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fomc | 1,980 | But I mean those market-- | 6 |
fomc | 1,980 | Whether we follow the aggregates or not is an academic point. They follow the M1 numbers, which come out on Friday --or this time on Monday. But the emphasis is on the thrust of policy toward inflation. | 43 |
fomc | 1,980 | There are two markets that we are talking about here. The government securities market is always very obsessed with trying to invent a federal funds rate range if one doesn't exist. They react to what we do as though it has significance when it doesn't have any. | 50 |
fomc | 1,980 | Do you tell them that it doesn't have any significance? | 11 |
fomc | 1,980 | Of course. | 3 |
fomc | 1,980 | Good. | 2 |
fomc | 1,980 | We have a proposal to raise the intermeeting limit [on changes in System holdings of securities]. What is the intermeeting period? | 26 |
fomc | 1,980 | It would be for the period through the 12th of August. | 14 |
fomc | 1,980 | I take it the limit is normally $3 billion [and the proposal is to raise it] to $4 billion because we are getting a decline in reserve requirements that is going to have to be offset in the normal course of events. | 47 |
fomc | 1,980 | How much do we have to offset? | 8 |
fomc | 1,980 | What is the decline in reserve requirements? | 8 |
fomc | 1,980 | It's $3-1/2 billion in the week of June 30. | 16 |
fomc | 1,980 | Is $4 billion enough if you have $3-1/2 billion to mop up? | 19 |
fomc | 1,980 | It's right on the edge on our [staff's] estimates. The Board [staff] has somewhat lower estimates. But it seemed prudent to have adequate room. These estimates are notoriously unreliable. | 38 |
fomc | 1,980 | I think, Mr. Chairman, that we want to be very certain that we mop up any reserves here. I can't understand why in the world the market thinks we won't, but there seems to be some view of that. So if it's right on the edge, I would make it higher; I would propose $4-1/2 billion. | 70 |
fomc | 1,980 | Well, $4 billion would be quite adequate, I think. | 13 |
fomc | 1,980 | But you said that was right on the edge. | 10 |
fomc | 1,980 | The $3 billion [normal limit] is right on the edge. | 14 |
fomc | 1,980 | Oh, I see. I misunderstood you. | 9 |
fomc | 1,980 | We can always change it again; fine-tuning this figure doesn't have much significance. But if you are convinced that $4 billion [is appropriate], is there a motion to that effect? | 38 |
fomc | 1,980 | So moved. | 3 |
fomc | 1,980 | Seconded. | 3 |
fomc | 1,980 | Without objection, we approve until the next meeting a $4 billion limit. We need ratification of the transactions. Can I have a motion to that effect? | 32 |
fomc | 1,980 | So moved. | 3 |
fomc | 1,980 | Seconded. | 3 |
fomc | 1,980 | Without objection, we approve your operations since the last meeting. [Before] we turn to the economic situation, I might just [raise] another point here so that you are aware of it. You might already be aware of it; I believe you have been sent a copy of the resolution that Mr. Proxmire and Senator Garn have introduce... | 496 |
fomc | 1,980 | Do you think Mr. Proxmire knows the implications of this resolution with regard to real output and employment? | 22 |
fomc | 1,980 | Well, the third paragraph says "to maintain full employment and balanced growth." | 15 |
fomc | 1,980 | Yes, but there is a phrase that says "get back on the targets for the aggregates." I see your point. There are a lot of things in it; they could change it from year to year. | 42 |
fomc | 1,980 | It worries me a little, frankly. I'd just as soon it didn't come up. I discussed it with Arthur and I'm not sure he's so happy himself that this [process] has started. I'm sure he's convinced that he thought it all through, but I don't know what we can do. | 58 |
fomc | 1,980 | When did you talk to Arthur Burns? | 8 |
fomc | 1,980 | A couple of weeks ago. | 6 |
fomc | 1,980 | Well, I talked to him the day before yesterday, and he told me that the resolution as originally introduced had been much more specific and that he had Proxmire make it much more general and so forth. So it was a bigger problem when-- | 50 |
fomc | 1,980 | Well, the main difference between [the current version] and what was initially introduced is that the first sentence talked about the long run anti-inflationary policy and so forth--I can't remember the language--but had a phrase in it about long-term interest rates. It said, in effect, that [such a policy] could bring... | 261 |
fomc | 1,980 | What else can you do? It would be like talking against motherhood to oppose it. | 17 |
fomc | 1,980 | Well, I think you would be justified in going on to say that it might create--I don't know how to phrase this but you'd have to handle it cautiously--dangers for the future. | 39 |
fomc | 1,980 | Yes, I could say that I don't think it is wise for these resolutions to be all that specific but that a resolution with this kind of general sentiment is [fine]. | 34 |
fomc | 1,980 | Could you say that if Congress wants to influence Federal Reserve policy directly that the appropriate way is to do it by legislation rather than resolution? I would expect that [such] legislation would not [be enacted]. That is a tough statement. But we could be snowed with these resolutions and the pressure-- | 60 |
fomc | 1,980 | I did ask if there had ever been a resolution quite like this, referring to policy. And I think it is true--well, at least nobody was able to tell me off-hand--that there has not been. The nearest thing to it was the concurrent resolution, adopted in [1975], which in part gave rise to the whole monetary targeting exerc... | 222 |
fomc | 1,980 | I don't see how it could be opposed. | 9 |
fomc | 1,980 | Well, Mr. Kichline and Mr. Zeisel, it's up to you. MESSRS. KICHLINE, ZEISEL, and TRUMAN. [Statements--see Appendix.] | 41 |
fomc | 1,980 | Let me interrupt you. If I remember correctly from the Bluebook, this is an artificial 4-1/2 percent in a sense because it doesn't allow for a depression of M-1A from NOW accounts and so forth. | 47 |
fomc | 1,980 | Yes. Whatever shifts occur would be subtracted from that. So if the shift were one point, the number would be 3-1/2 percent; and if it were 2 points, it would be 2-1/2 percent, etc. | 53 |
fomc | 1,980 | A shift over and above what is already assumed in M-1A and M-1B? | 20 |
fomc | 1,980 | These are shifts that could be related to the introduction of nationwide NOW accounts beginning around the end of this year. So the 4-1/2 percent subsumes whatever is going on now. This is the new introduction-- | 45 |
fomc | 1,980 | So, if I understand correctly, the target doesn't fully allow for what is going on this year. | 20 |
fomc | 1,980 | Well, given what is going on this year, we think that 4-1/2 percent is more reflective of unchanged policy than 4-3/4 percent because there seems to be a little more movement out of demand deposits into NOW accounts. | 51 |
fomc | 1,980 | So you're just saying that the 1/4 percentage point allows for that. | 16 |
fomc | 1,980 | Yes. It's a small amount. We raised M-1B a bit. MESSRS. KICHLINE and ZEISEL. [Statements continued.] | 32 |
fomc | 1,980 | That was a very complete and very comprehensive presentation. I'm sure it leaves a certain amount of questions in peoples' minds. I have two or three myself, so I might start. We will spend a little time here on the economic outlook before we get to the aggregates discussion. Your forecast, obviously, has a very low re... | 181 |
fomc | 1,980 | Well, the point you made earlier applies to virtually all of the variables in the sense that we get low growth in disposable income in part because of the sluggish improvement in employment, which is related to the sluggish improvement in output, which is consistent with the sluggish improvement in productivity. The qu... | 66 |
fomc | 1,980 | Well, how much of it is the other way around? I'm asking how much [reflects the fact] that anything is going to look less buoyant than it looked before because we get less productivity growth, all other things equal. | 47 |
fomc | 1,980 | Of course, any improvement in productivity performance would give us the potential for a greater increase in real income. In a sense that's partially endogenous and partially exogenous. Our projection of sluggish productivity growth is consistent, as I mentioned earlier, with our projection of the very sluggish recover... | 157 |
fomc | 1,980 | Your capital spending assumptions tie into this productivity assumption, too, don't they? | 15 |
fomc | 1,980 | Well, over the longer haul, obviously, that's correct. Over the short run it would not be a significant variable. | 24 |
fomc | 1,980 | I'm thinking really of the capital spending that's already in place or under way. | 15 |
fomc | 1,980 | The capital/labor ratio, as I'm sure you know, has deteriorated in recent decades and people feel that that has played a significant role in the deterioration of productivity. But a lot of other factors appear to be operating as well. | 47 |
fomc | 1,980 | I'm sure this has something to do with the chart you've labeled "Prices II." There's a striking difference here. In '75-'76 [the percentage rise in] the gross business product deflator went down, my word, from 12 percent to 4 or 5 percent. Now you say it can't go down much. Of course, it had gone up very sharply. But h... | 108 |
fomc | 1,980 | Look at the previous [chart], Paul. | 9 |
fomc | 1,980 | Well, several things are operating. One factor is the behavior of energy and food [prices], and I think we ought to abstract from those. But even [so] we had a very significant deceleration. Part of the answer is the very vigorous recovery in output and productivity during that period. The productivity swing between 19... | 141 |
fomc | 1,980 | You have a 4 point [swing], if I understand you correctly. | 16 |
fomc | 1,980 | Well, yes. | 4 |
fomc | 1,980 | Actually, if you flip the page and go back to [the chart labeled] "Prices I," the numbers on the top panel of that chart show the peak was in the fourth quarter of 1974 when unit labor costs were up 14.9 percent [from a year earlier]. The fourth quarter of 1975, one year later, was the low point [when the year-to-year ... | 110 |
fomc | 1,980 | We had an 8 point swing in productivity during that period, so we must have had a 4 point swing or so in compensation? | 28 |
fomc | 1,980 | I don't have [compensation figures] quarterly; I have hourly wages figures. | 16 |
fomc | 1,980 | Compensation is [charted] on the previous page; that shows around 3 percent, I think. | 21 |
fomc | 1,980 | It was 2-1/2 percent to 3 percent [unintelligible]. | 19 |
fomc | 1,980 | Wasn't there another factor going on during that period, though, that affected all of these variables on both compensation and prices? The wage-price control program [affected] 1974. There was an enormous catch-up increase, which inflated the rates of increase; and when that was over, everything settled down again. Tha... | 75 |
fomc | 1,980 | That was a very important component. We had an explosion and then a deflation, so that played a significant role temporarily. A combination of forces was operating that I'm afraid cannot be exactly disassociated from one another. | 43 |
fomc | 1,980 | In some sense it could be argued that you are rather pessimistic on both compensation and productivity. | 19 |
fomc | 1,980 | Well, we are pessimistic relative to past cyclical performance. And I think the productivity assumption is a very tenuous one. There are alternative explanations of why productivity declined, and one could very easily suggest that we may get a bigger rebound. At the same time, on the compensation side we have a situati... | 133 |
fomc | 1,980 | Because real wages are declining? | 6 |
fomc | 1,980 | Well, in a sense that puts pressure on the bargaining units and on workers who wish to command higher nominal wages to offset that. | 26 |
fomc | 1,980 | All [I'm talking about is] this pessimism relative to earlier cycles. It's pretty deeply related to the productivity picture one way or another. | 28 |
fomc | 1,980 | It is very deeply related. I think that's absolutely correct. | 12 |
fomc | 1,980 | Is that really true? If you had a higher productivity growth plugged into your forecast, unless you had a change in the monetary and fiscal policy, wouldn't the main effect of that simply be a lower rise of employment with the same increase in real GNP and hence the same increase in real disposable income? If you look ... | 92 |
fomc | 1,980 | We'd also have a good deal less pressure on unit labor costs and prices and presumably the ability, therefore, to move into a different fiscal position as well. | 32 |
fomc | 1,980 | If you removed policy constraints and found that policy were more expansive, then you would have a larger rise in real GNP. | 25 |
fomc | 1,980 | But what we have provides the basis for allowing that, I believe. | 14 |
fomc | 1,980 | I would agree with Lyle. I think you're substituting manhours for lack of gain in productivity. So you don't actually get a difference in real output in the forecast period, but I think it does lead to pessimism on the price front compared to what might otherwise be the case. | 58 |
fomc | 1,980 | To the extent it came out in lower prices, with the same money and fiscal assumptions you get more output. | 22 |
fomc | 1,980 | What effect do you get from the fact that energy prices in manufacturing never made very much difference? They were so low in terms of the costs. Now the situation is quite different; a lot of manufacturing firms are thinking in terms of capital expenditures of the kind that lower their energy costs. What does that do?... | 74 |
fomc | 1,980 | Well, that's one factor. It tends to cut several ways. One of the arguments is that, given the rising cost of capital, firms will tend to substitute more labor for capital. It depends on the industry. In fact, President Morris had a conference at the Boston Fed about this whole role of energy and productivity and capit... | 155 |
fomc | 1,980 | Let me just ask one more question. On these charts of econometric exercises with and without tax cuts, is there a lower real GNP in '83 with a tax cut? If I understand it correctly, you also have a lower unemployment rate. Offhand that somehow seems inconsistent. | 57 |
fomc | 1,980 | Well, unemployment adjusts with a lag. And these are rates of growth. We have a higher level of real GNP but these are rates of growth of real GNP. | 35 |
fomc | 1,980 | Okay, you still have a slightly higher level of [real GNP]. | 15 |
fomc | 1,980 | That's right, but it's reversing. The difference in the unemployment rate in 1982 is 0.8 percentage point and in 1983 it's a half percentage point. So the gains on the unemployment side are disappearing, but with a lag. | 50 |
fomc | 1,980 | Mr. Balles. | 5 |
fomc | 1,980 | Mr. Chairman, that was a fine presentation. I have only two questions. One has to try to put monetary policy in the context with the thrust of fiscal policy, and in the first section of your report you have a table on the federal budget and also one on the high employment budget. My question has to do specifically with... | 101 |
fomc | 1,980 | I think it's about 6 percent. Governor Gramley, do you recall? | 16 |
fomc | 1,980 | If it's the official one, it's 5.1 percent. | 13 |
fomc | 1,980 | And this uses the official one? | 7 |
fomc | 1,980 | Yes, we'd be consistent with that. | 8 |
fomc | 1,980 | In the last several months there was a generalized governmental review of the calculation of this high employment budget and an agreement on the calculations involved. So we're using that. | 32 |
fomc | 1,980 | Well, as you know, this calculation is very sensitive to differences in the unemployment rate assumption. A lot of observers, including my staff, think that the non-inflationary full employment rate is somewhat higher than 5.1 percent and may be closer to 6 percent. Have you made any alternative calculations? What woul... | 77 |
fomc | 1,980 | We have done that in the past. We have not done that this time. The way we use this high employment budget in our own approach is to look at the change in the budget from one year to another. Differences in the unemployment level used mainly affect the level of the budget rather than the swings from one year to the nex... | 159 |
fomc | 1,980 | You'd just raise [the non-inflationary full employment rate] by 0.9, would you? Is that effectively what you would do? | 32 |
fomc | 1,980 | Well, by how much is the question, Chuck. I'm trying to get some range of estimates here as to how restrictive fiscal policy is going to be and I doubt that it's going to be as restrictive, in terms of the level, as what the staff shows. What I was trying to find out is what the level would be with a 6 percent assumpti... | 73 |
fomc | 1,980 | Well, we have not done that calculation, and I don't have in mind any rules of thumb that would allow me to give you an answer right now. | 31 |
fomc | 1,980 | Okay. Maybe we can talk about that later. | 10 |
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