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fomc | 1,980 | No, one of the reasons we repaid our debt so quickly was that there is the risk of a snapback. As I say, the only thing that is supporting us at the moment is really the interest rate differential. Market expectations toward the dollar are still very bearish. | 55 |
fomc | 1,980 | The question I would like to raise more broadly is, insofar as we do anything in the market at all, should we restrain the dollar more than we have? We share with the Bundesbank in the proceeds of their support operation. In any event, if there is a strong movement, one can't do very much. But if the dollar goes up, sa... | 92 |
fomc | 1,980 | Well, the rise of the dollar has been almost totally during the European hours, and the Bundesbank has been prepared to in one operation or the other. By the time we come in, the market is pretty limp. We have been able to do small amounts. We haven't wanted to do too much for fear that the market psychology would turn... | 146 |
fomc | 1,980 | The market moves against the intervention is what you are saying. The dollar goes up in Frankfurt against the Bundesbank intervention and doesn't go up in New York despite the absence of intervention. | 36 |
fomc | 1,980 | We have been prepared to operate a little, but [the dollar] has been pretty steady in New York. | 22 |
fomc | 1,980 | We need to ratify the transactions since the last meeting. Do we have a motion? Second? SEVERAL. Second. | 26 |
fomc | 1,980 | [Approved] without objection. You have a recommendation? | 11 |
fomc | 1,980 | For once I don't have to recommend any swap renewals. But I do have a rather complicated transaction to describe, so that I can be authorized to complete it. When the dollar came into demand in late February, early March, the Bundesbank supplemented its spot sales of dollars with forward sales of dollars against marks ... | 601 |
fomc | 1,980 | But at what cost? | 5 |
fomc | 1,980 | I take it? | 4 |
fomc | 1,980 | Yes. | 2 |
fomc | 1,980 | in today's markets, it's the Treasury who bears [the cost], and they want to bear it. | 20 |
fomc | 1,980 | We don't know where the rate will be in May. | 11 |
fomc | 1,980 | Why does the Bundesbank | 5 |
fomc | 1,980 | It's a matter of that nature, yes. They prefer | 11 |
fomc | 1,980 | Was the Treasury a party to the original agreement, Scott? That is, did they agree that those forwards ought to be sold? | 26 |
fomc | 1,980 | No, but they were the ones who suggested that we should raise the question of this 50-50 sharing with the Bundesbank. As soon as they heard about it, they were the ones who pressed the Desk to inquire whether the Germans would be prepared to-- | 53 |
fomc | 1,980 | It was the Bundesbank's decision to buy in the first place; but as soon as the Treasury heard about it, they wanted [to participate]. | 30 |
fomc | 1,980 | There was no objection raised by Treasury, or for that matter by the Federal Reserve. | 17 |
fomc | 1,980 | Does that reflect the judgment of the Treasury on the outlook for the dollar? | 15 |
fomc | 1,980 | All this discussion took place when [the transaction] was at about the market rate. It's just that with the lapse of two or three weeks since the transaction took place it's no longer the market rate. | 40 |
fomc | 1,980 | Scott, at what rate do we get these marks back [from] the Treasury, if we need them? | 22 |
fomc | 1,980 | Well, I am sure the Treasury would insist on a rate of around 175, 176. The average rate is 175-1/2 or thereabouts. | 34 |
fomc | 1,980 | I think we probably wouldn't want them back. | 9 |
fomc | 1,980 | No, if the situation arises, I will [undertake] a very complicated negotiation to avoid our getting stuck with them. | 25 |
fomc | 1,980 | Well, this seems more technical to me than real. The original transaction was at a market rate and what we are doing is back-dating in some sense--not literally back-dating, but it's no longer at the market rate. The Treasury wants the marks and we are a conduit. I don't see any big problem in this myself. | 68 |
fomc | 1,980 | I move we accept this. | 6 |
fomc | 1,980 | Is there any real question about it? I think we just have to write the exception in such a way so that the circumstances are clear as to the fact that this was not an off-market transaction when it took place. | 44 |
fomc | 1,980 | And we're not committed to buy them back from Treasury? | 11 |
fomc | 1,980 | No, I don't see that we should be committed. I don't understand that part. I don't see where we would want to buy them back. If we have to intervene on the other side, the Treasury can use the [mark] balances [it holds] and it would take the loss. I don't think we want to take them back at the off-market rate. | 74 |
fomc | 1,980 | Right. | 2 |
fomc | 1,980 | This was a transaction that was initiated by the Germans and it automatically involved us to the extent of 50 percent? | 23 |
fomc | 1,980 | It didn't automatically. They've been giving us 50 percent of their intervention at our request and this falls into that pattern. | 24 |
fomc | 1,980 | I see. | 3 |
fomc | 1,980 | They originated the intervention but they have been giving us 50 percent, and they will give us 50 percent of this. It just happens to be a forward transaction which hasn't been [consummated] yet. It falls into the regular pattern, but what is different about it is that it is a forward transaction. | 64 |
fomc | 1,980 | Forward, yes. | 4 |
fomc | 1,980 | Do they regularly engage in forward transactions? | 8 |
fomc | 1,980 | No, I believe they did it for liquidity reasons. | 11 |
fomc | 1,980 | Yes, liquidity. | 4 |
fomc | 1,980 | They were doing a lot of intervention and the effect was to drain liquidity. They didn't want to drain that much liquidity at the time, so they did a forward. That's why they did it, as I understand. | 43 |
fomc | 1,980 | In fact they are now | 5 |
fomc | 1,980 | I don't think they have done any forward transactions recently. This was all during a limited period. Well, without objection we will provide that exception. Mr. Sternlight. | 34 |
fomc | 1,980 | Paul, before you turn to that: What's our posture for the month ahead in this area as the markets bubble? | 23 |
fomc | 1,980 | Well, I think Mr. Pardee has described our present posture. We would certainly buy some marks, to the extent that the mark is at these levels and to the extent that it is strong in New York. But as he points out, it hasn't been terribly strong in New York. The Bundesbank has agreed to share with us their intervention, ... | 101 |
fomc | 1,980 | $3.3 billion. Yes, we can continue; and they are continuing to share. | 19 |
fomc | 1,980 | Do we have any mark balances now? We have a few mark balances, don't we? | 18 |
fomc | 1,980 | Yes, $100 million worth of marks. | 9 |
fomc | 1,980 | Essentially, we will pass along our share of their intervention to the Treasury until the Treasury gets balanced. If the dollar remains that strong and indeed we do any intervention in New York, we will pass that on to the Treasury, too. | 48 |
fomc | 1,980 | Yes, everything. The problem will remain if the dollar comes under selling pressure. I think we are going to have to give quite a bit of ground before we start operating very vigorously in defense of the dollar because the Bundesbank certainly won't help us for a long ways down. | 55 |
fomc | 1,980 | There is a great concern in Europe generally about their currencies depreciating because of the internal inflationary repercussions, and everybody wants their currencies to appreciate at this point. I think it's only that our interest rates have prevailed here at the moment. But the danger is that they will raise their... | 146 |
fomc | 1,980 | Shall I proceed, Mr. Chairman? | 9 |
fomc | 1,980 | Yes. | 2 |
fomc | 1,980 | [Statement--see Appendix.] | 6 |
fomc | 1,980 | Peter, would you have been able to come closer to the total reserve path if we had contemporaneous accounting? | 22 |
fomc | 1,980 | I really don't think it would have mattered a great deal, President Morris. I have not regarded the lagged accounting as a significant impediment to achieving the [path], as long as we are able to make the kinds of adjustments we make in the nonborrowed path to bring speedier adjustments to the growth of the aggregates... | 75 |
fomc | 1,980 | Isn't it true that the one-week bulge in the money supply practically made it impossible for you to hit the total reserve path in the last three weeks? | 32 |
fomc | 1,980 | Well, even with contemporaneous accounting, we are going to get bulges at times; and if we didn't provide the reserves, [the reserve needs] would be met at the discount window. The banks would have to borrow, or would have to do something, to get the reserves to meet their requirements. | 62 |
fomc | 1,980 | You do have to be prepared to change your nonborrowed path frequently, I take it, as these borrowings numbers come out in ways that are unexpected. | 32 |
fomc | 1,980 | I think that is right. | 6 |
fomc | 1,980 | There will be a lot more of that in the future, too, Peter. | 16 |
fomc | 1,980 | Certainly so, given the new look at the discount window. | 12 |
fomc | 1,980 | But, Chuck, how do you know which way it's going? If we are making an adjustment in the nonborrowed, borrowings go up. It's hard to see which one comes first here. If we lower the nonborrowed path, that almost dictates an increase in the borrowings. | 59 |
fomc | 1,980 | Well, that certainly is true. But I think we do it by looking at total reserves, too--by seeing what's happening in total reserves relative to our path. What I worry about is that there may be a number of necessitous borrowers. There may be a lot of nonmember borrowers who will come in once this bill passes. So we coul... | 113 |
fomc | 1,980 | There is no question that if new borrowers come in for emergency reasons or because they are new, we will have to make an adjustment to allow for that. But I think this elasticity in the borrowing numbers is very bothersome whether we are on contemporaneous or lagged accounting. The contemporaneous might help. When are... | 76 |
fomc | 1,980 | Well, at any time. Following the previous FOMC discussion, we looked up all our old work on the various proposals that the Presidents put forward. And we'd be prepared to bring the issue of lagged reserve accounting plus some of those other issues before the Board at any time. If the Board were going to consider it, I ... | 140 |
fomc | 1,980 | We are going to be prepared to have a discussion of that at our next meeting? | 17 |
fomc | 1,980 | Do you mean on the other measures in addition to the lagged reserve accounting that the Committee has already discussed or just--? | 25 |
fomc | 1,980 | What are they? | 4 |
fomc | 1,980 | Well, lagged reserve accounting, staggered reserve settlements, and a few other things. | 18 |
fomc | 1,980 | You are going to be prepared with all of this? | 11 |
fomc | 1,980 | Well, we could be. | 6 |
fomc | 1,980 | Let's try to do that. I think it's a major hazard to introduce something that is going to be as difficult as this for the banks to handle on top of all this other stuff that we have been giving them. | 43 |
fomc | 1,980 | My only point was that if the Board and the Committee wanted to do away with lagged reserve accounting, the time to do away with it is when the whole new reserve system goes into effect, [when it is] applicable to other institutions. | 49 |
fomc | 1,980 | I understand that consideration. Mr. Roos. | 10 |
fomc | 1,980 | I think my question was probably answered, Mr. Chairman. As I understand this process, every day you have a total reserve path target in mind, right? | 32 |
fomc | 1,980 | I would say that what we have in mind from day to day is more of a nonborrowed objective. Although as I described, in certain circumstances, such as when we get a bulge of borrowing over the weekend that may have been caused by banks anticipating a discount rate action, it seems sensible to come in below, let's say, a ... | 75 |
fomc | 1,980 | But the figure on borrowings is available to you on a [daily basis]? | 16 |
fomc | 1,980 | Oh, I get a tentative figure every day, yes. | 12 |
fomc | 1,980 | So, if you have a total reserve figure in mind and you know what the borrowings are, can't the adjustment almost automatically be made on the nonborrowed side to give you the total? If you know borrowings and if you know what total reserves should be, then can't you simply adjust the nonborrowed part of this to give yo... | 75 |
fomc | 1,980 | That's where the lag comes in. We have to meet the [required] reserves. | 17 |
fomc | 1,980 | We know the required reserves; we can't change the required reserves for that particular week. And the required reserves govern the total reserves. | 26 |
fomc | 1,980 | I recognize that. But if we offset, or if we don't supply the required reserves, what happens? Do we have to accommodate the needs of the banks? Or could we not stick by our total reserve target, and if they are short, they would have to scramble to adjust their operations to what we want to do. | 65 |
fomc | 1,980 | If we don't provide the reserves in nonborrowed form, they will have to get the reserves either through borrowings or be deficient in their reserves. | 30 |
fomc | 1,980 | Is that a bad thing? | 6 |
fomc | 1,980 | Well, it depends on what degree of pressure we want to impose on them at that moment. | 19 |
fomc | 1,980 | Are we fearful that interest rates will [rise]? | 10 |
fomc | 1,980 | The Committee has set bounds on the funds rate. If total reserves were the overriding objective, bar nothing, then we could drive interest rates up to just about any point, I would think. | 38 |
fomc | 1,980 | And even then we can't affect total reserves. The banks are just going to borrow. What we can affect is how much they borrow in any particular week. | 31 |
fomc | 1,980 | But we can affect the degree of pressure they are under so that they will start making adjustments. | 19 |
fomc | 1,980 | Well, we do want to do that, don't we? | 12 |
fomc | 1,980 | Yes. | 2 |
fomc | 1,980 | And we did that. | 5 |
fomc | 1,980 | I think we get an arithmetic impossibility if total reserves are set and we change nonborrowed reserves for every dollar change that occurs in borrowings to try to go along a path we have in mind for total reserves. It makes it impossible for the banking system to balance, given the fact that we have a two-week lag on ... | 78 |
fomc | 1,980 | Well, they can [have a] reserve deficiency for a week, for a little bit. | 19 |
fomc | 1,980 | But it's not very big. | 6 |
fomc | 1,980 | The important point really is the one you made a while ago, Chuck, about the need for reassessing the nonborrowed reserve target more frequently. I was on the call and I sensed that we really ought to be doing that; we did speed it up last month, but I would like to see even more. | 64 |
fomc | 1,980 | Mr. Balles. | 5 |
fomc | 1,980 | [Unintelligible] keep the level of borrowed reserves at about what we would hope to have it. And to the surprise of most, if not all of us, the necessity of frequent adjustments just didn't come along for a long time. It looks as if perhaps February might have been the month when it could have been used. The question, ... | 142 |
fomc | 1,980 | Well, of course, the discount rate was moved in the middle of February along with the Desk taking measures to impose greater reserve restraint. There was a certain amount of pressure that emerged almost automatically out of the process just by our sticking to our nonborrowed path when the banks were demanding additiona... | 273 |
fomc | 1,980 | One other question, Mr. Chairman. I would like to ask Steve something in this case, in conjunction with the Bluebook alternatives. Steve, would it be reasonable or even feasible for the staff to attempt to estimate a level of the discount rate that would be consistent with the money growth targets? | 59 |
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