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fomc | 1,980 | Well, I share much of what Mr. Sternlight says. If you want to estimate an interest rate that would produce these results--I was hoping this method would get away from that a little--it seems to me that, if anything, it would be more like the federal funds rate. In essence, if you look over a long enough time period, i... | 378 |
fomc | 1,980 | Well, if I could, I'd just raise one more point. In asking my own staff to review what went on during that February period, it seemed pretty clear to us that the staff here and in New York had done a fine job of guessing what the multiplier was going to be, what the total reserves should be, and what the nonborrowed pa... | 135 |
fomc | 1,980 | Well, our views are probably marginally different. A difference is that I might allege that we could hit the total reserve path week to week. I don't think it's very important to do it, but we could without lagged reserve accounting. But we'd have to have very large movements in the federal funds rate because we'd have... | 360 |
fomc | 1,980 | May I ask Steve a question? The advocates of contemporaneous reserve accounting argue that there would be less volatility in the funds rate than under lagged accounting. Do you subscribe to that? | 37 |
fomc | 1,980 | Oh no, I think there would be quite a bit more, for one reason. The one [internal] reason is that Mr. Sternlight really won't be "able"--and I put the word in quotes because I don't mean that he's really managing the funds rate--to adapt his operations as readily because in the current week he won't know required reser... | 336 |
fomc | 1,980 | Governor Wallich. | 4 |
fomc | 1,980 | I wonder if I may ask two questions? The first one is to Steve. Steve, on contemporaneous reserve accounting, how much of a change in deposits would you need in order to sweat out $1 of reserve deficiency? | 45 |
fomc | 1,980 | I am not sure I get the gist of your question, Governor Wallich. | 16 |
fomc | 1,980 | It depends on what the multiplier is. | 8 |
fomc | 1,980 | The multiplier on demand deposits at the moment is roughly 6. So if we took put in $1 of reserves, we ought to get $6 more, roughly, in demand deposits. But that is not certain; if we put in reserves, they may end up in currency or anywhere else for that matter. But that's the multiplier on demand deposits; it's a lot ... | 79 |
fomc | 1,980 | The point I am trying to get at is: Isn't the additional adjustment you get from contemporaneous reserve accounting relatively small? You need a very large movement in deposits in order to overcome a small deficiency or surplus of reserves. | 44 |
fomc | 1,980 | Contemporaneous reserve accounting, as nearly as I can tell, does only two things for you. First, it absolutely can remove interest rates in some sense from your consideration. If you believed that there was a multiplier that the staff could predict, you could set total reserves; you'd have to chase borrowing up and do... | 254 |
fomc | 1,980 | And you can anticipate it anyway but-- | 8 |
fomc | 1,980 | What it really does, in my mind, is to remove the necessity of making judgments about where you want interest rates to be. But that's a judgment the Committee may not want to remove. | 38 |
fomc | 1,980 | We'd have to be willing to let the interest rates go anywhere. | 14 |
fomc | 1,980 | We will have to have an exhaustive discussion of these questions when we put contemporaneous reserve accounting squarely on the table, so perhaps we shouldn't waste too much time now. I don't think we are going to change [our procedures] at this meeting. | 50 |
fomc | 1,980 | May I ask my other question? Peter, what determines your decision to buy coupons? You mentioned that you bought nearly $1/2 billion. | 29 |
fomc | 1,980 | Well, we were in the midst of a period of sizable reserve provision and it was a judgment that we should divide up that purchase. We anticipated the need to provide for an outright increase in the portfolio of some $1-1/2 billion. It seemed appropriate to do the bulk of it in the bill area, but we had not bought any co... | 99 |
fomc | 1,980 | Would you have done about the same had the bond market been different? | 14 |
fomc | 1,980 | We want to keep in mind that we don't want to buy at a time when issues are very scarce and we'd have a sharp impact on prices. Certainly the fact that the coupons were available would make some marginal difference in our decisions. | 46 |
fomc | 1,980 | Yes, so you were stabilizing the market? | 10 |
fomc | 1,980 | We did a bum job of stabilizing! | 9 |
fomc | 1,980 | Unsuccessful. | 3 |
fomc | 1,980 | Mr. Guffey. | 6 |
fomc | 1,980 | I would like to ask what may be the same question John Balles asked but in a little different way. Had we raised the discount rate early in March, having in mind that through the period total reserves would be over [path] by about $700 million plus, would you not [conclude] that we'd have come closer to the total reser... | 119 |
fomc | 1,980 | If you had taken a further upward discount rate action from 13 percent, say, to 15 percent, I would have predicted a faster adjustment of the money supply only if that rise in the discount rate also meant that you were going to permit the federal funds rate to rise substantially. If you weren't going to permit the fede... | 159 |
fomc | 1,980 | I hope we can proceed here with some dispatch. Mr. Eastburn. | 15 |
fomc | 1,980 | I have just an informational question. Steve, some time ago there was discussion about having some papers on the function of the discount mechanism, the rate and so on. We now have a new situation with the surcharge and also the likelihood that we'll be making loans to other institutions--in a couple of weeks, possibly... | 76 |
fomc | 1,980 | Well, I have seen first drafts and, in some cases second drafts, of a sizable number of papers. Of course, the Board's decisions have in a sense "prejudiced" some of the conclusions. [Secretary's note: These decisions involving special reserve and other measures were made in conjunction with the President's anti-inflat... | 189 |
fomc | 1,980 | Mr. Winn. | 4 |
fomc | 1,980 | Peter, on the unsuccessful unwinding of some of these GNMA futures with the failure of a firm or two: Do you see any more problems ahead on that score with [more of those market instruments] reaching maturity? | 44 |
fomc | 1,980 | In a way, I have been surprised, given the extent of rate moves in the market, that there haven't been more problems cropping up in the GNMA area. It may be that they had enough of a scare last October when there were fears of problems in the GNMA market. From that point on, I have had the impression that activity has ... | 165 |
fomc | 1,980 | Let me just say on these questions on discount rates--I didn't hear the last answer Mr. Axilrod gave--that I am not sure it makes a great deal of difference whether we move the discount rate or not, except for its signalling influence, which might have been considerable. That's because we could adjust the borrowings, p... | 171 |
fomc | 1,980 | Ratification. | 3 |
fomc | 1,980 | Oh, we need the ratification of domestic operations. | 11 |
fomc | 1,980 | So moved. | 3 |
fomc | 1,980 | Second? | 2 |
fomc | 1,980 | Second. | 2 |
fomc | 1,980 | Without objection they are ratified. Mr. Kichline next and then I think we will go straight to Mr. Axilrod. We can then have the Committee discussion in which I would like to get as much flavor as you propose to give in the limited time we have of what is going on out there in the financial markets and in the banking s... | 138 |
fomc | 1,980 | [Statement--see Appendix.] | 6 |
fomc | 1,980 | Mr. Axilrod. | 6 |
fomc | 1,980 | [Statement--see Appendix.] | 6 |
fomc | 1,980 | In connection with that distinction--the willingness or need of banks to borrow at the discount window--I think it is important that we all reiterate publicly or otherwise the fact that this change in the discount rate procedures does not imply any greater willingness on our part to tolerate borrowing. I think your dis... | 347 |
fomc | 1,980 | They've ignored the farmers, haven't they? | 9 |
fomc | 1,980 | They don't have a lot of farmers in Manhattan. | 10 |
fomc | 1,980 | There may be more farmers in Manhattan, though, fairly soon! | 13 |
fomc | 1,980 | With their $10,000 tractors. | 8 |
fomc | 1,980 | We can have a general go-around with comments. But apart from the general business situation, any comments that you have about how far this restraint has gone and how far it needs to go and what the special problems are, as I said, would be very welcome. | 53 |
fomc | 1,980 | May I ask Steve a couple of questions first? Steve, I'm a little confused about the relationship between M2 and the other aggregates [in the Bluebook alternatives]. First of all let me ask this question: Is the relationship between the new M2 and GNP pretty similar to the relationship between the old M2 and GNP that pe... | 78 |
fomc | 1,980 | My memory is that we have ended up with a somewhat better relationship. I had better not answer; my memory is a little off on that. | 29 |
fomc | 1,980 | For the second more important question, let's look at alternative B. The implied rates of growth for February to June for M-1A and M-1B were lowered by 1-1/4 points from the growth rates for December to June, but the growth rate for M2 has only been lowered by 3/4 point from 7-3/4 to 7 percent. Now, given the new actio... | 131 |
fomc | 1,980 | It may turn out that we seriously underestimated the growth that would occur in money market funds over the first two months of the year. So there was a much bigger expansion in M2 than the Committee, in effect, wanted at that time. We have assumed that growth in money market funds would drop from here on to a rate jus... | 280 |
fomc | 1,980 | If I understand these inter-relationships correctly, the December-to-June figure you show has a monthly base, but if it were on a quarterly base the way the yearly target is, the implied 4th quarter to 2nd quarter figure for M-1A in alternative B, for instance, would be 5-1/4 percent. | 71 |
fomc | 1,980 | That's right. Those rates are on-- | 8 |
fomc | 1,980 | That's somewhat above the midpoint [of our long-term range]. | 12 |
fomc | 1,980 | That's correct. | 3 |
fomc | 1,980 | And even alternative C is above the midpoint. | 9 |
fomc | 1,980 | Slightly, that's right. That would be 5 percent, just given the way the quarterly averages work out relative to these monthly patterns. | 29 |
fomc | 1,980 | Steve, even with alternative C, growth would end up in the second quarter as a whole running slightly above the middle of our range. | 27 |
fomc | 1,980 | But well within the range. | 6 |
fomc | 1,980 | Well within, but above the middle of it. | 10 |
fomc | 1,980 | That assumes a very strong April, so we get the money in early in the [quarter]. If it didn't work out that way, it would be a little lower, I would think. | 38 |
fomc | 1,980 | Well, the April growth rate is only 8 percent in alternative C. | 15 |
fomc | 1,980 | I mean it is strong relative to the other months. But if [that pattern were] reversed, it would lower the quarterly average growth. | 28 |
fomc | 1,980 | Mr. Eastburn. | 5 |
fomc | 1,980 | Just a quick technical question. It seems to me that April is rather critical to the decision we make today and I am trying to get a fix on your feeling about the probability of those numbers. Your estimates and the New York staff's estimates, I gather, are somewhat different on this. | 58 |
fomc | 1,980 | I think the direction is the same; it's the magnitudes that are different. | 16 |
fomc | 1,980 | New York has a stronger estimate for April, partly because of the tax refunds. | 16 |
fomc | 1,980 | It's quite a bit stronger, isn't it? Is that the basis for the strong April in both cases? | 21 |
fomc | 1,980 | We did not put in any specific estimate for tax refunds because we haven't observed them having an effect yet in late February or early March when they began. If we put one in, we would add only a couple of percentage points, roughly. | 48 |
fomc | 1,980 | And New York has them in? | 7 |
fomc | 1,980 | Yes, that's part of the difference; I really don't know if that's the whole difference. | 18 |
fomc | 1,980 | But [the difference] is very substantial, Peter, in April. Dave, New York's [estimate] is about twice what the-- | 28 |
fomc | 1,980 | Yes, there's a very big difference. | 8 |
fomc | 1,980 | The overall difference is about 8 percentage points but my impression was that the tax refunds accounted for about 3 or 4 percentage points of that. | 30 |
fomc | 1,980 | Steve, could you say anything about your feeling of confidence in that? | 14 |
fomc | 1,980 | I was hoping not to. I consider this as reasonable an estimate as a group of human beings working together might come to. I didn't give you the specifics, but it assumes roughly a $1 billion increase in M1 in the week of the 19th, which is the week we're in, another $2-1/2 billion in the week of the 26th, and then very... | 236 |
fomc | 1,980 | I think it's fair to say, in the light of history, that there is no feeling of certainty about any of these numbers. | 26 |
fomc | 1,980 | It's my understanding that a refund will feed directly into the money supply. Is that right? | 18 |
fomc | 1,980 | Well, there will be checks received by consumers. The uncertainty is what people will do with them. Will they deposit them directly in their savings and time accounts--in which case it will go into M2--or will they put them in their demand accounts? And if they put them in demand accounts, will they hold them for one o... | 259 |
fomc | 1,980 | Well, suppose the refund is real and it occurs. Is that enough to knock us off of our money path growth? | 24 |
fomc | 1,980 | Well, as we said last time and this time also, we think the effect in the three months of March, April, and May might be on the order of 1 to 3 percentage points [unintelligible] and then unwinding to that extent in June and July and piddling out in August. That's our estimate of what might happen. But we haven't delib... | 81 |
fomc | 1,980 | You have a big seasonal in April to take care of this in a normal way? | 17 |
fomc | 1,980 | Yes, but the refunds this year are estimated to be about $12 billion above the average of the last two or three years. So it's more than normal. | 32 |
fomc | 1,980 | What is the normal? | 5 |
fomc | 1,980 | They are estimating about $46 billion, I think, so $33 billion or so must be normal. | 21 |
fomc | 1,980 | I don't remember the exact number. I don't know whether Darwin [Beck] has it. Well, this year we're estimating the individual tax refunds to be somewhere on the order of $48 billion. In 1979, total refunds were $36 billion. Reading back, in recent years they were, in billions of dollars, 36, 34, 31, and 29. So you can ... | 158 |
fomc | 1,980 | Who would like to make some general comments? | 9 |
fomc | 1,980 | I would just like to respond to the one question you raised about farm credit. | 16 |
fomc | 1,980 | Well, respond more generally, too. | 8 |
fomc | 1,980 | We have recently done a survey of our country banks and they tell us they are as tight as a drum, and the farmers tell us [the banks] are as tight as a drum. Yet we have very few of the country banks trying to pass on those loans to the city banks, which are not tight as a drum. When we get behind that, [we find that] ... | 437 |
fomc | 1,980 | On a cash basis, isn't the budget going to be in some surplus between April 1 and the end of the year? | 25 |
fomc | 1,980 | Yes. | 2 |
fomc | 1,980 | Yes, but it normally has a big seasonal. | 10 |
fomc | 1,980 | I understand that, but just on a cash basis-- | 11 |
fomc | 1,980 | May I piggyback on Mark's comments for a minute? On your agriculture point, Mark, I wasn't sure I followed you. Is it that the banks are not making loans at close to the prime rate but are falling further below? Is that what you're saying? | 54 |
fomc | 1,980 | Well, the country banks have loaned out about everything they have. But typically, now, given the current prime rate, the loans are at below prime, and they're reluctant to pass those on to the city banks. | 44 |
fomc | 1,980 | Well, the city banks won't buy them except at a discount-- | 13 |
fomc | 1,980 | That's right. | 3 |
fomc | 1,980 | --is what you're saying. We have that same experience, and the banks in our area are very tight. | 22 |
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