves with total reserves. I'm just arguing that we ought to get away from this averaging regardless of which-- | 42 |
fomc | 1,980 | Old M1 with M2? | 7 |
fomc | 1,980 | Or M-lA with M-1B. What does that mean? | 15 |
fomc | 1,980 | Do we even have all the data now to [calculate] M-1B? | 17 |
fomc | 1,980 | I'd like Mr. Darwin Beck to answer that. | 10 |
fomc | 1,980 | M-1B? We have [some of the data] in process; they are not yet flowing in. We have the historical monthly data but we are in the process [of putting together] quarterly data and weekly data. | 46 |
fomc | 1,980 | We will have them at the end of the month, right? | 13 |
fomc | 1,980 | That is the schedule. As far as we know we will have them at the end of the month, yes. | 23 |
fomc | 1,980 | Well, I was just pointing out that there is a problem knowing what M-1B is going to be. If we have a shortfall of data, we may be sitting here next month wondering what M-1B was. | 47 |
fomc | 1,980 | You won't have M-1B as quickly for Desk operations, will you, Darwin? M-1B will not become available as speedily as M-1A. | 35 |
fomc | 1,980 | There may be a somewhat greater delay, hopefuly not too much greater. | 15 |
fomc | 1,980 | But when the stock adjustment falls out, presumably we will drop M-1A. | 17 |
fomc | 1,980 | Yes. | 2 |
fomc | 1,980 | When we start publishing this, which presumably will be shortly after the next meeting, we are planning to publish M-1A and M-1B weekly but not M2 and M3. They will be monthly [data]. | 46 |
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