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fomc | 1,977 | That hardly improves the thinking process that is going on in this area. | 14 |
fomc | 1,977 | Mr. Chairman, we have an explicit estimate of the Administration proposal. Governor Gardner, [for] the first quarter of 1979, which is when it will become effective, our estimate is that it will add 1-1/2 percentage points annual rate to total compensation, 2 percentage points in the first quarter of 1980, and 2-1/2 pe... | 88 |
fomc | 1,977 | You know, if I were a businessman today, I think I would be bewildered. Here you have something called an energy policy, and this energy policy contains the most massive tax bill ever presented to Congress. With taxes running up, money being taken out of one set of pocketbooks in the amount of perhaps $70 billion per y... | 204 |
fomc | 1,977 | Well, if you will remember when you were talking about a speech you were giving on this subject, I suggested you say that, until we have an energy policy, there's more uncertainty than ever. And the minute that all of the proposals have gone to Congress, we have had some kind of a policy--I guess you'd call it a no-pol... | 251 |
fomc | 1,977 | All right, thank you. Mr. Guffey, you will now speak. | 17 |
fomc | 1,977 | I can only observe--the philosophy of these meetings seems to be, if things are going well at the present, the meeting gets longer because of the [unintelligible]. And I would suggest, as Chuck has mentioned earlier, we have had rain in the Midwest--spring has arrived, the sap is rising. There is an increased demand in... | 220 |
fomc | 1,977 | Gentlemen, I think this is a very good time to stop our discussion on the state of the economy. Mr. Sternlight, would you like to report on operations of the Desk? | 39 |
fomc | 1,977 | [Statement--see Appendix.] | 6 |
fomc | 1,977 | We'll continue our deliberations and go along with Mr. Axilrod's statement. Mr. Axilrod. | 23 |
fomc | 1,977 | [Secretary's note: This statement was not found in Committee records.] | 14 |
fomc | 1,977 | Thank you, Mr. Axilrod. We are ready now to discuss the reports by Mr. Sternlight and by Mr. Axilrod. Mr. Coldwell? | 35 |
fomc | 1,977 | Mr. Axilrod, in forecasting the aggregates over the remainder of May and early June, my recollection is that you are looking at about 4 to 5 for May and 1 to 2 for June. Does your cutback reflect the idea that April is now explained at least partly in a seasonal, or is this a stock and flow concept--there's enough in t... | 94 |
fomc | 1,977 | It's the latter, principally, Governor Coldwell. There's enough in the hands of the consumer now, or in the public, generally financed in the second quarter transactions. Our second quarter growth rate, as I mentioned, is still a relatively high 9-1/4 percent. So we have not assumed that, say, a half or even two-thirds... | 126 |
fomc | 1,977 | Well, I may be missing something in the rationale here, but see if you can help me. If this is a position in which sufficient [funds have] been created now to handle the second quarter's expenditures, and we still get further enlargement of the recovery and growth in the economy, presumably creating additional funds--y... | 115 |
fomc | 1,977 | We're not expecting--I was trying to explain the behavior of time and savings deposits recently. In April, there were both special factors as well as, I believe, shifts to demand deposits for spending purposes as well as direct use [of the original demand deposits] for spending purposes. We're actually projecting some ... | 102 |
fomc | 1,977 | [Does] your forecast for these various alternatives range no higher than 8 percent for M2 and go as low as 2-3/4 per cent, depending on the alternative selected? | 39 |
fomc | 1,977 | That's right. | 3 |
fomc | 1,977 | Now, that to me sounds like you're still slowing this time and savings [deposit] package. | 19 |
fomc | 1,977 | Well, we're getting a very low growth rate in May because of the pattern. We had a jump up in the beginning of April, it's been very stable through the first week in May, and then we're beginning to pick up the rate of growth in May. But that gives us a very low growth rate in May as compared with April, and then you g... | 150 |
fomc | 1,977 | I won't take any more of the Committee's time Mr. Chairman. I don't quite understand the figures with what I've heard when you look at the forecast of the June rate on M2 at 6 percent. But on the second sheet, page 6, on the alternatives [unintelligible]. | 61 |
fomc | 1,977 | Well, you see, that goes with a 1 percent M1, and so your time deposits would be on the order of 10 percent for another month. | 33 |
fomc | 1,977 | All right. Mr. Partee next, please. | 11 |
fomc | 1,977 | I had two questions. First, Mr. Sternlight, as you stated in your review, the adjustment in the market [to] the changes in observed Federal Reserve policy was remarkably, extraordinarily smooth. Would you say, Peter, that it's completed? That is, would you say, since it was so smooth, is it still partial? Or, say that ... | 104 |
fomc | 1,977 | I think the adjustment to that 5.25 to 5.30 or-- | 17 |
fomc | 1,977 | --or 5.35-- | 7 |
fomc | 1,977 | --area, or something like, has been completed. | 11 |
fomc | 1,977 | And that involved an increase in bills from about 4.40 to about 5 percent? | 19 |
fomc | 1,977 | Thereabout, 4.50 to 5 percent. | 12 |
fomc | 1,977 | --4.50 to 5 percent. Which brings me to my question to Mr. Axilrod. Now this last 50 basis points in bills was really not a segment of the [interest] rate range competitive with thrift institutions and time and savings deposits. If you have another--and I guess this is sort of like Phil's question--if you had another 5... | 129 |
fomc | 1,977 | Well, that's essentially why, under alternative C, which assumes another 50 basis point increase in the funds rate and approximately that in the bill rate, that we have a somewhat more substantial slowing in M2 than we would ordinarily have in comparing two alternatives. And our thought was that you would force out a c... | 158 |
fomc | 1,977 | And that could be even more so, I suppose, Steve, because we have a larger proportion in time and savings deposit form now that are really sizable sums. I happen to divide our categories in savings and time deposits between the consumer type and business or institutional type, and the consumer type has held up very wel... | 130 |
fomc | 1,977 | I might add, Governor Partee, if we are right and you don't get an offset in some other components of time deposits, this effect I think would be temporary, and you would return later to a higher growth rate even at the higher level of interest rates because you would have just removed-- | 59 |
fomc | 1,977 | You have a stock adjustment. | 6 |
fomc | 1,977 | --you would have removed a stock of hot money; that's what we are assuming. So therefore, that's why we suggested a 3/4 point drop in the alternative C range for M2 relative to alternative B, to accommodate that stock adjustment without having to make a policy move. | 57 |
fomc | 1,977 | And what that's associated with is another increase in the complex of market rates of about 50 basis points. | 21 |
fomc | 1,977 | In effect, to moving the Treasury bill rates, obviously, well above the passbook ceiling rate. On an investment yield basis, it's above the commercial bank ceiling rate right now, of course. | 39 |
fomc | 1,977 | Thank you. | 3 |
fomc | 1,977 | All right. Mr. Black, please. | 9 |
fomc | 1,977 | I'd like to ask Mr. Sternlight--Peter, a couple of things impress me about the behavior of the financial markets since our last meeting. One is that most rates, and long rates, of course, in practice have moved up less than the federal funds rate. The other is, you've had some little strength in the stock market in the... | 135 |
fomc | 1,977 | I think that some market participants would take some comfort in observing that the System has moved to counteract that burst of growth in the aggregates. I don't know if I'd want to go further than that, as to saying that inflationary expectations are significantly diminished, because the markets were also getting evi... | 66 |
fomc | 1,977 | All right. Mr. Eastburn now, please. | 11 |
fomc | 1,977 | Steve, you mentioned that you've revised your interest rate forecast upward. One of the things that we have been doing regularly once a month is to look at the interest rate patterns to see what this tells us about expectations and forecasts for interest rates on the part of the market. And, with the exception of one m... | 123 |
fomc | 1,977 | Or the market may have a weaker economic forecast, more obviously. We do check our forecasts against what's in the futures market, and what's implicit in the yield structure--both. And at the time we were making the forecast, the three-month bill rate in the futures market, by the first quarter of '78, was being foreca... | 169 |
fomc | 1,977 | Have you ever gone back to check the accuracy of these two methods of-- | 15 |
fomc | 1,977 | No, I haven't, but I'd say it was a good thing to do. I think we will. | 21 |
fomc | 1,977 | All right. Mr. Jackson now, please. | 10 |
fomc | 1,977 | Steve, in view of your flow of funds projections and the general scenario painted in the Bluebook, what do you see the yield curve doing during this next six to nine months? Is it going to get significantly flatter, or are long-term rates going to react upward, where you continue to have a significant disparate view be... | 85 |
fomc | 1,977 | I believe that if short rates go up over the next several months, roughly the order of magnitude that we projected or a little less or a little more, that you'll have not very large effects on long-term rates on average. Any time that the short rate begins to move up, we'll have an expectational effect, or just an adju... | 169 |
fomc | 1,977 | Does that tie in with the flow of funds projections that we've got? | 14 |
fomc | 1,977 | Yes, they're consistent. We have a fairly easy corporate bond market. We've got a lot of institutional money around, and some drop-off in corporate bond market borrowing. Our explicit forecast of a corporate bond rate is, by the end of this year, to the 8-1/2 percent area, which is only up about 1/4 point, so you do ha... | 91 |
fomc | 1,977 | I would like to point out, Governor Jackson, because I think it's a very critical point, that if you think back to '74, while the yield curve flattened, there was a sharp tightening in the money market partly because of how sharp the rate of inflation became, and so you did get a very sharp rise in long-term rates at t... | 99 |
fomc | 1,977 | All right. Mr. Balles next, please. | 11 |
fomc | 1,977 | Just a comment on the Board staff forecast, Steve, of M1 and M2. My staff's been keeping book on the accuracy of these things and found out something rather interesting, I think. In the first place, we always filter out the noise in the week-to-week series, as you know, by using these 13-week moving averages, and we in... | 236 |
fomc | 1,977 | No, I don't have any good feeling of the last year. And I think that we will go back and assess both our interest rate forecast in line with President Eastburn's suggestion and our M1 and M2 forecast. As you know, we reassess these things periodically and have normally found that there is somewhat less error in the M2 ... | 125 |
fomc | 1,977 | That's on a moving average. | 6 |
fomc | 1,977 | That's why we would have-- | 6 |
fomc | 1,977 | And it didn't include April. | 6 |
fomc | 1,977 | Any other question or comment? Well, if not we still need to act on the activities carried out at the Domestic Desk. Is there a motion to approve the transactions of the Desk. | 37 |
fomc | 1,977 | So moved. | 3 |
fomc | 1,977 | The motion has been made and, I take it, approved. We're ready now to turn to monetary policy and our domestic policy directive. I think in some ways our task today is an easy one, and in other ways it's somewhat puzzling. I think our decision last month was certainly in the right direction, and I think it's been carri... | 551 |
fomc | 1,977 | Mr. Chairman, you started taking my speech away. I was going to suggest a 5 to 5-3/4 with a 5-1/4 to 5-3/8 midpoint, and 5-3/8 happens to be the midpoint of 5 to 5-3/4. And I was with you until you started talking about the aggregates. At that point, I dropped off the list because I'm a little bit hesitant about some o... | 260 |
fomc | 1,977 | For purposes of clarification, I made some introductory comments first and then suggested some numerical specifications. Taking my numerical specifications, you see--zero to 4 for M1, for example--if a negative figure for M1 developed, and assuming that there was no counterindication arising from M2, then an inconsiste... | 91 |
fomc | 1,977 | Thank you, Mr. Chairman. Last month--which, of course, was my first meeting--the Committee was very cautious in approaching policy. And I suspect that was, as you indicated, very prudent in light of the uncertainties that the Committee faced. But I, for one at least, feel much less cautious today than I was inclined to... | 291 |
fomc | 1,977 | Well, that must have been [a matter] of financial stringency--we don't have more money to give you. Now, to the extent that business firms are in the same position, they can hold out also against large wage demands, but you need a little adversity to produce that result. | 59 |
fomc | 1,977 | I think that's exactly right. And that's my point. I think if businessmen think that every time there is a little adversity, whether it's an increase in the Social Security tax or something else, and we are going to bail them out with monetary policy, they've got no inclination to stand up. But I get the impression fro... | 292 |
fomc | 1,977 | No, if--let's take, just for purposes of illustration, a range of growth of M1 of zero to 4. And let's ignore the fact, for purposes of this illustration, that the Desk gives equal weight to M1 and M2. Then, as 4 was approached, the Desk would be moving the federal funds rate toward the upper limit of 5-3/4. | 81 |
fomc | 1,977 | I see, okay. | 5 |
fomc | 1,977 | Or vice versa if it's toward zero. | 8 |
fomc | 1,977 | All right, that's a little different than my understanding, and that helps. I guess, if anything, I'd be inclined to go 5-1/4 to 6 just so the Desk did feel willing to move fairly aggressively on [the] interest rate. The only other comment I would make is that, in addition to these steps in terms of open market policy,... | 113 |
fomc | 1,977 | All right, Mr. Willes. Mr. Eastburn now, please. | 16 |
fomc | 1,977 | Well, I would agree essentially with the staff's projections on the economy, with the possibility that we will be seeing a slowdown in the latter part of this year. And as I indicated earlier, that might not be too undesirable. So I approach this session with two main points of view. One is that we should be seeing adj... | 168 |
fomc | 1,977 | Well, you say it would imply a significant decline for June. If May, I think our staff in that event would be revising the figure for June. Isn't that correct? | 36 |
fomc | 1,977 | Yes, if May were coming in weaker, we would of course, begin writing down June right around that time, so that both months could in effect be quite weak. Something like that. There could be a large negative in May, even a small plus for June; you can't tell quite how the pattern would come. | 64 |
fomc | 1,977 | Well, all I'm saying, unless I don't understand what you're saying, you have a zero or a significant negative figure for the two-month period--I think [that] is a little risky, and this leads me a little bit to alternative B. | 50 |
fomc | 1,977 | I expressed a personal attitude, and that personal attitude was not translated into a numerical specification that I suggested to the Committee. | 24 |
fomc | 1,977 | So I think the important thing is to have the funds rate reasonably stable and be prepared to move it up, if necessary. | 25 |
fomc | 1,977 | All right, thank you, Mr. Eastburn. Mr. Partee now, please. | 19 |
fomc | 1,977 | Well, two things restrain me from moving with anything like as much alacrity toward monetary tightness as Mark Willes suggests. The first is that in addition to an inflation objective, we also have the objective of maintaining reasonable growth in the economy, and the growth rates that are being projected by the staff ... | 269 |
fomc | 1,977 | What harm did we do? | 6 |
fomc | 1,977 | And the aggregates eased off. But I would rather not go a long way in that direction until I felt fairly certain this time that the trend was really with us. And I think it probably is, but then I thought it probably was a year ago, and so I don't know that I'm much of a forecaster. | 64 |
fomc | 1,977 | Do you think we did much harm, significant harm, in '75 or '76? You know, we reversed rather quickly. | 26 |
fomc | 1,977 | No, I don't think we did, because we did reverse, but I think it's something I would prefer not to do if I didn't-- | 28 |
fomc | 1,977 | Oh, in other words, you prefer not to make a mistake. | 14 |
fomc | 1,977 | But in any event, you know, we only have one high month--now, it's an awfully high month. | 24 |
fomc | 1,977 | Sure is. | 3 |
fomc | 1,977 | But on the other hand, there could well be a negative, which isn't really projected in the May-June period, because if one is to use that as a sort of a stock adjustment in money supply, it may have been overdone. And it may not turn downward. So I think we ought to be a little cautious for another month or two about g... | 575 |
fomc | 1,977 | Well, I would certainly join you in considering pretty carefully. Mr. Jackson, please, now. | 20 |
fomc | 1,977 | I would share a lot of the judgments that have been expressed about the concern for an unusual rate of growth, but I also am concerned about the uncertainty of the reaction that might flow from that. I wouldn't want to hesitate to restrain that rate of growth if it's quite clear that, in the period ahead, this growth h... | 328 |
fomc | 1,977 | Thank you, Mr. Jackson. Mr. Black now, please. | 14 |
fomc | 1,977 | Our work with the aggregates tends to pretty well confirm the staff's guess as to where these would come out for the second quarter, around 9 percent on M1, which is well above our long-run target rates. But at the same time, as Governor Partee has pointed out, we ought to be careful to note that, historically, the sec... | 265 |
fomc | 1,977 | Thank you, Mr. Black. Mr. Morris now, please. | 14 |
fomc | 1,977 | Mr. Chairman, could I clarify your proposal? Do I understand you properly that you keep the funds rate at around 5-1/4 and only move it up if we were hitting the higher part of the ranges? | 45 |
fomc | 1,977 | No, I would use the federal funds rate range in the normal fashion, and the federal funds rate now is closer to 5-3/8 than it is to 5-1/4--that's my understanding. And I would leave it where it is for a week or so, and then depending on how our estimates of the monetary aggregates come in, move within the indicated ran... | 96 |
fomc | 1,977 | Well, I think that my feeling, Mr. Chairman, is that we ought to make a bigger move right now. I think the economy is very strong. I think the lull that Mr. Partee and Mr. Eastburn speak of is certainly a possibility, but I don't see in the indicators any evidence that it's probable. We are faced with this April bulge ... | 350 |
fomc | 1,977 | I would go even further to say that the fact that we moved that early in 1975 gave reassurance to the business and financial community. | 28 |
fomc | 1,977 | Well, it seems to me that, again, it is a matter of taking out insurance [in case the] second quarter bulge turns out to be bigger than we are now projecting. But I think we ought to make another move, and I'm just talking about a modest initial move next week, to 5-1/2 [and] give the Manager authority to move as high ... | 108 |
fomc | 1,977 | Thank you, Mr. Morris. Mr. Balles now, please. | 15 |
fomc | 1,977 | Mr. Chairman, I find a great deal of merit in your proposal, both for the reasons that you cited in your comments and because of the considerations in the longer term, as you set forth in your recent testimony on monetary policy. But looking upon other things, the fact [is] that, if anything, we have probably been a li... | 633 |
fomc | 1,977 | Thank you, Mr. Balles. Mr. Winn now, please. | 15 |
fomc | 1,977 | Mr. Chairman, I'd like to associate myself with the description provided by Chuck in what we should be doing. The demand for credit, particularly for the large commercial and industrial borrower, is the thing that gives me pause at the moment. I guess if we hadn't had our blip in the money supply, we'd have been closer... | 174 |
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