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fomc | 1,980 | Another thing is that if we had the regular discount rate at 16 percent, I think we'd be pretty sure the federal funds rate would not rapidly go much below 16 percent. Whether our surcharge exerts any drag at all on the funds rate as it goes down to 16 percent isn't clear. But there's very little borrowing at that rate... | 93 |
fomc | 1,980 | We're also below [path] on total reserves, aren't we, Steve? That would be another reason for adjusting the borrowing down. | 26 |
fomc | 1,980 | Yes. I should be clear, Mr. Chairman, that the borrowing level in alternative B was on the assumption that rates would come down. And the borrowing level in alternative C-- | 36 |
fomc | 1,980 | By rates you're talking about the federal funds rate basically? | 11 |
fomc | 1,980 | Yes, the funds rate. Alternative C was more like the borrowing that we had [earlier]. And even that was shaded a little lower because we thought the funds rate would be more like 18 percent, which is a shade below what it had been. So we did put in something that carries with it an easing in the funds rate. | 69 |
fomc | 1,980 | Yes. I realize that, but you said your guess is around 16 to 17 percent or somewhat lower. I guess that means 16 percent. | 31 |
fomc | 1,980 | I'd say it means 15 to 17 percent. | 11 |
fomc | 1,980 | But it also implies in the normal course of our operations that if the money supply in the next week or two continued weak, assuming for the moment that Steve is right, [the funds rate] would be lower. [Money growth] would have to be quite a lot stronger probably [for the funds rate] to be much higher. But I have no pa... | 97 |
fomc | 1,980 | It would be rather nice symbolically to move the upper limit down to 19 percent. | 18 |
fomc | 1,980 | Or 18 percent. | 5 |
fomc | 1,980 | Well, that gets a little tight. I like 19. | 13 |
fomc | 1,980 | I personally wouldn't like to see it go up to 20 percent again. I'm not at all sure I'd want to see it go up to 19 percent. | 32 |
fomc | 1,980 | After all, we could get a spurt in the money supply. The fact.that we've had two minus months increases the odds that we're going to have plus months. That's the only rule that I have and-- | 43 |
fomc | 1,980 | Unfortunately, it hasn't worked that way over extended periods in the past, for example in the summer of 1979 and a good part of '76 and '77. We have a long history of sustained overshoots and undershoots, and that's what I think we have to guard against now. | 61 |
fomc | 1,980 | We're talking a little out of perspective. In perspective, with this unexpected drop [in M1] last week from a level that was already running a bit low, we start from a lower base; but it's still one week's figure and heaven knows what the future will bring. We can't all be speaking. Mr. Winn. | 65 |
fomc | 1,980 | Paul, the seasonal adjustment for April makes me fairly nervous, so I'd like to get a bit of feeling for May before we pump in an inordinate amount of reserves in the next week. I think the danger of being whipsawed is very great. I haven't any concern about your suggestion. | 59 |
fomc | 1,980 | Of course, we don't pump reserves in unless we have a shortfall. | 15 |
fomc | 1,980 | No, I understand. | 5 |
fomc | 1,980 | Not beyond what I said. But if you're interpreting what I said as "pumping," it is "pumping" a bit. | 27 |
fomc | 1,980 | With the inflation problem being what it is and with the fact that everybody doesn't read our policies the same way, a flip in our policy on inflation at this time could be most unfortunate, given all the other things we've done to move in the other direction. | 51 |
fomc | 1,980 | Well, let's get some other comments. | 8 |
fomc | 1,980 | I think your proposition makes a lot of sense. It's a good mini-max solution to the very uncertain conditions that we face. If you add the idea that we would consult (a) if the rates seemed to be coming down faster than we'd like to see them or (b) if the aggregates were coming in quite low, which in my view would be t... | 106 |
fomc | 1,980 | I'm agreeable to it, too, Paul. It's a nice intermediate course, and it is only four weeks to the next meeting. We could get a reversal or it could get a lot worse. So I would suggest, as I think you did, that we take a point off the upper end of that [funds rate] range and live with "B" and expect the funds rate to co... | 131 |
fomc | 1,980 | Thank you, Mr. Chairman. I feel some discomfort in what I'm about to say in the sense that it may be taken that I don't have great faith in our new procedures. But maybe it's because of uncertainty. I'd feel somewhat more comfortable if we were to move toward "C," [which has 4 percent growth for M-1A]. [Our directive] ... | 346 |
fomc | 1,980 | Mr. Roos. | 5 |
fomc | 1,980 | I would subscribe to "B," Mr. Chairman. I think your analysis is totally consistent with the facts of life. I don't want to belabor the 20 or 19 percent upper limit on the funds range other than to say that any change in it, to the person who concentrates on minuscule parts of what we're doing, might imply that we stil... | 102 |
fomc | 1,980 | Governor Wallich. | 4 |
fomc | 1,980 | I'm afraid I don't like any of the three [Bluebook alternatives]. I'd like something a little stronger. It doesn't mean that we'd have to get outside of our range. We can live within the 4 to 6-1/2 percent annual range on M-1B, which [is the aggregate] I like to think in terms of. We would have to have a lower growth r... | 225 |
fomc | 1,980 | Isn't M-1B growth just about that, 5 percent? | 15 |
fomc | 1,980 | Well, [you are] talking of "B." But now look at M2, which is after all what guides bank credit mostly. If that has a reduction of velocity, I see considerable accumulation of liquidity. In any event, after all that has happened, I think we'll be sitting here a year. or a year and a half from now and I will then be aski... | 254 |
fomc | 1,980 | Who else wants to say something? | 7 |
fomc | 1,980 | Henry has a one-way ladder. Have you noticed? It keeps ratcheting up as we go. | 21 |
fomc | 1,980 | "B" sounds fine; I'm not a bit uncomfortable with funds in the 15 to 17 percent range and I think having a consultation point makes a lot of sense. Maybe I just don't know quite enough about how the projections are put together to have great belief in them, but on the track record they have been [unintelligible]. | 69 |
fomc | 1,980 | It's one of those things you're better off not looking into too closely! | 14 |
fomc | 1,980 | I'd really just like to sneak up on this animal a little in case he springs at me. So, rather than borrowing at $1-1/4 billion plus the emergency or the special lending, I'd like to start at $1-1/2 billion and if things look a little weak, then we can move back down in line with the sort of technique we're talking abou... | 151 |
fomc | 1,980 | Mr. Morris. | 4 |
fomc | 1,980 | I don't have any problem with "B." And I think it would be desirable to move the top [of the funds rate range] down to 19 percent. It's not clear to me what the consultation point is. Is it 16 or 15 percent? | 53 |
fomc | 1,980 | Or is it the money supply going negative? We have a consultation any time we get a big number but we don't seem to have very many consultations when we get little numbers. | 35 |
fomc | 1,980 | Well, we won't have a consultation, presumably, if the money supply is coming in weak. | 19 |
fomc | 1,980 | I know. | 3 |
fomc | 1,980 | When the funds rate drops as a result, we will have a consultation. | 15 |
fomc | 1,980 | The implication, in terms of a consultation, is that we would have a combination of two things. We can make a formal decision on it if you want to, but we would have a combination of a weak money supply and a sharply declining funds rate. If the money supply were not coming in very low, we wouldn't face the interest ra... | 115 |
fomc | 1,980 | I'm not uncomfortable with consultation at 15 percent. I wouldn't mind seeing it get down in that range, but it would make me feel--to use Larry Roos' term--a bit antsy below 15 percent. | 45 |
fomc | 1,980 | But Fred, if I may, Mr. Chairman, the factors that would essentially cause interest rates to decline would be a softening of economic activity and a softening in the demand for credit of a substantial scope. If that were to happen--if the economy were in a seriously weakened condition and credit demand fell off--and, l... | 159 |
fomc | 1,980 | I think you're probably overstating the possible significance of what would be happening in a 2- or 3-week period. I think what you say is true if one looked at it in a long enough perspective. But we're dealing with uncertain seasonal adjustment factors, uncertain week-to-week numbers, and an extremely uncertain relat... | 89 |
fomc | 1,980 | I'm not as experienced as the rest of the people at this table, but it doesn't seem to me that we need a formal decision in this regard. We ought to give the Chairman an indication, as he himself suggested I guess, that when the funds rate gets down to the 16 percent range, more or less, he would initiate a consultatio... | 156 |
fomc | 1,980 | I think we ought to look at other interest rates, too, because the funds rate has become a very poor indicator of the rest of the spectrum of rates. If bill rates, for instance, were to fall more rapidly than the funds rate, that would be a further signal to the market. | 59 |
fomc | 1,980 | I don't know who has not talked yet. I don't think you have, Emmett. | 18 |
fomc | 1,980 | Well, I'm prepared to go along with what you suggest. Alternative B seems right, and I would be willing to see one point knocked off the top end of the federal funds range to 19 percent. | 41 |
fomc | 1,980 | Who else has comments? I seem to have a number of Committee members who haven't-- | 17 |
fomc | 1,980 | I can support alternative B and taking off the one percentage point [on the funds rate range]. I think we're more likely to run into a problem of not being able to maintain the growth rates of the money supply, [which may mean we would] need a consultation. I also think that the spread between the federal funds rate an... | 201 |
fomc | 1,980 | Well, let me fine-tune this a bit further, if I can, after listening to people here. What I would continue to propose is the same language in the directive that we had last time, which in some sense is "B" minus. It's this language of "B" [Ml growth] or somewhat less, which has some significance. I don't feel strongly ... | 222 |
fomc | 1,980 | Is that exclusive of the big bank borrowings? | 10 |
fomc | 1,980 | Yes, these figures all exclude the big bank borrowings. So that's a slight modification toward a little more caution than has been suggested. | 27 |
fomc | 1,980 | I interpret that, Mr. Chairman, for constructing the path--it's only four weeks here--as putting in $1-1/2 billion for the first two weeks and $1-1/4 billion for the last two weeks. What would actually develop-- | 53 |
fomc | 1,980 | I guess so, but the last two weeks would be affected by what happens. We might move a little more rapidly toward the $1-1/4 billion if money came in low; or if it came in high, we would-- | 48 |
fomc | 1,980 | I think that would happen if the data we get tomorrow or next week-- | 15 |
fomc | 1,980 | If the money supply were right on the present projections, we'd presumably get down to $1-1/4 billion. | 24 |
fomc | 1,980 | Two weeks from now. | 5 |
fomc | 1,980 | Two weeks from now, yes. | 7 |
fomc | 1,980 | We don't have the borrowing in the directive, do we? | 12 |
fomc | 1,980 | No. | 2 |
fomc | 1,980 | Well, Mr. Chairman, I think one thing we should have learned in the last few months is that we are unable to forecast the volume of borrowing. | 31 |
fomc | 1,980 | Well, we have to have some flexibility here. But it's useful to discuss this just to get some sense of which way the caution should be exercised in the short run. What we're saying, I think, is that we want to see some increase in the money supply, first of all, to meet these targets. We are willing to see some short-r... | 159 |
fomc | 1,980 | It helps me infinitesimally. | 8 |
fomc | 1,980 | May I ask a question? If the fed funds rate goes below 16 percent, will that make the 3 percent surcharge on the discount rate sustainable? Would there would be a large amount of pressure to take that off as not being appropriate? I don't know enough about this-- | 56 |
fomc | 1,980 | I don't know, either, but it certainly would tend to bring the borrowing down pretty fast if we had a 16 percent-- | 26 |
fomc | 1,980 | There's not much borrowing at that rate. | 8 |
fomc | 1,980 | There's very little borrowing at that rate now. | 9 |
fomc | 1,980 | Except at one bank. | 5 |
fomc | 1,980 | That's a separate decision. Obviously, it would raise the question at the very least. How much pressure it will bring I suppose is a judgment as to whether we want to give that kind of overt signal at that particular point in time. There's no doubt that the question will arise. I'm not sure it would arise very forcibly... | 88 |
fomc | 1,980 | The only question that remains in my mind is whether or not we want to say "or somewhat less." It would be helpful to me if Peter would give me some interpretation of how it would affect his actions any differently if "somewhat less" were in or not. | 54 |
fomc | 1,980 | That really has more to do with the construction of the paths than specific Desk action. Having the "or less" gives me a little sense or tone of being a bit more accommodative of lower growth. Steve might want to comment on that. | 49 |
fomc | 1,980 | Operationally, I think there are two things, President Eastburn. If we construct the path on 4-1/2 percent, which is the exact point, then the "or less" would mean to me that if total reserves were falling short a little, we would not make a big upward adjustment in nonborrowed reserves to offset that. That would be th... | 181 |
fomc | 1,980 | Well, I think we've accepted this kind of operation where the path is set consistent with the 4-1/2 percent but we have a slightly higher borrowing figure at the beginning than the one in the center of Steve's frequency distribution. I happen to think that frequency distribution is a rather flat bell instead of a-- | 64 |
fomc | 1,980 | Yes, but with some limits to it. | 9 |
fomc | 1,980 | Well, are we ready to vote? | 8 |
fomc | 1,980 | Does this imply consultation at 16 percent? | 9 |
fomc | 1,980 | I think I have the message on consultation. Don't hold me to an exact number. If the federal funds rate drops to 16 percent on one day, on Wednesday afternoon or even on another day, don't stay right close to the telephone. If there's a problem in that area, I'll let you know. I have a sense that if the money supply is... | 95 |
fomc | 1,980 | Well, I agree very much with Tony. I think we have to be careful not to make this too formal because if it is formal, it ought to be in the directive. | 36 |
fomc | 1,980 | I understand [the thinking] about the 16 percent. But the real sense of what we're saying, consistent with these directions, is that if the money supply persists in coming in low, that is what is going to make the interest rate go down. So we could state it as-- | 58 |
fomc | 1,980 | Consultation if we have low money supply. | 9 |
fomc | 1,980 | Consultation if the money supply doesn't seem to be coming up. Are you ready to vote? | 19 |
fomc | 1,980 | This is 4-1/2 percent on M-1A, 5 percent on M-1B, with "or somewhat less" in the case of both, and a federal funds rate range of 13 to 19 percent. M2 is 6-3/4 percent; that's the alternative B specification for M2. Chairman Volcker Yes Vice Chairman Solomon Yes President Guffey Yes President Morris Yes Governor Partee ... | 117 |
fomc | 1,980 | [To complete the agenda] I just have to remind you that there is a meeting set for Tuesday, May 20. We have a little time, and I won't take all of it. But a memo was distributed to you and we thought we would have a discussion today, though not a prolonged one, of these different ideas of reserve --what do we call it, ... | 100 |
fomc | 1,980 | Various reserve proposals. | 4 |
fomc | 1,980 | The Board, of course, openly will have to decide that. That material has been sent out to all the Reserve Banks and there is going to be a meeting of the Bank economists about it, isn't there, Steve? | 44 |
fomc | 1,980 | Yes, I believe--we'll talk to Mike [Keran]--it's May 2. We, Mr. Lindsey, Mr. Simpson, and myself, will be meeting with the various Bank economists to discuss it in detail. | 47 |
fomc | 1,980 | Pending that discussion, any recommendations have been left out of that document. That is my understanding; I have not read it myself. | 26 |
fomc | 1,980 | That is right. We think we've covered the issues that the Committee members have raised. One is mildly irrelevant, as we're told it's illegal. | 28 |
fomc | 1,980 | Totally irrelevant? | 4 |
fomc | 1,980 | We've changed laws these days. | 6 |
fomc | 1,980 | Unless the Committee members would like to suggest other options, we hope to have this discussion with Mr. Keran's group and then be prepared to have a more pointed memorandum, with this as background, for the Committee at a later point. | 48 |
fomc | 1,980 | This is just your opportunity, if you had a chance to read it, to convey any violent feelings you might have had about something left out of this or any tentative conclusions. | 35 |
fomc | 1,980 | Which one is illegal? Excuse me, Henry. | 11 |
fomc | 1,980 | That takes the fun out of it, if you-- | 11 |
fomc | 1,980 | Well, I always favor ones that are unpopular or illegal! I just thought I'd save some time. | 20 |
fomc | 1,980 | Paul, this is a very technical matter and it has many ramifications. Sometimes before when we've had a very technical matter, for instance on the directive, a subcommittee was appointed. I wondered whether this would lend itself to that kind of treatment. I guess by implication this examination by the Reserve Banks is ... | 89 |
fomc | 1,980 | No. The final decision is going to be a Board of Governors decision. That's right. | 18 |
fomc | 1,980 | But [we will present it at] a joint Board and President's meeting. We weren't assuming this to be part of an FOMC meeting since it's a matter to be decided ultimately by [the Board]. | 42 |
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