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fomc | 1,980 | How much of your 8 percent [inflation forecast] would be energy-related then? | 18 |
fomc | 1,980 | Well, it varies. In 1981 it's a little over a percentage point, about 1-1/2 percent, and in 1980 it's about 2 percentage points. Let me just say, as it turns out, that domestic wellhead prices in 1979 are estimated to have been up 55 percent. The price of domestic crude oil is estimated to have been at $14-1/2 a barrel... | 131 |
fomc | 1,980 | You're just talking about domestic crude oil prices? | 9 |
fomc | 1,980 | Domestic wellhead prices for crude oil. But the current decontrol schedule, which is obviously subject to change--the President does have that authority--would by October of 1981 place domestic crude oil prices at the world price level. So, we're going in two years from $14-1/2 to $33-1/2 on the price of half our oil s... | 77 |
fomc | 1,980 | But this still would have very little impact on the price of gasoline, wouldn't it, barring an increase in taxes? What would be the price of gasoline, would you say, corresponding to a world level price for crude oil? | 46 |
fomc | 1,980 | We've got all these numbers. Let me just say that lots of things intervene in getting to the retail price of gasoline including importantly margins, which we have assumed will shrink a bit. Gasoline prices are estimated to have increased 50 percent in 1979; [the estimate for] 1980 is 29 percent and for 1981, 15 percent... | 82 |
fomc | 1,980 | Jim, you have an inflation rate of about 15 percent this first quarter, don't you? | 19 |
fomc | 1,980 | For the CPI. | 4 |
fomc | 1,980 | There was an announcement that the prices of homes declined some in November. We've been wrestling with this question of when we will start to see a leveling out of the housing component in the CPI. Are we getting any better feel as to when we will see some impact? Is it as early as March, or are we going to have to wa... | 76 |
fomc | 1,980 | Well, as you know, there are two important influences on that housing component: One is the price and one is mortgage interest costs. Mortgage interest costs tend to lag commitment rates by about a quarter. So, what happened in the fourth quarter in mortgage rates would appear in the CPI measure this quarter. Given our... | 213 |
fomc | 1,980 | You did mean to say it was multiplicative, didn't you? | 13 |
fomc | 1,980 | I get into so much trouble when I use that term that I decided to avoid it today. | 19 |
fomc | 1,980 | Why is that different index used? | 7 |
fomc | 1,980 | Well, as I understand it, the index used to measure house prices is an FHA series. It's based in effect on FHA loans, which as you know are a small part of the market. It's designed to measure "a representative house." The series that come out monthly are Census series, which are based upon the turnover of new and exis... | 143 |
fomc | 1,980 | I was wondering whether the staff has had any chance to [develop] even a preliminary view on the likely impact on inflation rates of this morning's announcement of the upward adjustment on the wage/price guidelines. | 41 |
fomc | 1,980 | Well, that was pretty much in line with our expectations. We have assumed in the forecast for some time now that the wage/price restraint program would reduce compensation by perhaps 1/4 percent or so, or a couple of tenths, but not a great deal. In effect, part of this is the notion of: Do you experience settlements t... | 153 |
fomc | 1,980 | Your projection of the average earnings increase is up into that guideline, isn't it? | 16 |
fomc | 1,980 | Yes, we have compensation in total running in the 9-1/2 percent area, so it's at the top end of that program. I might also note, though, that this is a fairly heavy bargaining year. We face [labor negotiations by] the steel workers, communication workers, some longshoremen, and the aluminum can industry; so 1980 is not... | 87 |
fomc | 1,980 | Did I see someplace that nonunion wages are now rising faster than union wages? | 16 |
fomc | 1,980 | I'm not aware of that. | 6 |
fomc | 1,980 | Maybe I just picked up the idea. | 8 |
fomc | 1,980 | In effect, Jim, what you've done by the revisions this time is to push the recession into 1980; 1979 is no longer a recession year. What are the chances of [a recession] being deferred another six months? | 48 |
fomc | 1,980 | That's not his projection. | 5 |
fomc | 1,980 | Well, as you know, [those chances] are clearly there. If you look back, we had assumed in the staff forecast that a recession or a downturn in economic activity would take place in the third quarter of 1979. We were a bit late in coming to the recession view and, as it turned out, obviously not late enough. It is possi... | 225 |
fomc | 1,980 | Well, Table I-10 in Part I of the Greenbook seems to indicate that you're forecasting a six-quarter decline in personal consumption expenditures, heavily concentrated in the goods sector--in fact, all in the goods sector--with services continuing to rise on a real basis. You're forecasting very heavy declines [in total... | 116 |
fomc | 1,980 | No. What we have had often in the past is a sharper slowdown, particularly in goods, but nothing that has stretched out for six quarters. What is unusual about this is not so much the size, but the duration--that is, six consecutive quarters of declining real personal consumption expenditures. I would associate a good ... | 144 |
fomc | 1,980 | I was going to ask a question later but it's timely to ask [now]. You have a prolonged recession or sluggish period here and you have no fiscal action assumed. You make some assumptions about monetary policy. Would you like to comment about an appropriate policy mix over this period, looking six to eighteen months ahea... | 62 |
fomc | 1,980 | Sure. In my own view, I think a posture of monetary restraint indexed by a rate of growth of the Ms that is no higher, and perhaps somewhat less, than we had in the last year would be appropriate. I also believe, however, that action should be taken on the fiscal side. [I'd note] two important aspects there. One would ... | 236 |
fomc | 1,980 | What about the timing on that, Jim? Just rolling back the social security tax is no tax increase rather than an actual tax cut. Isn't there a possibility that a tax cut in the payroll tax, say in mid-1980, would be appropriate timing? | 52 |
fomc | 1,980 | That's quite conceivable. That would mean we could avoid part of the increase that would be coming along this year because as of January 1 we did have about a $4,000 increase in the social security tax base and effectively for consumers that will come into play largely in the second half of this year. So, that's right.... | 109 |
fomc | 1,980 | You have given us a scenario here of an $18 billion tax cut in social security taxes and something for business and you say, realistically, something for consumers, too. So I don't know how much above $30 billion you are. | 47 |
fomc | 1,980 | Well, I didn't recommend that. I said I think that's one of the facts of life. The number may go higher. | 25 |
fomc | 1,980 | It would bother you if it were higher, right? | 11 |
fomc | 1,980 | Don't forget the $18 billion so-called tax cut is just not a tax increase. It's a funny tax cut. | 23 |
fomc | 1,980 | That should be offset or compensated for by a rise in the personal income tax, shouldn't it? | 19 |
fomc | 1,980 | Pardon? | 3 |
fomc | 1,980 | We're talking about a shift of the social security financing from the payroll tax to personal income tax. So we would have to anticipate the rise in the personal income tax as we cut back on the social security tax increase, if we didn't want to increase the deficit. | 52 |
fomc | 1,980 | Well, given the size of the full employment surplus as shown, it doesn't bother me at all to have an increase in the deficit. By the end of '80 it's shown as being 4 percent of GNP. | 44 |
fomc | 1,980 | Your budget deficit for 1981 is what? | 10 |
fomc | 1,980 | $30 billion. The Administration, we understand, is trying to hold the number in its budget message to around $15 billion. But we have a different economic situation. I think that's right that [the deficit] is an upward constraint because if we have a tax cut [this year], it seems to me that in fiscal year 1981 the defi... | 84 |
fomc | 1,980 | What does the 50 cent gasoline tax do to the consumer presently? | 14 |
fomc | 1,980 | It's about 2-1/2 percent under a direct measure. | 14 |
fomc | 1,980 | On the level of the index or--? | 9 |
fomc | 1,980 | No, if inflation were rising at 10 percent before, it would rise at 12-1/2 percent for a year. | 27 |
fomc | 1,980 | For a year. So it raises the level of price increases by 2-1/2 percent? | 21 |
fomc | 1,980 | Right. The percentage change goes up by 2-1/2 points. | 16 |
fomc | 1,980 | Mr. Chairman, I would like to go back to this forecast of personal consumption expenditures because I think it's an important point. You have forecast an increase in unemployment of roughly 1/2 point per quarter in this period ahead, at least for 1980, and industrial production is only going down about 2.3 percent [in ... | 149 |
fomc | 1,980 | Well, one of the important points here is that industrial production is only a part of this; what has been driving the changes in industrial production recently has been autos. And we expect that to spread. When you talk about the unemployment rate and IP, you are talking about the bulk of employment outside the manufa... | 196 |
fomc | 1,980 | Presumably they get convinced by the end of the second quarter with a two percent reduction in goods sales. | 21 |
fomc | 1,980 | I think that would be convincing evidence, assuming that our forecast is right. | 15 |
fomc | 1,980 | Well, I think the emphasis on the consumer is certainly appropriate here. I would point out, Phil, that in nominal terms goods expenditures rise every quarter, which I think makes the point that consumers are being pressed not only by taxes but also by inflation, particularly the inflation in oil prices which doesn't r... | 380 |
fomc | 1,980 | Well, I have a view that in fact the economy has not been generating much real disposable personal income. [Its growth] peaked out in December of 1978. In terms of the monthly figures, it bounced around but in the second half of last year, for example, real disposable personal income is estimated to have gone up less t... | 182 |
fomc | 1,980 | There couldn't have been much of an increase in car sales in that period; they probably declined. Were other durables strong? | 25 |
fomc | 1,980 | Well, some appliance sales had been strong, but consumers were generating installment debt increases of around 10 percent. | 22 |
fomc | 1,980 | This change in consumer behavior, as I said yesterday, strikes me as very significant. If, now, in a period of accelerating inflation people don't save more but save less, there must have been some change in their evaluation of the situation. The most plausible guess, it seems to me, is that in '74 people were genuinel... | 401 |
fomc | 1,980 | I think your description of those forecasts is quite correct; most major models do have a somewhat deeper or perhaps the same decline, though shorter in duration, and a much stronger recovery. DRI is one example and that's clearly their forecast. On the inflation side, curiously enough, the Board staff's forecast would... | 137 |
fomc | 1,980 | Your assumption of the impact of that social security tax increase on prices was what in 1981? | 20 |
fomc | 1,980 | Well, we think it will be close to 1 percent without a constraint on the time horizon. We think it's probably closer to 2/3 of a percentage point or something like that in 1981. Compensation goes up by 3/4 of a percent because of that effect and we assume it will be fairly quickly passed through in the form of higher p... | 75 |
fomc | 1,980 | What sort of a monetary interest rate projection do you have underlying this forecast, Jim? | 17 |
fomc | 1,980 | We have a moderate decline in rates beginning in the spring and going on; the 3-month Treasury bill rate we assume will [drop to] around 10 percent in the spring [and will drop a bit more through] the third quarter and rise slightly thereafter to 11 percent in the second half of 1981. | 65 |
fomc | 1,980 | So it's basically a very restrictive monetary and fiscal policy. | 11 |
fomc | 1,980 | Oh, yes. | 4 |
fomc | 1,980 | That's based on what--6 percent Ml growth? | 10 |
fomc | 1,980 | Right. | 2 |
fomc | 1,980 | Is that M-1A or M-1B? | 12 |
fomc | 1,980 | It's M-1A, but I'm not sure we would want to forecast a great deal of difference in interest rates on the basis of M-1A and M-1B. | 37 |
fomc | 1,980 | Jim, I was a little surprised about the magnitude of the announced increase in real GNP for the fourth quarter. Where would you guess that will end up after the final revisions are in? | 38 |
fomc | 1,980 | We don't have any additional information; in fact, I'm not sure that the Commerce Department has anything in the way of hard evidence right now. All of the data for December are essentially missing, including retail sales. The obvious assumption would have to be that consumer expenditures are even stronger than we have... | 218 |
fomc | 1,980 | 2 percent for what? | 5 |
fomc | 1,980 | Real GNP in the fourth quarter. | 8 |
fomc | 1,980 | Okay. | 2 |
fomc | 1,980 | Mr. Mayo. | 4 |
fomc | 1,980 | Jim, first a question: I assume that these projections were glued together before the President's grain embargo statement was issued and therefore do not reflect either the suspension of additional exports to Russia nor the promise by the government for grain storage, whatever that may mean. Have you had a chance to ev... | 72 |
fomc | 1,980 | Yes, we've looked at that. There are a number of uncertainties at this point. We don't think it will have much of an impact on real GNP. It will change the internal mechanics of accounting for it, namely about $2-1/2 billion less in agricultural exports. And that would show up in farm inventories or government purchase... | 179 |
fomc | 1,980 | Of course, there's also the question of what happens to the grain. It can't be stored indefinitely. | 20 |
fomc | 1,980 | That's right. | 3 |
fomc | 1,980 | My other point is an observation. It seems to me that one of the factors making consumers spend much more is that, for better or for worse, they have had such an increase in the equity in their homes that they consider that their kitty. That could be very dangerous if there is a prolonged slowing in [housing prices]. B... | 113 |
fomc | 1,980 | Although there was a decline in the saving rate in the second half of the year, do you mean they suddenly recognized their wealth? | 26 |
fomc | 1,980 | Yes. Well, don't try to get me to predict the timing of some of these things; it just comes in waves. As we said, the product--whether they're buying automobiles or refrigerators or whatever the composition is--is elusive here. But [the rise in home prices] seems to me to be an important factor. | 65 |
fomc | 1,980 | Mr. Willes. | 5 |
fomc | 1,980 | Following along your question and Governor Wallich's comments, I'd like to ask Jim a question and then reserve the right to comment on what I think his answer will be. The Chairman forced you into a policy recommendation on fiscal policy. Would you indicate--you've got to have some idea in mind since you gave that stat... | 83 |
fomc | 1,980 | Well, in terms of price behavior, we have performed some exercises with our quarterly econometric model to get some notion of the impact of something like a mid-1980 tax cut in a range of about $30 to $35 billion. We think that by 1981 that probably would result in a reduction in the rate of increase in the deflator by... | 134 |
fomc | 1,980 | The tax cut would lead to a reduction in the deflator? | 13 |
fomc | 1,980 | That's because it's oriented toward social security and business fixed investment and not toward generating additional direct consumer expenditures. So, I gave you an answer that was different than you thought. | 34 |
fomc | 1,980 | But in a way even better. | 7 |
fomc | 1,980 | President Willes, that tax package is essentially the difference between Strategy 3 and Strategy 4 on page 11 [of the Bluebook]. | 29 |
fomc | 1,980 | That's what I thought. Well, we've been having a lot of discussion about tax cuts and responding to recession and so on, which is a conversation that is similar to those we've been having for the last 10 years. And the only comment I would make is that we do that based on models that have proved to be off track almost ... | 337 |
fomc | 1,980 | Let me just see if I understand what you're saying. You're saying that a tax reduction of any sort will have an adverse impact on inflation and not too much impact on the real economy, you suspect. | 40 |
fomc | 1,980 | I think at the moment that's the best guess. | 10 |
fomc | 1,980 | There's no impact on real activity through government policy? | 10 |
fomc | 1,980 | No, I didn't say that. Clearly tax policy, monetary policy, and lots of things can have an impact on real economic activity. But as far as we know it can't have a predictable impact. We're going to change lots of things. Any time tax policy changes it's going to change things. It changes incentives, it changes function... | 140 |
fomc | 1,980 | Are you simply saying that the variance around the forecast is wider? Or are you saying that the forecast is--? | 23 |
fomc | 1,980 | It's not a question of variance. It's the fact that the parameters are unstable and will respond, in our view of course, to expectations. Therefore, by failing to factor expectations in, we've completely misspecified the shape of the economy. Ten years ago that would have sounded like an absolutely absurd assumption. I... | 212 |
fomc | 1,980 | But don't you think, even though one could view this as very imprecise in terms of the numbers we come out with, that we can predict the direction? Isn't that really the more crucial question? | 41 |
fomc | 1,980 | Well, the best guess that we can make, if we try to make adjustments--and one can't do this in a very precise way, of course, except in a very simple model--is that, yes, we can predict the direction fairly precisely. But the extent we can predict what would happen to real output is essentially zero. | 67 |
fomc | 1,980 | Then you are saying that we can't affect aggregate activity through government policies. | 14 |
fomc | 1,980 | Yes, on average. | 5 |
fomc | 1,980 | This is very, very [specific]. | 8 |
fomc | 1,980 | Yes, it is. There's no question about it. But the evidence--I'm not sure I'm happy to say it but I will--is increasingly consistent with that view. | 34 |
fomc | 1,980 | Jim, in your forecast you said you used 6 percent monetary growth as a base. Did you play around with this to take into account some alternatives to the Bluebook with the idea of maybe 3 percent for the first half and 6 or 8 percent in the second half? | 58 |
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