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fomc | 1,980 | Without objection, they are ratified. Let's turn to the staff report on the economic situation. | 19 |
fomc | 1,980 | [Statement--see Appendix.] | 6 |
fomc | 1,980 | Since we've identified with such accuracy past financial relationships, I think we ought to have our economist discuss prospective financial relationships. | 23 |
fomc | 1,980 | [Statement--see Appendix.] | 6 |
fomc | 1,980 | We can have some general comments about the economic situation and policy implications and we'll return to a more precise discussion after an initial go-around. Mr. Winn. | 31 |
fomc | 1,980 | I had a question I wanted to raise, which may be more on the technical side than the general side, Paul. Do you want to hold that? | 31 |
fomc | 1,980 | I think it's fair to ask questions at this time, too. | 13 |
fomc | 1,980 | Okay. Steve, you have made an income analysis for money demand in the period ahead. If one looks back at many previous credit crunches, one sees that after the economy turns down, we get a bulge in credit demand. The margins start to narrow; sales are off and inventories are up and there is continued price pressure for... | 140 |
fomc | 1,980 | We actually have projected a rather sharp drop in borrowing in the second quarter, largely because we assume a very substantial liquidation of liquid assets built up by corporations. | 31 |
fomc | 1,980 | But that runs out eventually. | 6 |
fomc | 1,980 | That's right. So the sharp drop levels off, but with borrowings at a lower level. And, of course, we have some weakening in the consumer demand area. So, we don't have any substantial build-up in borrowing demand ahead of us. Over the long run, of course, we could probably foresee some business desire to restructure ba... | 93 |
fomc | 1,980 | But if you talk to some of these businessmen, they don't have [unintelligible] they can hold out without having to come back in. They are out now. Rates have scared them off and they are using up what they have. | 49 |
fomc | 1,980 | That's right. There is pressure; they're not generating internal funds to any substantial degree. It's true that we have them running down their liquid assets. There is some built-in pressure generated against expanding their spending to a great degree. We don't have a vast expansion in spending; and to the degree that... | 74 |
fomc | 1,980 | Don't you think, Willis, that they followed a different inventory policy this time? | 16 |
fomc | 1,980 | They kept inventories pretty tight; but if sales drop off, they still are faced with having to carry [inventories]. | 24 |
fomc | 1,980 | They seemed to cut production very fast, too. I don't know. | 14 |
fomc | 1,980 | The adjustment is not quite as easy as we like to think of it sometimes. | 16 |
fomc | 1,980 | Let me say in connection with all of these confusing money figures and related numbers, that we took some actions in March that were unusual, to say the least, on consumer credit, on the voluntary program, on the money market funds, and all the rest. And we had interest rates at levels nobody ever saw before. I suspect... | 235 |
fomc | 1,980 | I'd like to pursue, if I may, the reasoning that Steve expressed. It's my understanding that back in October we adopted a policy of letting interest rates flow freely. Indeed, interest rates did move up rather dramatically and we did not act to impede that upward movement; we let them move. Now, Steve, if I understood ... | 289 |
fomc | 1,980 | In answer to the first question, President Roos, I was trying to bring before the Committee the various concerns that the market would see and also the economic analysis. I was not expressing my own judgment, particularly, on one or the other aspects of this. The only thing I can say is that, empirically, in recent per... | 158 |
fomc | 1,980 | You don't want to express any judgment about the persuasive powers of the Chairman, Mr. Axilrod? [Laughter] They are limited I would say. | 32 |
fomc | 1,980 | Are they limited, Paul, by the tradition of our taking an action and letting people decide what caused us to do what we did or are they limited for other reasons? I think your persuasive potential--and it isn't salary-setting time, so I'm not polishing the apple--is enormous. [Laughter] But I think the Fed has traditio... | 94 |
fomc | 1,980 | The only answer I could give you is that we would get a mixed reaction. Some people will believe it. People of monetarist persuasion will believe it more than others. Some people don't believe the underlying theory, so they have no reason to believe it. And there will be people in between. But I don't know whether ther... | 178 |
fomc | 1,980 | I would just remind you of how he charmed Gail Cincotta. VICE CHAIRMAN SOLOMON(?). The ability to persuade is asymmetrical also. | 33 |
fomc | 1,980 | That's probably right. People believe what they want to believe. If they saw the inflation rate coming down, they would be more persuaded. But we are in this unfortunate position where I suspect the consumer price index, anyway, is going to remain at or above--or maybe if we are really lucky a little below--its current... | 202 |
fomc | 1,980 | I'd like to follow up on what Larry said. I think it is perfectly possible to convince the market that we are sticking to a fixed money supply policy. That doesn't mean that we are not engaging in a very stimulative policy at a time of recession. That's exactly the nature of that policy. It's not really a policy; it's ... | 547 |
fomc | 1,980 | Our present target is not 5 percent. It's 4-1/2 percent or somewhat less. | 21 |
fomc | 1,980 | That comes out of the movement in the previous period, I think. | 14 |
fomc | 1,980 | For December to June the Committee last time voted on 4-1/2 percent or somewhat less. | 21 |
fomc | 1,980 | It's consistent with the numbers you gave, which are the average over the longer run. Henry mentioned M-1B also. | 25 |
fomc | 1,980 | Do you accept the fact that if we keep money growing slowly, there is a direct effect on output? Isn't that part of the risk? | 28 |
fomc | 1,980 | No. I don't believe there is any direct effect from money to the economy. The economy in my opinion runs on interest rates. The effect from money goes to interest rates and from there it goes to the economy. And the prescription for a fixed rate of growth of the money supply, far from being a neutral and noninterventio... | 194 |
fomc | 1,980 | Mr. Black. | 4 |
fomc | 1,980 | Mr. Chairman, I agree with the staff's further downward revisions in the projections for the forthcoming period. And if I had to guess, I would say that they still haven't got them quite low enough, because I just don't see any area in the economy that seems to have significant strength. Housing is headed much lower, I... | 460 |
fomc | 1,980 | April is pretty well gone, I'm afraid. | 9 |
fomc | 1,980 | Well, probably so. | 5 |
fomc | 1,980 | Mr. Morris. | 4 |
fomc | 1,980 | Well, Mr. Chairman, I think we have the first big test of our new operating procedure ahead of us. It may be more severe than the staff has projected because we feel the second quarter is likely to be weaker than the staff forecast. If at this juncture we begin to revise our money growth targets, then in effect we are ... | 339 |
fomc | 1,980 | Mr. Baughman. | 6 |
fomc | 1,980 | First, Mr. Chairman--and it's possibly a trivial question--on page I-24 in the Greenbook it's reported that one of the reasons for strength in exports of nonagricultural commodities is the high price of silver in [the form of] exported coins. Is that a significant business? | 60 |
fomc | 1,980 | Yes, exports of coins were something over $2 billion at an annual rate in January and February. | 20 |
fomc | 1,980 | Aside from the silver price, was that about a normal volume? | 13 |
fomc | 1,980 | Well, we don't have volume figures for it; and in fact, we never will. That is one of the problems in putting together the first-quarter GNP numbers. The price increase clearly is some of it, as well as other random factors in terms of when the exports actually take place. But the two together, and they will never be u... | 85 |
fomc | 1,980 | And this is a product in which I take it we compete in the world market? | 17 |
fomc | 1,980 | It so happens that we had a lot of silver exports and that they were very high priced in that period, which results in a big increase in nonagricultural exports in that period. I don't think it goes beyond that. The price has since come down, so even if we have a normal level of exports, we are going to get lower nonag... | 76 |
fomc | 1,980 | But it is silver exports in formal coins rather than-- | 11 |
fomc | 1,980 | That's how it's recorded on the statistics; that's the only information I have. | 15 |
fomc | 1,980 | With respect to the general economic forecast, I have no particular quarrel with it. It seems to me that the direction and the amount of the revisions from a month ago are quite appropriate in the circumstances. With respect to the remarks that have been made here that were oriented to policy, I think I agree with ever... | 68 |
fomc | 1,980 | That's not possible! [Laughter] | 8 |
fomc | 1,980 | It seems to me that it is. When we adopted our current policy posture, we did it knowing that it was going to give us strong swings in interest rates as we undertook to determine whether or not stabilizing the rate of growth of the money stock imparts stability or instability to the real economy. So as I see it, we dec... | 163 |
fomc | 1,980 | Governor Partee. | 4 |
fomc | 1,980 | I agree that there's a sizable decline in activity now in process. It was inevitable, I think. But it's probably worse because of the policies we've followed over the last six months in defense of a principle. The principle was that in the absence of knowledge about how interest rates should move--because we have so li... | 591 |
fomc | 1,980 | Mr. Balles. | 5 |
fomc | 1,980 | I don't know that I can add much to the comments of my three colleagues to my right except to say that I'm essentially in agreement with them. It certainly took a great deal of courage for this Committee to let interest rates rise to these extraordinary levels that we've seen, and I think that was the right thing to do... | 331 |
fomc | 1,980 | Mr. Guffey. | 6 |
fomc | 1,980 | Thank you, Mr. Chairman. The new operating procedures seem to me a bit more effective when we're seeking to. restrain credit on the up side than when we're trying to encourage the extension of credit on the down side. As a result, I've been pleased with what we've been able to do on the up side, but I am concerned abou... | 417 |
fomc | 1,980 | Mr. Mayo. | 4 |
fomc | 1,980 | Well, Mr. Chairman, most of my points have been made. I would stick with the targets. I would not see any objection, however, to our interpretation of "about" 4-1/2 percent being 4-1/2 percent or a little less rather than 4-1/2 percent or a little more. Okay, so that's fine-tuning, but I think we can lean in that way f... | 471 |
fomc | 1,980 | Mr. Eastburn. | 5 |
fomc | 1,980 | Just a couple of comments: On the theological issue, I come out with a view that we did make a decision back in October and that it was a very fundamental decision and we ought to adhere to it on the down side as well as the up side. In my scale of preferences, I'm going to worry more about a very sharp undershoot of t... | 159 |
fomc | 1,980 | Governor Rice. | 3 |
fomc | 1,980 | I have no reason to disagree with the revised projections of the staff. It seems to me pretty clear that as a result of recent developments the recession is going to be more severe, that the recovery is going to be weaker, and that we'll be in a period of recession for a longer time than originally expected. I agree wi... | 330 |
fomc | 1,980 | Governor Teeters. | 4 |
fomc | 1,980 | I don't have much to add to what has been said. I would like to remind you that it took us two months to raise the federal funds rate by 5 full percentage points. And if you're uncomfortable about the period ahead, I'm very uncomfortable about the period we've been through. We choked the horse. Now, do you want to comp... | 543 |
fomc | 1,980 | No one else has volunteered but there are a few people [who have not commented], like Mr. Willes. | 23 |
fomc | 1,980 | I promised my wife I'd be quiet today. But as long as you've given me the opportunity, I'll just make a few brief comments. We had Yoshiho Suzuki from the Bank of Japan in our Bank the other day and asked him to give a speech to some local people. It was very interesting to hear him in that speech analyze the Japanese ... | 139 |
fomc | 1,980 | Are profits being squeezed? Is that how that works? | 11 |
fomc | 1,980 | To some extent, profits have gone down. Also they have found reductions in energy utilization being forced by the policy and so on. There has also been a cut in real incomes because wages have not adjusted. They haven't allowed wages to [rise with inflation]. | 51 |
fomc | 1,980 | And 5 percent productivity [growth]. | 8 |
fomc | 1,980 | And 5 percent productivity [growth]. That doesn't hurt. It's a question of what leads what; and that's a whole other discussion, which I won't take time for. The only other thing I'd say, Mr. Chairman, is that I've listened to this discussion today with great interest and was particularly interested in the way Chuck po... | 423 |
fomc | 1,980 | Governor Schultz. | 3 |
fomc | 1,980 | Well, I certainly would agree that it is important that we continue with a course that strengthens our credibility. I believe we have made the right moves in going to a different kind of procedure. I think it's important that we hold to that 3-1/2 to 6 percent [Ml] figure for the year. But while I want interest rates t... | 546 |
fomc | 1,980 | I guess we've left you the unusual privilege of going last, Mr. Solomon. | 16 |
fomc | 1,980 | Well, that's the privilege of a new boy. I want to second very strongly what Fred Schultz said. I think we ought to stick with the "B" targets and accept the March-to-June targets that fall out. I'm perfectly willing to see a decline in interest rates, but I really would urge you not to permit too precipitous a decline... | 312 |
fomc | 1,980 | Well, why don't we have a break and come back to this and be more operational in our comments after the break? | 24 |
fomc | 1,980 | Let me distill a bit what I think I'm hearing and what I'm thinking. The big change we've had--though we've had a lot of changes since the last meeting--is that we certainly have some evidence of an economic decline that we didn't have before. I for one still think it's a little premature to make very conclusive judgme... | 1,823 |
fomc | 1,980 | Does that include First Pennsylvania? | 6 |
fomc | 1,980 | Yes, that included [an allowance of] about $500 million, when we were [calculating] that-- | 23 |
fomc | 1,980 | Actually it included about $500 million of [borrowing by] First Pennsylvania, so one might say the equivalent is a little higher than that to allow for the fact that they are borrowing $600 million at this point. But that's fine-tuning. It's not all that far from where we are. There has been a lot of talk about interes... | 1,087 |
fomc | 1,980 | It's about 17 percent. | 6 |
fomc | 1,980 | --with the high level of borrowings earlier this week and some softness in the money market today and presumably even more tomorrow, it will already have pointed in that direction because the level of borrowings currently is too high. It's very simple in a technical sense, I suppose, [for the funds rate] to persist at ... | 277 |
fomc | 1,980 | Paul, are you specifying a funds rate target? Is that what we're going to be doing? | 19 |
fomc | 1,980 | No, I'm just telling you where I think the funds rate is likely to be with [an alternative B] borrowing target. | 25 |
fomc | 1,980 | I see. I don't think there's any problem if Steve is right and we get around 7 percent money growth in May and June. But what if we got zero money growth in May and June? | 40 |
fomc | 1,980 | We won't know that in the short run, so I'm really talking about what we will do in the next two or three weeks. We're going to meet again in four weeks. We will know more, obviously, two or three weeks from now, and we may want a consultation. I'm just setting the dial at the moment and telling you what I think the re... | 183 |
fomc | 1,980 | I might add, Mr. Chairman, that we set that $1-3/4 billion [borrowing level of alternative B] before the banks this week suddenly decided to borrow more. So I would go on to say that there's a lot of uncertainty in this borrowing/funds rate/ discount rate relationship here. But our best judgment at the time we set this... | 93 |
fomc | 1,980 | I'm saying basically that something like "B" looks right--or, more specifically, what we adopted last time, which is now "B" in terms of the December-to-June period as a whole, or 4-1/2 percent growth just looking at M-1A. We said about the same thing for the others. Technically we said "or somewhat less" for M-1B and ... | 97 |
fomc | 1,980 | [About] 7-3/4 percent. | 11 |
fomc | 1,980 | So this alternative does have a lower figure for M2 than we had last time, reflecting the decline in M2. I think what has happened in M2, certainly in part, is that we just shut off the money market funds; and I'm sure there was some substitution between money market funds and Treasury bills, which are not in M2. So I'... | 195 |
fomc | 1,980 | Another approach would be to say "somewhat more or less." | 13 |
fomc | 1,980 | Or "around." | 4 |
fomc | 1,980 | That depends. It gives a little feeling of how cautious we want to be about moving down the borrowing level I will say instead of the interest rate level. If we say "or somewhat less," there's a little more room for being a bit more cautious in moving down the borrowing level. | 57 |
fomc | 1,980 | That's what we said last time. | 7 |
fomc | 1,980 | In any event, consistent with "B," we'd have to move it down. There's no question about that. | 22 |
fomc | 1,980 | Wouldn't it be a little better to set a borrowing level of about $1-1/2 billion plus emergency lending and any special contingencies since, as I understand it, included in that $1-3/4 billion is that uncertain situation and we don't know what else may arise? | 59 |
fomc | 1,980 | We could do that, except it should be $1-1/4 billion, I think. | 20 |
fomc | 1,980 | I think what we're really saying is roughly $1-1/4 billion plus whatever that emergency borrowing or seasonal borrowing or whatever happens to be. | 29 |
fomc | 1,980 | As we did the projections we thought $1-1/2 billion would be more consistent with the projections. But we defer to Steve, if he feels that his 16 to 17 percent assumption and staying on alternative B is more consistent with $1-1/4 billion. | 57 |
fomc | 1,980 | In that connection, Steve, remind me: What has borrowing been ex this special borrowing situation? | 19 |
fomc | 1,980 | In the first three weeks of April, ex the special borrowing, it has been running around $1.8 to $2 billion. It was about $1.8 billion in the week of the 16th. This week, though, it has moved up to around $2 billion. That, of course, is with the funds rate running 18-1/2 to 19-1/2 percent. So our thought was that with t... | 117 |
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