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http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Collection: Paul A. Volcker Papers Call Number: MC279  Box 29  Preferred Citation: Federal Reserve: October 6, 1979 Action, 1979-1980; Paul A. Volcker Papers, Box 29; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c205 and haps://fraser.sdouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Policy on Digitized Collections Digitized collections are made accessible for research purposes. Princeton University has indicated what it knows about the copyrights and rights of privacy, publicity or trademark in its finding aids. However, due to the nature of archival collections, it is not always possible to identify this information. Princeton University is eager to hear from any rights owners, so that it may provide accurate information. When a rights issue needs to be addressed, upon request Princeton University will remove the material from public view while it reviews the claim. Inquiries about this material can be directed to: Seeley G. Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) mudda,princeton.edu   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  BOARD  OF  GOVERNORS  OF THE  FEDERAL  RESERVE SYSTEM  Paul--The material you requested.  As indicated Joe Coyne has the list of the House and Senate Banking Committee leaders you should call plus Lloyd Bentsen and Jack Javits of the JEC.  In the past we haven't called the leadership on matters like this.  But you might want  to consider calling Bobby Byrd.  Attached  is his Congressional Record insert of 9-21-79 entitled Gold, the Dollar and OPEC . You might also want to consider calling the Majority leader of the House, Jim Wright, who takes an interest in what you are doing.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Ken G.  enate FRt1, SEPTEMBER  21, 1979  (Legislative day ol Thursday, June 21, 1979) The Senate rammed at G:30 am., on THE JOURNAL the expiration of the recess, and was Mr. ROBERT C. BYRD.Mr.President, called to order by Hon. ROBERT MORCAN, a Senator from the State of North Caro- I ask unanimous consent that the Journal of the proceedings be approved to lina. date. The ACTING PRESIDENT pro temPRAYER pore. Without objection, it is so ordered. The Chaplain. the Reverend Edward L. R. Elson, D.D.. offered the following GOLD. Trn DOLLAR, AND OPEC prayer: Let us pray. I Mr. ROBERT C. BYRD. Mr. PresiAlmighty God, whose laws of right- dent, over the past several days the price eousness and justice determine the des- of gold has jumped to meteoric leveLs, tiny of nations. establish among the peo- reaching a high of about $377 an ounce ple of our Nation, and those having au- at Tuesday's Treasury auction. Yesterthority over us, the righteousness which day it reached a high of $380 in London. shall be our safety, and the justice which In the past 4 months the price of gold shall be our strength. Thou hast brought has risen 50 percent. In 1967 gold was us through many vicLssitudes of conflict valued at $35 an ounce. During the past couple of weeks, the and adversity to great riches and power, and now Thou dost confront us with the price of gold has risen in relation to all obligations of our abundance.. and the currencies, not just the dollar. However. perils of our prosperity. Guide, we pray, on Thurgday, the dollar became subject the consciences of our"people to meet to severe downward pressures in relation the untried and grave demands of the to other currencies. Last fall the Government engaged in present time. As our forefathers prevailed over the dangers of their great a dollar support program which involved adventure, so direct us among the un- a multicurrency loan to provide foreign Lteseue to purprecedented decisions of today. Give us exchange for the the wisdom which is from above, and chase dollars in 'International markets set before our minds the truth which should such action prove necessary. Bemakes men free; through Jesus Christ tween last October and June of this year the dollar, on a weighted basis with other our Lord. Amen. currencies, appreciated almost 10 percent. Since June, however, the dollar has fallen about 5 percent. APPOINTMENT OF ACTING PRESIThose of us concerned about the staDENT PRO TEMPORE bility of foreign markets and the purThe PRESIDING OFFICER. The clerk chasing power of the U.S. dollar must will please read a communication to the focus on the causes of the tremendous Senate from the President pro tempore rise of gold and the decline of the dollar. There are several factors which have (Mr. MAGNUSON). The assistant legislative clerk read the contributed to these phenomena. First. Inflation in the United States following letter: and more recently in West Germany and U.S. SENATE, Japan and other industrialized nations PRESIDENT rao TEMPOKE, has diminished the attractiveness of Washington, D.C., September 21, 1979 To the Senate: holding assets denominated in the curUnder the provisions of rule I. section 3 rencies of these countries. of the Standing Rules of the Senate. I hereby Second. A large quotient of worldwide appoint the Honorable ROBERT MoacArl, a inflation is due to recent OPEC price InSenator from the State of North Carolina. creases. Those price increases have gento perform the duties of the Chair. erated surplus foreign reserves in the WARREN G. MAGNUSON, hands of OPEC money managers. There President pro tempore is a good possibility that some of these Mr. MORGAN thereupon assumed the reserves may have been shifted from curchair as Acting President pro tempore. rency investments into gold, thereby sparking a fever in the gold market. Third. The gold market Is very thin. RECOGNITION OF THE MAJORITY It does not take a great deal of buying or selling to cause swings In either direcLEADER tion. Once buying pressure pushed the The ACTING PRESIDENT pro tem- market significantly from equilibrium ,a pore. Under the previous order, the ma- full-fledged bull market was launched. jority leader is recognized. It should be emphasized that accordMr. ROBERT C. BYRD. I thank the ing to U.S. Treasury officials, there is Chair. no evidence of official central bank or  monetary authority participation in the recent gold rush. But there is a great deal of foreign exchange available to some very wealthy citizens in OPEC nations who have a traditional fondness for gold as a medium of value and exchange. This situation is not a crisis, but it is certainly cause for concern. Particularly, it points up the need for increased U.S. efforts to restrict oil imports—in the short run through serious conservation efforts, and in the long run through aggressive development of alternative domestic energy sources. Ultimately, the value of the dollar does not depend on the price of gold or the price of oil, but on our ability to foster a noninflated, expanding, energy-Independent economy. RECOGNITION OF THE MINORITY LEADER The ACTING PRESIDENT pro ternpore. The minority leader is recognized. Mr. BAKER. Mr. President. I thank the Chair. Mr. President, I have no need for my time under the standing order this morning, and I have no requests for time. I am prepared to yield back my time. Mr. ROBERT C. BYRD. Mr.President, I yield back my time. Mr. BAKER. Mr. President, I yield back my time. SELECTIVE SERVICE REGISTRATION The ACTING PRESIDENT pro tempore. Under the previous order. the Senate will proceed to the consideration of S. 109, which the clerk will state by title. The assistant legislative clerk read as follows: A bill (S. 109) to require the reinstitution of procedures for the registration of certain persons under the Military Selective Service Act, and for other purposes.  The Senate proceeded to consider the bill which had been reported from the Committee on Armed Services with an amendment to strike all after the enacting clause and insert the following: Be it enacted by the Senate and lIcruse of Representatives of the United States of America in Congress assembled, That section 3 of the Military Selective Service Act (60 App. U.S.C. 453) is amended by inserting "(a)" before "Except" at the beginning of such section and by adding at the end of such section the following new subsection: "(b) The President shall commence registration of citizens and other persons in accordance with the provisions of this title by January 2, 1980. The President may suspend the registration of persons under this title only for the purpose of revising existing reg-  •This "bullet" symbol identifies statements or insertions which are not spoken by the Member on the floor -   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  8 13129  PARREN J. MITCHELL, MO., cHAIRMAN  GEORGE HANSEN IDAHO RON PAUL. TEX. DON RITTER. PA.  STEPHFN L'NEAL. N C. 1•FultMANI F. [YAW,'Irv;. DOUG BAPNAPI, JIM MATTOX. It JOHN J. CAVANAUGH, NLJR.  U.S. HOUSE OF REPRESENTATIVES  225-7315  SUBCOMMITTEE ON DOMESTIC MONETARY POLICY OF THE  COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS N INETY-SIXTH CONGRESS  WASHINGTON, D.C. 20515  September 5, 1979  The Honorable Paul Volcker Chairman, Board of Governors of the Federal Reserve System Federal Reserve Building Washington, D.C. 20551 Dear Mr. Volcker: We appreciate having received courtesy copies of the letter you sent on August 16, 1979 to the Honorable Henry S. Reuss, Chairman of the House Banking COurnittce. It is a pleasure and reassurance to know, at the outset of your tenure at the Board of Governors, that you take the monetary policy report of this Committee seriously, and that you approach the report process as a constructive dialogue. In the spirit of that dialogue, we want to point out to you that at least one major recomendation in the Committee's monetary report still has not been dealt with by the Federal Reserve, even in your letter. That reccramendation is that the Federal Reserve should set longer-term goals, so that we can see clearly the path that will be followed in attaining the overall economic goals of the HumphreyHawkins Act. Specifically, the last paragraph of the Committee's report of July 27, 1979, said the following:   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  "Your committee agrees with the Federal Reserve that its previously established growth ranges for the monetary aggregates for 1979 are still appropriate. We are, however, disappointed that the Federal Reserve has failed to set longer-term targets for progressive deceleration in monetary growth, such as we recommended in our report of March 12, 1979. Because, as your committee stated in that earlier report, achievement of the interim 1983 goals of the Humphrey-Hawkins Act (4 percent unemployment and 3 percent inflation) would be promoted by steady deceleration in the average annual rate of monetary expansion over the next 5 years, we renew our recommendation for the establishment of the long-term targets we specified in the report of March 12, 1979, as follows:  Hon. Paul Volcker  -2-  September 5, 1979  Reccurnended percent growth 4th quarter to 4th quarter MI (adjusted) 1978-83 Percent 1972 7.6 1979 6.0 1980 5.0 1981 4.0 1982 3.0 1983 3.0 We note that the Federal Reserve's "tentative" ranges for 1980 growth in Ml (adjusted for ATS accounts) would "permit" attainment of our recamended rate of growth for that year, but it is disquietirg. that the Federal Reserve has set its range for M1 (adjusted) such that the mid-point is well above our recommendation. We would be much happier if the Open Market Cammittee would set its short-term targets with an explicit connection to a longer-term target path which pramises achievonent of the Humphrey-Hawkins goals. If you and your colleagues believe that the Committee's reccurnerried 19791983 monetary growth path is wrong, certainly it should be explained why you do and an alternative proposed. Without an explicit longer-term monetary growth target path, and an explicit and defensible connection of the shorter-term targets to that path, we find it difficult to accept the Federal Reserve's position that it is, in its short-term operations, advancing toward the achievement of the 4% unemployment and 3% inflation goals for 1983 specified by the Humphrey-Hawkins Act. We trust that the Board will not again, in its next regular report, pass over this subject in silence. More importantly, we hope that the Federal Reserve will be able to report to us early in 1980 that it has conducted monetary policy in a way that shows clear progress in attaining the goals of Humphrey-Hawkins, whatever the short-term temptations may be to focus on illusory short run interest rate targets.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Sincerely, Are  /  CLE-04/  Pea t  et,t  .1  ---  464.."4.°11"*"1“••••••••....-.•••••.....-  -   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  1  Transcript of Press Conference with Paul A. Volcker, Chairman Board of Governors of the Federal Reserve System  held in Board Room Federal Reserve Building Washington, D. C.  October 6, 1979  Mr. Coyne:  Gentlemen and ladies, we are sorry to bring you out on such  a beautiful day but I know you are all interested in this.  This is all on  This gentleman is Stephen  the record.  I think you all know Chairman Volcker.  H. Axilrod.  Steve is the Staff Director for Monetary and Financial Policy  here at the Board.  On the Chairman's left is Peter D. Sternlight who is  the Senior Vice President at the Federal Reserve 'bank of New York and Manager for Domestic Operations, System Open Market Accounts.  Mr. Volcker:  Mr. Chairman --  Ladies and gentlemen, I know we have had somewhat unsettled  and problem markets in recent days.  I will tell you that the major purpose  of this press conference is to show that I have not resigned -- the way the early rumor had it yesterday -- and I'm still alive -- contrary to the latest rumor.  We have been busy during the day with the Federal Reserve Board and  the Federal Open Market Committee in developing a series of actions that is reflected in the release in front of you.  I think in general you know the  background of these actions; the inflation rate has been moving at an excessive rate and the fact of inflation and the anticipation of inflation have been unsettling to markets both at home and abroad.  That unsettlement,in itself,  and its reflection in some commodity markets is, I think, contrary to the basic objective of an orderly development of economic activity. These actions today do effectively reinforce actions that have been taken earlier to deal with the inflationary environment insofar as it is related to credit and financial markets ; it will have a healthy effect on expectations and will be and is fully consistent with the broad effort to bring inflation under control and to facilitate and ease any adjustments in the real economy that are underway.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  I think with that  -2-  background you can appreciate the particular measures that were announced here. I would emphasize that the broad thrust is to bring monetary expansion and credit expansion within the ranges that were established by the Federal Reserve a year ago.  They were reviewed in mid-year and reconfirmed  and reported through regular procedures to the relevant Congressional committees. I think there has been broad support for the targets themselves.  In recent  months the money supply has been running, and bank credit has been running, in excess of the amounts we would like to see, in excess of the ranges we have set.  Let me point out we are not basically outside of the targets but  the projectory of growth has been excessive and we believe that these measures will work to bring the money supply and credit down and assure control. We have already taken action in that direction, as you know. we take operate with a lag.  All the actions  We feel that actions that we have already taken have  moved in the same direction, and in a sense the actions announced today are reinforcement.  With that, let me open this up for any questions that you  may have. Question: Can you explain that Item 3? Mr. Volcker: Yes, unfortunately this gets into a somewhat complex area but it's been an area that has been under very active discussion among economists, within Congress, in financial markets, for some time.  The Federal Reserve for  some years has ordered a good deal of its emphasis in actual day-to-day operations on maintaining a high degree of stability in the Federal Funds rate which we most directly influence.  That rate, of course, has been influenced in one direction  or another, but generally by small increments, in order to effect the growth in the money supply.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Now what is implied here is a somewhat different approach  -3reserves which ultimately where the primary emphasis is put on the supply of controls the money supply.  I don't want to suggest that the control is so  ion month by month. precise that it works week by week or even with precis aining the growth of But by emphasizing the supply of reserves and constr we think we can get firmer the money supply through the reserve mechanism, shorter period of time -control over the growth in the money supply in a greater assurance of that result.  But the other side of the coin is in  rate in the market -- the supplying the reserves in that manner, the daily apt to fluctuate rate not in itself of great economic significance -- is recent years. over a wider range than has been the practice in  We at the  will, in the daily fluctuFederal Reserve will take less interest, if you ations of that very short-term rate. Question:  e requirement, Are you saying that Item No. 2, the marginal reserv  frequently in order to could be something that you might change rather accomplish Item No. 3? nt changes. Mr. Volcker: I would not look necessarily to freque  I do think  ry kind of measure that one that kind of reserve requirement is not the ordina would like to keep in place permanently.  It is designed to fit a particular  be happy to get rid of situation and I'm sure both we and the banks will ion, in particular, becomes it as the situation warrants -- as credit expans aligned with policy intentions.  The nature of this requirement is to take  of borrowing from banks a basket of liabilities -- deposits or other forms definition of the in short-term markets, not encompassed in the ordinary money supply.  the banks have This kind of access to the money markets that  it has been the source of has expanded quite rapidly in recent months and in bank credit. financing a considerable portion of the increase  So as we  assuredly, it only seems appropriate actually strain the money supply itself more that are outside the narrow and logical that the forms of financing for banks   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  Let me  definition of the money supply also are to a degree inhibited.  point out that our targets for the money supply this year continue to envision some growth, which is normal, natural and appropriate.  Growth in  the money supply, in moderate amounts, in measured amounts, growth in bank credit in moderate and measured amounts is certainly suitable to the current economc situation. inflationary growth.  What we are guarding against here is excessive  We are looking to deal with the excess, not with  normal processes of credit creation and money creation. Question: What impact will the marginal reserve requirements have on money funds which mainly hold these kind of liabilities? Mr. Volcker: Well, I can't predict that fully. very considerable extent  Money market funds to a  at least, are dealing with smaller amounts of  money from individuals which are not encompassed in this managed liability concept of banks.  This covers large CDs in negotiable form over $100,000  and under a year's maturity.  That's a big wholesale market.  It covers  purchases of Federal funds outside the member banking system, purchases of Federal funds from non-banks or from non-member banks. that banks obtain from the Eurodollar market. activities.  It covers funds  These are all big wholesale  Money market funds are basically directed toward a different  market than in direct competition with the kind of liabilities we have in mind here.  Our money market funds do themselves invest in some of these liabilities.  They are a source of funds to the banks and the effect would be-- all other things equal -- perhaps to make that outlet for funds grow less attractive. Question: Mr. Volcker, just a couple of weeks ago the Board split four to three in raising the discount rate by just a fraction.  What has happened since  then to change the Board's mind so dramatically that they would raise it by a full point?   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -5-  Mr. Volcker: I tried to make that clear through the many comments that I made at that time. Board members come to the table with independent minds in judging a specific situation. voice our opinions.  They bring differences of opinion.  We  We vote, I think it is wrong to imply, as I said at  that time, that a vote in a particular situation implies great and dramatic implications for future attitudes.  What has changed since then is quite clear.  We have had some business data; we  have had some inflation data; we have  had a lot of market data.  If I may summarize it roughly: the business data  has been good and better than expected; the inflationary data has been bad and perhaps worse than some expected; and we have had developments in markets that suggested more forcibly than before the dangers of instability and inflationary expectations.  I speak for myself and at'least in most connections  I was not voting for more than a half a percent discount rate increase two weeks ago.  In that sense, I changed my mind.  Question: Mr. Volcker I wonder if you would go perhaps a half a step further and characterize and perhaps attach a certain amount of urgency to whatever events happened the last few days that we would have such an extraordinary session like this. Mr. Volcker: It is not the events in the last few days; it is the events of the last few weeks.  We have had unsettlement in the financial markets and  these indications that I mentioned of economic and inflationary trends.  There  is no question that given a degree of unsettlement in financial markets -whether foreign exchange markets or domestic markets, running back two weeks or so or maybe a little bit more -- the anticipation that markets have had seemed to make it desirable to announce whatever we had to say at the earliest reasonable opportunity and particularly when the market was closed.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -6-  Question: Is gold's role a key in this or is that just a symptom? Mr. Volcker: I think that gold is a symptom,in a sense.  It happens to be  a market that gets a lot of attention and I think inevitably . Question: On page 3 you have a statement here the Board stresses that banks should avoid loan activity that supports speculative activity in gold commodities in foreign exchange markets.  Is there anything more to add to this?  Mr. Volcker: No, I don't want it interpreted as any feeling of necessarily substantial bank credit involvement in those markets at this time, although I have no statistics and no direct evidence.  But there have been increasing  speculative overtones, not just in the gold market but in other markets recently and,in view of those speculative overtones,we thought it was useful to remind banks that it is not the most productive activity in the world to be financing sheerly speculative movements of markets. Question: Is this indicative that you are going to be paying any closer attention to bank activities in these areas?  This is just a reminder of a  statement of intent. Mr. Volcker: I think that's essentially right. Question: You wouldn't be thinking of controling margin requirements in those areas? Mr. Volcker: There is only one margin requirement that is under our control and that is the stock margin requirement.  I don't think speculative activity  has been evident in an unhealthy way in the stock market, in my personal judgment. Question: There is one more question.  On the international front.  of this package that you have announced here?  Have you  Have you taken any action to  reactivate swaps which you arranged last year or actually swaps which you arranged last   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -7-  Mr. Volcker: We have swaps activated,as you know, and in general, resources are available in that area.  In general, we have had some discussions, as you  know, in recent days and weeks to provide even closer coordination on tactics and intervention in exchange markets,particularly with German authorities. You well know that money has not been a problem.  I think we have had some  very useful discussions in that area of intervention.  I think there is a  meeting of minds among the various authorities imolved there.  But I would  emphasize that the fundamental solution to the instability of foreign exchange markets is not intervention.  And the kind of actions we take here  are hopefully more important. Question: Report of activation of swaps.  Does that actually happen?  Mr. Volcker: The package that we announced last November was activated, remains activated, there was nothing new to activate last week. Question: Is there any thought to expanding, mobilizing additional resources? You spoke of market anticipations.  That's one thing the market is anticipating.  Mr. Volcker: There are various methods that could be used to obtain additional financing.  I have no announcements to make there now.  I'm sure that one of  several particular techniques could be used as appropriate but the basic point is there is no urgent problem in this connection. Question: Are you saying hands off altogether on the Federal funds rate or will you still have some ceilings in mind for it? Mr. Volcker:  Cautious central bankers never talk in extremes,but I think the  banks will find that they will have to learn again, in a sense, how to make reserve adjustments on a daily basis or a weekly basis in a Federal funds market that does not have the same official chaperonage on a day-to-day basis.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -8Question:  But it still won't be completely free to go as high as it might?  Mr. Volcker: I don't know what you think is as high as it might.  There will  I- substantial freedom in the market. Question:  Mr. Volcker, what domestic of economic effects would you anticipate  from this series of actions?  Would you expect it to further slow the economy  or deepen the recession? Mr. Volcker: I would hope that these actions, and expect that these actions, I think it is  would ultimately have a settling effect on financial markets.  basically good for longer-term interest rates which are the most important in terms of the economy because they are sensitive to inflationary expectations. It would be mSSe and expectation that this will help to avoid distortions, help to avoid excessive inflationary expectations, which comes back to the basic point.  I'm sure you heard me say it before.  I don't think it  is good for business activity, I don't think it is good for productivity, I don't think it is good for growth to have inflationary expectations running ahead, and to the extent that we can deal with that problem we have a firmer and better base for dealing with economic developments. Question:  But in immediate terms does it have an effect that will tend to  slow down economic growth that is already too wishy-washy in this country? Mr. Volcker:  Well, you get varying opinions about that. I S.  will have important effects in that connection. results of these actions.  think it  I would be optimistic about the  But we're in an area dealing with economic events  that are not fully predictable.  I think the main thing to say about the economy  right now is that it is somewhat stronger than anticipated.  The outlook  cSntinues to be, in a general way, that some inventory adjustment may be in prospect.  I think the best indications that I have now in an uncertain  world, is that this can be accomplished reasonably smoothly.  There are always  risks when one l55ks ahead but I think again, just looking at recent history,   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -9And  expectations of the worst are not always a valid basis for policy-making.  I am not inclined to sit here and say let's dream up the worst that can happen and base all our policy decisions on that kind of thought. Question:  What kind of staff forecast for the domestic economy were you  looking at at the time you made this decision? Mr. Volcker:  I don't think we ordinarily reveal all our staff forecasts.  Our staff forecast,like any other staff forecast,is probably not up to date on what has been happening recently.  But there is a widespread feeling, as I said -- and  I'm sure as shared among most members of the Federal Reserve staff-- that the current rate of inventory accumulation will probably have to come down and that that has potential impacts on production in the short -run.  It might give a  little glow of ruddy cheeks to the economy for a few months, but it would really be a sign of feverish cheeks to have a burst of inventory speculation at this point.  I don't think we need that so that in that sense it is an example,  and an important example, of how inflationary expectations can basically complicate and endanger the economic outlook, Question:  With the economy stronger as you say than had been expected and inflation  worse than had been expected and now you are taking these actions, do all of these factors argue against tax reduction on the part of the Administration anytime soon? Mr. Volcker:  I have expressed the view before, and the Administration has  expressed the view, that this is not the time for tax reduction and there is nothing in these actions that alters that.  I think that what has happened  recently underscores the wisdom of that position and the wisdom of the Administration's position on that score.  It has been fully underscored.  As to  like to see a tax reduction what happens in the future, as I've said before I'd of some sort, a well-structured tax reduction; but this is not the time. Question: Mr. Chairman, since the spring, the Federal Open Market Committee,   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -1rin fact, has been permitting larger than normal swings in the Federal funds rate on a daily basis, particularly on the Wednesday closing dates. has been a swing of as much as a point and a half. this spring when this was happening.  There  There was an occasion  Is a point and a half the kind of  fluctuation range that anticipates a new regime or larger?  What are the  outer limits that you would imagine that Mr. Volcker:  I'm not sure of your premise -- maybe you follow it more  closely than I do, Wednesday is always a peculiar day in the Federal funds market.  I am not particularly sensitive to those fluctuations having  been greater recently than before. both.  Mr. Sternlight could perhaps inform us  I don't think I want to comment upon any precise range of fluctuation.  I think there will be substantial dips.  Let me put it this way.  There could  be substantial volatility on a day-to-day basis,which I don't think is significant in itself, but maybe we will be surprised as banks learn to deal with this; they're quick learners in this area.  It is their job,  it is their professional job, to smooth out these day-to-day fluctuations in the money market because it is money to them.  They don't want to sell  Federal funds at a low rate one day and have to buy back at a high rate the next day. So you've got an enormous cadre of professional money managers out there whose lives and jobs are designed to arbitrage from one day to another between markets.  You might see a rather smooth market develop  rather quickly as these people do their everyday job,and many people in the money markets think that's precisely what will happen in a very quick period of time.  So I don't want to sit here and forecast fluctuations.  What I  will say is that we will not shepherd the market so closely from day to day, but that's not the same thing as saying that it will affect fluctuations.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -11Question:  Can you tell us the terms in which you are going to be issuing  directives to Mr. Sternlight?  Now you in the past have talked about the  Federal funds rate and rate of growth to the aggregates. Mr. Volcker:  We will talk about rates of growth in the aggregates as the  fundamental objective of the economy.  We have been concerned about the  aggregates right along, and in terms of the directive, there will be that same concern about the aggregates.  What will differ is that more emphasis  will be placed upon a translation of those aggregate objectives, which in themselves have not changed, into their implications for the Reserve Banks for actual reserves and for non-borrowed reserves.  Mr. Sternlight and Mr.  Axilrod will be heavily engaged in that process that I have described and Mr. Sternlight will be heavily engaged in translating that in daily open market operations. Question:  Mr. Volcker, is there any help that you're hoping for from any  other quarters, be it the Executive Branch or Congress or business, against inflation? Mr. Volcker:  We're always looking for help and indeed I think we are going  to get some help.  We live in a difficult world, as you know.  Fiscal policy  is restraining in relative terms and it has been a move often overlooked. The budget is still in deficit, I recognize that, but it has moved very substantially over a period of a couple of years.  Expenditures have been  restrained, so that area, I think, is pulling its weight.  The Administration  has been struggling, as you know, with the guideline program and the cooperation of business and labor that is aimed at the same problem, and we're getting help, as you put it, I think, in that direction. be said that we are giving them some help too.  Maybe it might properly  I think our priorities are  similar in both areas, so in that sense it can be considered part of a broader program.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  There are a lot of other economic policies, many of which have  -12a longer term significance.  The whole regulatory business, which the  President has given some attention to, is not an area where you make striking progress in any short period of time.  When one looks at this whole range  of problems, you can't help to be impressed with what needs to done. There has been a discouraging trend in this country on productivity.  We had, in a sense, bad news on that again yesterday, because  with the revision of the labor force figures, and particularly the employment figures,— the benchmark revision that was announced -- we found out that employment was even higher than we thought it was and the growth of employment was even greater than we thought it was.  Of course, let's not  forget, we had an immense growth in employment in this country in recent years.  But with output as it was, we now find out that employment was  still higher,and the productivity figures are looking worse than they did before--and they didn't look good before those figures came out.  We  have an adverse trend in productivity to the point where the figures are actually negative from last year. it is a significant negative figure.  Computed with these new figures, You know what that means: when  employment is increasing, relatively, and there haven't been any substantial changes in the unemployment figure during this period, it means we're getting less output per worker.  We've had a lot more workers,  but per worker there is less output. That only can get translated into a decline in the standard of living.  You can't be too surprised when  at the other end of the sausage grinder, so to speak, you find prices rising more rapidly than income.  That is inherent in a situation where productivity  is declining. Now we also have another wedge ,in a different context ,from the increase of the OPEC oil prices.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  In effect, a tax of something like  -13$25 million dollars 1.6 wedged into the American economy between prices and income. And so we've had two very fundamental reasons why real income has declined.  And the reason it's so closely related to this  inflationary process is that people understandably don't like real income So they say: "Let's catch up in real income.  declining.  in our wages with the prices."  Let's catch up  If you have a decline in productivity  and if you have higher import prices-- strikingly higher import prices -the inexorable fact is you can't catch up, because the output is not there to permit the increase in real income.  And so it is in a very  fundamental sense something that we have to accommodate ourselves to. Well, the answer is very obvious. import prices.  Raise productiuity and get stability in  I must say that stability in the exchange value of the  dollar is not irrelevant. . Question:  Mr. Volcker, have you discussed these measures with anyone in the  administration, and what were their reactions? Mr. Volcker:  Of course, I've kept them infoLmed of thinking as it has  I don't think its really appropriate for me to speak for them,  developed.  I think they really ought to use whatever words they care to use.  But I  will emphasize, there are no surprises. Question:  Mr. Chairman have you had any pledges from the  on their interest rates and view of your discount rate increase, they have been marking up more or less  with us and it has been  assume to be a very large part of the short-term cash rose in determining. . . Mr. Volcker:  There have been some allegations of that sort.  I don't  have any pledges from them.  In very broad terms there have not been any  recent measures in Germany.  There were some sizable interest rate increases  terms of the earlier this year and they are explainable, quite readily, in   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -14problems they've been having.  They've been having quite a brisk economic  expansion and,by their standards,rather sizable increases in consumer prices,so the kind of measures that they're taking are not surprising on those grounds.  Let me say in that connection--while it's not reflected  in the consumer prices and I'm not suggesting that they expect it will be reflected in consumer prices, but it's indicated as a general problem -that wholesale prices in Germany and in most other industrialized countries in the months of this year have been very comparable in proportion to the increase in producer prices in the United States. a lot of attention.  That hasn't gotten  I have not looked at the figure,frankly,for the past  two or three months, but when I last looked at it, approximately two months ago, curiously enough the increase in the producer price index in the United States up until that time was among the lowest among the industrialized countries from the beginning of 1979.  I don't cite that as a brilliant record  obviously,on the part of the United States. part of a world phenomena.  But, this is, to some degree,  So in that connection it is not entirely surprising  to see some parallelism in the kind of actions taken.  Having said all that,  I think the kind of consultation that we have had with foreign monetary authority is in the degree of intensity  and closeness greater than anything  I've seen in my experience, and I've been in this game for a while. Question:  Mr. Chairman would you say the effect of this kind of action would  be on the business lending and also consumer problems? Mr. Volcker:  I would not expect it to have any particularly direct or  quantitative effect on consumer loans, to single those out. do think total loan growth has been excessive in terms of an environment in which we want to move back towards more stability. of that recently has been in the business loan area.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  The biggest chunk Now let me emphasize  -15the object of this action is not to turn this off. in the money supply.  We expect some growth  We certainly expect growth in business lending.  Inventory accumulation is high; it needs to be financed. to get at is the excess.  What we want  And the figures have been high enough to suggest  that excesses have entered into the process. Question:  Do you expect that the bottom results of these actions will be  to make credit unavailable at any price, some otherwise creditworthy ones? Mr. Volcker: Question:  No.  That is that people will not be able to roll over (?)  Nr. Volcker:  I definitely do not.  As I just indicated, our objective here  is not to shut off the flow of credit, but to hold it within those proportions consistent with the orderly evolution of the economy. .   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  . ..,„, ,.. R. ,  RESERVE  FEDERAL press  release  October 6, 1979  For immediate release  The Federal Reserve today announced a series of complementary actions that should assure better control over the expansion of money and bank credit, help curb speculative excesses in financial, foreign exchange and commodity markets and thereby serve to dampen inflationary forces. Actions taken are: 1.  A 1 percent increase in the discount rate, approved unanimously  by the Board, from 11 percent to 12 percent. 2.  Establishment of an 8 percent marginal reserve requirement  on increases in "managed liabilities" -- liabilities that have been actively used to finance rapid expansion in bank credit.  This was also approved  unanimously by the Board. 3.  A change in the method used to conduct monetary policy to  support the objective of containing growth in the monetary aggregates over the remainder of this year within the ranges previously adopted by the Federal Reserve.  These  ranges  over the months ahead.  are consistent with moderate growth in the aggregates This action involves placing greater emphasis in day-  to-day operations on the supply of bank reserves and less emphasis on confining short-term fluctuations in the federal funds rate.  It was approved unanimously  by the Federal Open Market Committee, which is comprised of all members of the Board of Governors and five of the 12 Presidents of the Federal Reserve Banks. In announcing these changes, the Board issued the following statement:   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2-  "Inflation has continued at an exceptionally high rate over recent months.  In part, the inflation rate reflects sharply rising energy  prices, and those pressures should be subsiding in the months to come.  However, appropriate restraint on the supply of money and  credit is an essential part of any program to achieve the needed reduction in inflationary momentum and in inflationary expectations. Such restraint should help to avoid new uncertainties about the outlook for prices and distortions in markets that could aggravate the process of economic adjustment that is underway.  It will help  to restore a stable base for financial, foreign exchange and commodity pricing. "Under the provisions of the Humphrey-Hawkins Act, the Federal Reserve sets yearly targets for the monetary aggregates and bank credit, and reports these targets to the Congress.  At mid-year,  the targets for 1979, encompassing the period from the fourth quarter of 1978 to the fourth quarter of 1979, were reviewed and reaffirmed at 1 1/2 to 4 1/2 percent for M1, 5-8 percent for M2, and 6-9 percent for M3. *  These targets, after allowance for  the smaller shift of demand deposits to ATS and NOW accounts, still seem broadly appropriate. *The M1 target had assumed a shift of about 3 percent of demand deposits to automatic transfer service accounts (ATS) and NOW accounts; that shift now appears to be about I 1/2 percent so that the equivalent adjusted target is 3-6 percent for Ml.  -3-  "However, growth over recent months in these aggregates with and in bank credit has been more rapid than is consistent sive those targets, and if unrestrained, would clearly be exces in terms of our basic economic objectives.  Recent Federal Reserve  contain actions, taking account of inevitable lags, should work to consistent money and credit growth in the months immediately ahead, with the targeted objectives.  The actions announced today are  will designed to provide further assurance that those objectives be reached."  that The Board also stressed that banks should avoid loan activity gn exchange markets. supports speculative activity in gold, commodity and forei Discount Rate on In announcing the change in the discount rate, the Board acted delphia, requests from directors of the Federal Reserve Banks of New York, Phila Cleveland, Richmond, Minneapolis and San Francisco. borrow The discount rate is the rate that member banks are charged when they from their district Federal Reserve Bank.  The change is effective on  Monday. ing The Board indicated that, aithin the general framework of exist the discount policies regarding the adminirration of the discount window, bank borrowing. rate would be managed flexibly to discourage excessive member Marginal Reserve Requirement to The marginal reserve requirement adopted by the Board will apply corporations, and all increases in managed liabilities of member banks, Edge U.S. agencies and branches of foreign banks.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  This means that these institutions will be required to put up an additional 8 percent reserve against their deposits to the extent that they increase the aggregate level of their managed liabilities above a base amount. These liabilities include large time deposits ($100,000 and over with maturities of less than a year), Eurodollar borrowings, repurchase agreements against U.S. Government and federal agency securities, and federal funds borrowings from a nonmember institution. (Federal funds borrowings from member banks, Edge corporations, and U.S. agencies or branches of foreign banks are exempt in order to avoid a double counting of reserve requirements.) The marginal reserves will be an addition to any reserve requirement already in place for member banks and Edge corporations.  Large time deposits,  for example, are already subject to a supplemental reserve requirement of 2 percent that was put in place last November, plus a basic reserve ranging from 1 percent to 6 percent depending on maturity. The current reserve requirement on Eurodollar borrowings is zero while federal fund transactions and repurchase agreements against U.S. Government and federal agency securities are currently exempt from reserve requirements. The marginal reserve will also apply to loans made by foreign offices of member banks to U.S. residents and to assets sold by member banks, Edge corporation and U.S. branches and agencies to related foreign offices. The base for the marginal reserve will be $100 million or the average amount of managed liabilities held by a member bank, Edge corporation or by a family of U.S. branches or agencies of a foreign bank, as of the two statement   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  •  -5-  weeks ending September 26, whichever is larger.  Any increase in managed  liabilities above that point will be subject to the 8 percent marginal reserve. Since the marginal reserve will apply to the total aggregate level of managed liabilities for each bank, an increase in one component -- large CDs for example -- may be offset by a decrease in another without any overall increase in reserve requirements. This action is directed toward sources of funds that have been actively used by banks in recent months to finance the expansion of bank credit. Member banks are presently estimated to hold over $240 billion in such managed liabilities. last three months.  They have increased by about $17 billion over the About half of the increase in bank credit over that period  has been financed by such managed liabilities. The marginal reserve requirement will also apply to marginal increases in all repurchase agreements on U.S. Government and agency securities entered into by member banks, Edge corporations, and U.S. branches and agencies except those entered into with other member banks, Edge corporations and U.S. branches and agencies.  A deduction, however, will be permitted for U.S. Government and  agency securities held in an institution's trading account -- securities held for the purpose of resale.  The Board expects that affected institutions will  not reclassify securities held in their investment accounts to their trading accounts for the purpose of avoiding the marginal reserve requirement. The marginal reserve requirement will be effective on the increase in managed liabilities in the statement week beginning October 11 and maintained in the seven-day period beginning October 25.  Because U.S. agencies and  branches of foreign banks will be maintaining reserves with the Federal Reserve for the first time, they will begin maintaining reserves the week beginning November 8.  http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -6-  FOMC Action Under the  new procedures adopted by the FOMC for the conduct of open  market operations -- the major tool used by the Federal Reserve in its operations wider day-to-day or week-to-week fluctuations in the federal funds rate may occur. The federal funds rate is the rate that commercial banks pay to borrow short-term funds generally on an overnight basis. Over recent years, the FOMC has fixed a relatively narrow range for the federal funds rate.  To help achieve better control over the reserve base, it  will now be necessary -- within broad limits -- to permit wider fluctuations of that rate if so determined by market forces. In its open market operations, the Federal Reserve, through its trading desk at the Federal Reserve Bank of New York, buys or sells government securities in the open market.  In simple terms, a purchase of securities increases the  level of bank reserves while a sale of securities decreases bank reserves.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -0-  Outline of Remarks to Primary Dealers October 9, 1979 Peter D. Sternlight  One of the Fed policy moves announced last Saturday evening was a change in the New York Trading Desk's approach to open market operations.  Since you people are on the other side  of the firing line, or maybe I'd better say "telephone line" from our Desk, it seemed reasonable to invite you in and say what we could about how this all might work. Hope I haven't asked you under false pretences, because at this stage, there's really not a great deal I can say--not from deliberate reticence or secretiveness on my part, but because we're in the midst of a learning process ourselves.  We have some  objectives, but don't have fixed procedures at this stage.  I  expect these to evolve in the weeks and months ahead in a more _orderly form .than I can lay out now.  I suppose we could have  done without this session and instead let the subject come up in the course of conversations over the next couple of weeks, but I appreciate that there-'s a factor of timeliness and even if I can't answer all your questions I'd rather "unanswer" them all about the same way, and at the same time. As for general background underlying the change, I'd refer you to the Board's statement in their press release.  Calls  attention to exceptionally high inflation, and the need to restrain money and credit growth  in tin* effort!  The Fed set  targets for money and credit growth early this year, for year ending in fourth quarter 1979, and those targets were reaffirmed   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  2  in July and again in connection with latest meeting.  While  the yearly targets still look satisfactory, there's been an excessively rapid growth pace in the past several months. Left unrestrained, that growth would be excessive in terms of our basic objectives.  The actions announced Saturday are designed  to provide greater assurance those objectives will be reached. They're also designed to damp down the speculative fever that's cropped up in recent weeks. Focussing just on the open market operations technique item, the press statement indicates we're still aiming at monetary aggregates, as we did before.  But our initial operational focus  --what you might call our instrumental variable--is on various reserve measures rather than on the Fed funds rate. We still plan to look at the funds rate, though--both because we think that funds market developments can give us useful information on the availability of reserves, and because within broad limits we do have some constraints in mind.  But I would  emphasize that those limits are quite broad compared with the modus operandi of the past.  Whether those limits will be tested  in coming days remains to be seen.  Ordinarily I'm not an advocate  of fitmtuationfor its own sake, but there might be some advantage in having a good bit of movement early on just to establish the point that the rate can move around a fair amount--and thus help to avoid getting ourselves into the boxes that we so often found ourselves in under past paeggammips.,   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  3  We're still very much experimental, but as we see it as of this point, our approach is something like this:  the  staff starts with the monetary aggregates sought by the Committee, and works out reserve needs and monetary base needs that that generates, after making assumptions about deposit mix, other reservable liabilities, etc.  From this is derived a path for  the monetary base and total reserves.  (The monetary base is From the  total reserves plus currency outside member banks.)  total reserve path, one can subtract an assumed level of borrowing to get at a path for nonborrowed reserves (NBR).  That NBR path  can be thought of as a first approximation to what we might want to achieve in a particular week--but, and it's a big "but", we would make adjustments to that week-to-week target depending on the degree of pressure we want to put on the banking system to move toward desired reserve and monetary base paths. We've said funds can move in a wide range.  They can,  but don't necessarily have to--although as noted, I can see some advantage in having some flexibility emerge at an early stage. In the course of seeing funds patterns emerge here, you should realize  that Desk operations to add or drain reserves when funds  happen to be trading at particular levels need not have the significance it did under our past procedures.  Funds will always  be at some level when we go in to affect reserves.  Providing  reserves at rate 'Yndoesn't necessarily mean that "Y" is some sort of top in our range.  Nor is "X" the bottom of our range just  because we withdraw reserves when funds are trading there.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  The  4  next day, with no change of policy, we might well refrain from acting even though funds slipped lower than "X" or edged higher than "Y".  In large measure, we'll add or drain reserves based  on our reserve estimates, although we'd expect to get some information about the validity of our projections of market factors, like float, from the behavior of the funds market. As far as I can see at this point, the nature of our actual purchase and sale operations will be similar to what it's been.  We'll have use for both outright and rp-type transactions.  Whether we'll tend more than in the past toward outright or more toward the temporary-type transactions, I can't really say.  We'll  still have opportunities for dealing directly with foreign official accounts when that suits our objectives and theirs.  When we go to  the market, we'll still look to the dealers for bids and offerings --at prices they see fit to show. In that connection, will our modified technique make life more complicated for dealers?  It might well, in a transitional  learning period, though for the longer pull I'm not at all sure it would.  If the technique can help contain inflation, as we  think it can, it should benefit us all in the long run.  Needless  to say, but I'll say it anyway, the obligation to show some reasonable sized bids, at prices you deem appropriate, goes for Treasury financing operations as well as System go-arounds. One final point. We don't plan to be rigid or mechanistic in pursuit of reserve targets.  This may cause some die-hard  monetarists to subdue their elation at our change in approach   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  5  and recall their congratulatory messages.  But we are too much  aware of slippages of various kinds in the short-run to be really rigid.  You can get changes in the multiplier between  reserve and monetary aggregates that may wash out over a long time--a year, say--but we have to take life a month, week, or even a day at a time.  For instance, CD behavior can impact  quite noticeably on reserve measures, while the standard monetary aggregates are proceeding as expected or desired.  Blind pursuit  of a reserve target could have led us badly astray early this year.  We don't plan to let that happen.  We plan to be alert,  too, to aberrations such as bulges in possibly unusable excess reserves because of fog in O'Hare Airport, or a bulge in discount window borrowings because a computer at the Fed or a major money market bank breaks down; we'd want to recognize that borrowing so generated could have different significance from borrowing that developed because we were deliberately holding back on the provision of nonborrowed reserves.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  ( 9 - eftdie   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  ^  -^  •  /  , • tt'er a,tAtkktl (7.;(144=ce  :fek-C .  „ete-/_./xaaf c-t  cfr:0(  '  It  X.a.  keee-  If /1 4Ae'b:(  al(X, V.steL> fF  h64,u),4 •  Leto  Ge._ eta   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  e•ttif  4 1.  -  -ef.:(41- 't(f-t •'{e4r  1/2,r  -(-1A•774  <:?  a,eep,/,4 /gal  /m AlAotteof  Attuit-  6aSiudi?-.4;/  ,  eZe-eal &-e-  /Cit/6-e  rt  T  /2:7"firle„e_  t%ettA.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  tie,/  Ii  teilf7-1 /  2,te ,c,°1  &ee-w-4,6  0 / 1;,010,19 ' l17244t 171r. ' 17YlrfrP/22 TVV , 177 7 71/'  ,r •  (   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  P021 41 7  ),,  4 , 1 i ,;: 7 ;r1 fe " r  p.  „yornirke4r.,-,A,), .. 0011',"qtY41)111' 44,41  lhrt.;  Aid  727  /I)?  )1'47m4 ▪ '  ??1,77iPTir  • ?Int  , o•  ) .2,  MTh  /• -  77)29,  9-0)// V• kerfiryiiy _r '11c,r 1"1 //)3'  pr7rw7 I 7evryi47/91/ 1-41/ 4 '  ;44/ %  fr).-12.4,7f;  "  1)1  .07m;-7,7  Ard'  -„  •)11)41,749-7e(72-492r 7/Awivg)/ _ • )7-)?'"), kvaK,)  yrr  ".  ry  / eyor,  -74 17021  -v-e-Wier/  /,7r?Jf rim7/ / /yew 4i,firrr",/k/  17,9-17 0  71Y '427A,rt  _-011 ?' nlr i7Io dr/9 :7/1Pr°  kw 171 ,7/7/2///  . jt07  1/Y0i  I  104  Removal Notice The item(s) identified below have been removed in accordance with FRASER's policy on handling sensitive information in digitization projects due to internal or confidential information.  Citation Information Document Type: Class I FOMC Memo Citations:  Number of Pages Removed: 36  Proposal for Reserve Aggregates as Guide to Open Market Operations, Federal Open Market Committee Draft, October 2, 1979, with accompanying research dated September 27, 1979. Proposal for Reserve Aggregates as Guide to Open Market Operations, Federal Open Market Committee Draft, October 4, 1979.  Final version of this material is available in the Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents on FRASER.  Federal Reserve Bank of St. Louis  https://fraser.stlouisfed.org  Removal Notice The item(s) identified below have been removed in accordance with FRASER's policy on handling sensitive information in digitization projects due to internal or confidential information.  Citation Information Document Type: Class I FOMC Memo Citations:  Number of Pages Removed: 2  Draft of Domestic Policy Directive for Consideration by the Federal Open Market Committee at its Meeting on October 6, 1979, Federal Open Market Committee, October 6, 1979. Final version of this material is available in the Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents on FRASER.  Federal Reserve Bank of St. Louis  https://fraser.stlouisfed.org  BOARD OF GOVERNORS OF 1 / 4 E  FEDERAL RESERVE SYSTEM  Office Correspondence To  Chairman Volcker  From  Murray Altmann  Date  October 5, 1979  Subject: Notes for tomorrow's FOMC meeting  Given below are some notes for tomorrow's FOMC meeting, which is scheduled to begin at 9:30 a.m.  All Board members and presidents are  expected to attend, with the exception of Mark Willes. A.  You may wish to proceed on the assumption that, given the  telephone conference this morning, there is no need for a review of the economic situation and market developments, although Governor Rice and some of the Reserve Bank Presidents did not participate in the conference. Nevertheless, Messrs. Kichline, Truman, Axilrod, Sternlight, and Pardee will be prepared to make brief statements. B.  I shall have copies of the draft directive to distribute  if and when you wish to do so. C.  Should the proposed operating procedure be adopted, you  may wish to indicate that there is some uncertainty about the date of the next meeting. 1.  The following are among options you might consider: Cancel the meeting scheduled for October 16.  If so, you  might wish to plan on a telephone conference on the morning of October 16 for the purpose of reviewing operations under the new procedures.  With  or without an intervening telephone conference, you might wish to advance the date of the November meeting by about one week--to Wednesday the fourteenth from Tuesday the twentieth.  (Wednesday rather than Tuesday is  proposed because Monday the twelfth is the Veterans Day holiday.) 2.  Postpone the October meeting one week to the 23rd to lengthen  the interval after tomorrow's session. November meeting is four weeks.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  The interval from October 23 to the  PAV Draft - 10/4/79  The Federal Reserve Board and the Federal Open Market Committee today announced a series of complementary actions to assure firm control over the expansion of money and bank credit, to curb speculative excesses in financial, foreign exchange, and commodity markets, and thereby to dampen inflationary forces. Current high rates of inflation have been aggravated by extremely large increases in energy prices, which should begin to subside in a few months.  However, appropriate  restraint on the supply of money and credit is an essential part of any program to achieve the needed reduction in inflationary momentum and in inflationary expectations. Such restraint shouldA avoidnew uncertainties about the outlook for prices and distortions in markets that could aggravate the process of economic adjustment that is underway.  It will help to restore a stable base for financial,  foreign exchange, and commodity pricing. Under the provisions of the Humphrey Hawkins Act, the Federal Reserve sets yearly targets for the monetary aggregates and bank credit, and reports these targets to the Congress. At mid-year, the targets for 1979, encompassing the period from the fourth quarter of 1978 to the fourth quarter of 1979, 2 to 4% percent for M1, 5-8 / were reviewed and reaffirmed at 11 percent for M2, and 6-9 percent for M3.  (The M1 target had  assumed a shift of some 3 percent of demand deposits to ATS   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2-  or NOW accounts; that shift now appears to be about 1% percent.)  Those targets, after allowance for the smaller  shift of demand deposits to ATS and NOW accounts, still seem broadly appropriate. However, growth over recent months in these aggregates and in bank credit has been more rapid than consistent with those targets, and if unrestrained, would clearly be excessive in terms of our basic economic objectives.  Recent Federal  Reserve actions, taking account of inevitable lags, should work to contain money and credit growth in the months immediately ahead, consistent with the targeted objectives. The actions taken today are designed to provide further assurance that those objectives will be reached. To that end, the FOMC announced that for the period encompassed by the 1979 targets it would: (1)  Seek to hold the reserve base of the banking system to amounts adequate to meet the present monetary targets, but not sufficient to support expansion beyond those targets.  (2)  To achieve that control over the reserve base, operations in the period ahead will not be directed toward closely constraining fluctuations in the federal funds or other short-term market interest rates.  At the same time, the Federal Reserve Board announced a series of reserve requirement changes for member banks and   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -3-  for foreign banks operating in the United States designed to restrain growth in "near money" liabilities of member banks that could feed excessive bank credit growth: (1)  A special supplementary reserve requirement of  %, effective in the reserve computation  period beginning  , will be placed on  increases in the total "managed liabilities" above a base of  , or the total amount outstanding  in the four statement weeks ended These "managed liabilities" include certificates of deposit, speculative agreements secured by U.S. Government securities, and purchases of Federal funds from non-member banks or non-bank sources, and net takings of Euro-dollars from foreign branches or subsidiaries. (2)  A reserve requirement of  % on loans made by  foreign offices of member banks to U.S. obligati-ons. (3)  A reserve requirement of liabilities"  % on the "managed  of U.S. branches and subsidiaries of  foreign banks. The Board also indicated that, within the general framework of existing policies regarding the administration of the discount window, the discount rate would be managed flexibly in a manner to discourage excessive member bank borrowing.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  .  In taking these actions, the Federal Reserve Board also indicated that banks should particularly review and avoid loan activities that supported unusual speculative activity in gold, commodity, and foreign exchange markets.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Details of the reserve requirement actions are attached.  PAV Draft - 10/3/79  The Federal Reserve Board and the Federal Open Market Committee today announced a series of complementary actions to assure firm control over the expansion of money and bank credit, to curb speculative excesses in financial, foreign exchange, and commodity markets, and ti to dampen inflationary forces. Current high rates of inflation have been aggravated by extremely large increases in energy prices, which should begin to subside in a few months.  However, appropriate  restraint on the supply of money and credit is an essential part of any program to achieve the needed reduction in inflationary momentum and in inflationary expectations, taoe49Y) ave4445-ew uncertainties about the outlook for prices ancl."47 : t 7 -/ 4.01' e c,e.4 1€04/sc. a, 74'e , kri-eZ( 74:ce7 e0 CA kV etip,,* /40 economic artl ity,d to restore a stable base for financial,  fvc4 kexikam7  foreign exchange, and commodity pricing. Under the provisions of the Humphrey Hawkins Act, the Federal Reserve sets yearly targets for the monetary aggregates and bank credit, and reports these targets to the Congress. In—m1c1=-1-9-7, the targets for 1979, encompassing the period from the fourth quarter of 1978 to the fourth quarter of 1979 were reviewed and reaffirmed at 11 / 2 to 41 / 2 percent for M 5-8 1, percent for M and 6-9 percent for M3. 2'  (The M target assumed 1  a shift of some 3 percent of demand deposits to ATS or NOW niar accounts, A shift that now appears to be about 1% percent.) Those targets, after allowance for the smaller shift of demand deposits to ATS and NOW accounts, still seem broadly appropriate.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2-  However, growth over recent months in these aggregates and in bank credit has been more rapid than consistent with uovIci-nqs..ed those targets, and, if unmallitained, would clearly be excessive in terms of our basic economic objectives.  Recent Federal  Reserve actions, taking account of inevitable lags, should work to contain money and credit growth in the months immediately ahead, consistent with the targeted objectives. The actions taken today are designed to provide further assurance that those objectives will be reached. To that end, the FOMC announced that for the period encompassed by the 1979 targets it would: (1)  Seek to hold the reserve base of the banking system to amounts adequate to meet the present monetary targets, but not sufficient to support expansion beyond those targets.  t-vti-11  be taken of growth in currency in circulation, so that the total money supply is held under firm control.  (2)  To achieve that control over the reserve base, operations will not be directed toward closely constraining fluctuations in the Federal funds or other short-term market rates.  At the same time, the Federal Reserve Board announced a series of reserve requirement changes for member banks and for foreign banks operating in the United States designed to   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -3-  restrain growth in "near money" liabilities of banks that could feed excessive bank credit growth:  (1) laza/ ,{I.41,t1}4 7';41if,r  24,1  fe  3.  11:(AiliC-.77 ,  1/ 01,, obt4 _ it., t " , : goi 44.414 4.44t. 'it. 1-ti 7, i,,t7t44 .. (144c It I' 4,41 tl“Al  • 1,  Lttr't  aiv-e4A,eir  c?,)  /it4y.4i ,v,k,. .4e ;  ezid/At  44,4.  tise"tid  dtf ,'11;  f. ,.::,-,.'::,,..,04t, ,  et  "  e cl" • ' •  r  •  '  The Board also indicated that, within the general framework of existing policies regarding the administration of the discount window, the discount rate would be managed flexibly in a manner to discourage excessive member bank borrowing. In taking these actions, the Federal Reserve Board also indicated that banks should particularly review and avoid loan activities that supported unusual speculative activity in gold, commodity, and foreign exchange markets.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  hEia  /cte..a6ce  cd&A  Staff Projections of Key Variables Consistent with FOMC Monetary Targets Adopted in February and July (In percent)  Most recent: September  February  July  10.1 2.1 8.1  8.2 -1.3 10.4  8.5 -.8 9.9  6.3 10  6.9 10.5  6.9 11.25  Growth QIV '78 to QIV '79 Nominal GNP Real GNP Price Index 1/  Level QIV '79 Unemployment rate Federal funds rate  1/  Gross business product fixed -weight price index.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM  Office Correspondence  Date January 16, 1980 Subject: Effects of Marginal Reserve Program  To  Mr. Axilrod  From  Divisions of International Finance and Research and Statistics*  The Board's reserve action of October 6 established an eight per cent marginal reserve requirement for large member banks, Edge corporations, and the U.S. branches and agencies of foreign banks against net increases in managed liabilities above a base period level.  The  program is designed to damp the rate of expansion of bank credit available to domestic residents by increasing the cost of managed liabilities used to finance such expansion. since early October,  Although the growth in bank credit has slowed  it appears that this slowdown is related primarily to the  substantial increases in market interest rates that followed the October 6 measures, along with a possible reduction in the demand for credit in the face of increased uncertainty over prospects for the economy, rather than the marginal reserve program per se.  This conclusion is based on the  following factors: 1.  Most branches and agencies of foreign banks have been able to reduce managed liabilities to levels below their base levels, apparently primarily by moving maturing loans to foreign banks to their offshore affiliates. Many of these institutions are substantially below their bases and thus could have expanded domestic loans without incurring marginal reserves.  2.  Managed liabilities at many large domestic banks also are below base levels. A few of these domestic banks are well below their bases, so that their funding costs do not currently reflect the marginal requirement.  */ Messrs. Adams, Dooley, Frankel, Jensen, Quick and Williams. 1/ The base period is the two statement weeks ending 9/26/79.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  2  3.  If credit demand had remained strong and the marginal reserve program had been an effective constraint on bank activities since October 6, we would expect that banks would utilize all methods available for financing continued domestic loan growth while reducing liquid assets and increasing reliance on exempt sources of funds. Available data show that few of these actions have been taken to any significant degree.  4.  If the marginal reserve program were binding, we would expect that federal funds borrowed from member banks and agencies and branches would bear a higher interest rate than those borrowed from nonmember banks since fed funds sold by covered institutions are exempt from the marginal reserve program. Market observers report that, except during the first week or so after the plan went into effect, there has been no significant differential between the rates on member and nonmember bank federal funds.  5.  Discussions with lending offices at money-center banks indicate that while the marginal reserve requirement has influenced some to be more selective in lending to new customers, most had not increased rates or tightened other lending terms to reflect explicitly the marginal reserve cost because they would be undercut by their competitors. (That is not to say that the higher level of interest rates since October 6 has not influenced lending terms and conditions.)  With many agencies and branches of foreign banks and some large domestic banks comfortably below their base levels, they are in a position to expand managed liabilities to fund a resurgence in bank credit growth--either directly through loans to nonbanks or indirectly through federal funds sales to member banks-without U.S. banking offices as a group incurring significant marginal reserves against managed liabilities. The total amount of managed liabilities subject to marginal reserve requirements has declined on balance since October, largely reflecting the decline in managed liabilities in excess of base levels at agencies and branches (Summary Table 1).   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Similarly, while the number of member banks with managed  J  Summary Table I Covered Managed Liabilities Number of Institutions above Base Levels  Week Ending  Members1979--Oct. 17 24 31  Agencies and Branches  Amount in Excess of Base ($ billions) 1 Members-  Agencies and Branches  Total  141 115 102  38 34 28  4.0 2.5 2.9  3.4 2.6 1.5  7.4 5.1 4.4  Nov.  7 14 21 28  116 125 121 126  22 16 12 9  3.8 5.8 4.4 4.7  .9 1.1 .5 .3  4.7 6.9 4.9 5.0  Dec.  5 12 19 26  124 122 108 92  5 7 12 11  4.1 2.9 2.9 2.3  .1 .1 .4 .4  4.2 3.0 3.3 2.7  1980--Jan.  2  101  2.0  n.a•  n.a.  1/ Includes Edge Act corporation. n.a.--Not available.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  n.a.  3  liabilities above their bases has declined slightly over the 12 weeks shown, most foreign bank families initially holding an excess have been able to reduce managed liabilities below their bases. Summary Table 2 shows more detail on total managed liabilities covered by the marginal reserve program for all U.S. agencies and branches of foreign banks and for 25 large domestic chartered banks, which held 60 percent of total covered member bank managed liabilities during the base period.11 Of the 25 large domestic banks, the 6 banks with managed liabilities above base period levels for the week ending December 26 held $600 million of the total $2.3 billion in managed liabilities subject to marginal reserves at all member banks. The net increase in managed liabilities at these banks (of about 2 percent of their base) reflected growth of large CDs partially offset by declines in RPs and federal funds purchases. The 20 large banks with managed liabilities below their base levels had achieved by December 26 a cushion below their base of almost $6 billion (about 6 percent of their base), with most of the decline due to a sharp decrease in net Euroa/ dollar borrowing.-  This decrease in these banks' average weekly borrowing  from their foreign branches was due largely to their reduced participation in  1/ No data are available in sufficient detail for other domestically chartered banks. 2/ Increases in domestic CDs at domestic banks both above and below the base in this period may reflect some narrowing of the spread between costs of borrowing in U.S. and foreign markets since late September.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Surinary Table 2 Covered Managed Liabilities (not seasonally adjusted, $ billions)  25 Large U.S. Banks Base Period December 26 Change  RPs  63.2 70.9 +7.7  13.2 10.5 -2.7  22.4 18.7 -3.7  23.9 17.4 -6.5  122.8 117.6 -5.2  4.1 3.5 -.6  4.0 2.8 -1.2  6.2 6.2  31.7 32.3 +.6  9.7 7.0 -2.1  18.4 15.9 -2.5  17.7 11.2 -6.5  91.1 85.3 -5.8  1.0 .5 -.5  24.8 20.7 -4.1  43.8 39.3 -4.5  5 Above Base on December 26 Base Period 17.3 December 26 19.7 +2.4 Change 20 Below Base on December 26 45.9 Base Period 51.2 December 26 Change +5.3  Agencies and Branches of Foreign Banks 0.2 17.7 Base Period December 26 0.2 17.8 +.1 Change   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Net Eurodollars Borrowings  Large CDs  Fed. Funds  Total  4  weekend Eurodollar arbitrage which occurred after October 6.----  In  addition, foreign bank families have dropped below their base by about $4.5 billion (10 percent of their base), and all but 11 of the 134 families were below their bases on December 26. Other than for technical reasons such as the decrease in Eurodollar borrowing associated with the interruption of weekend Eurodollar arbitrage, the net reduction of managed liabilities at U.S. banking offices could reflect either a slowdown in the growth of credit to domestic residents financed by managed liabilities or continued domestic credit growth accompanied by actions of banks to minimize reliance on managed liabilities.  As  shown in the top panel of Summary Table 3, glowth in commercial bank credit at both large domestic banks and U.S. agencies and branches of foreign banks slowed sharply in the last three months of 1979 from the robust pace of the first nine months of the year.  In contrast, credit growth at small banks  has been maintained at roughly the pace of the rest of the year, due mainly  1/ When a foreign branch of a U.S. bank borrows clearinghouse funds on Friday from a U.S. office of a foreign bank and then passes on these funds to its domestic office, the entries on the domestic office books are increases in cash items and net Eurodollar borrowings. This transaction results in a decrease in reservable demand deposits (due to the deduction of cash items) and prior to October 6, no corresponding increase in another reservable category. Since October 6, banks have engaged in fewer such transactions, in part because they are less profitable due to the potential reserve requirement on net Eurodollar borrowings but also because wider day-to-day interest rate fluctuations have increased the uncertainty of the profits involved. As a result, weekly average net Eurodollar borrowings have declined at many of those banks Most actively involved in such transactions. 2/ It should be noted that between December 5 and December 26, managed liabilities in excess of base period levels decreased by $1.6 billion at the 25 large domestic banks, due largely to a sharp reduction in net Eurodollar borrowings which probably reflected some further curtailment in weekend arbitrage activities over this period.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Summary Table 3 Bank Credit Growth, 1979 (Annual rates, percent)  Seasonally Adjusted Total Total loans loans & investments Weekly Reporting Banks Jan. - Sept.  17.3  18.0  Oct. - Dec.  -.1  3.0  Jan. - Sept.  7.5  10.0  Oct. - Dec.  8.2  6.6  Other Domestic Chartered Banks  1/ Agencies and Branches of Foreign BanksJan. - Sept. Oct. - Dec.  40.3  40.6  -20.6  -21.6  Not Seasonally Adjusted Total loans Total & investments loans  Total loans less bankers acceptances and loans to foreigners  Weekly Reporting Banks 12.5  13.9  14.8  6.6  7.3  7.0  Jan. - Sept.  7.8  9.7  n.a.  Oct. - Dec.  6.7  4.6  n.a•  Jan. - Sept. Oct. - Dec. Other Domestic Chartered Banks  Agencies and Branches of Foreign Banks/ Jan. - Sept.  27.1  27.0  40.6  Oct. - Dec.  -3.6  -5.2  19.6  1/  Including Edge Act corporations.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  5  to a pickup in security acquisitions as loan growth abated somewhat)'-  It  is likely that the principal factor in the slowdown in total bank credit and especially in total loan growth, was the substantial increase in money market rates which followed the October 6 measures along with some slackening of demand as borrowers faced increased uncertainty about the outlook for economic activity. Moreover, the falloff in total bank credit and total loan growth reported above likely overstates the reduction in loan growth to domestic residents at agencies and branches of foreign banks.  The marginal reserve  program apparently induced the agencies and branches to allow maturing loans to nonresidents to run off and, in turn, to reduce net liabilities to foreign affiliates that have supported such loans.-' Roughly $40 billion of loans to nonresidents were on the books of the U.S. offices of foreign banks at the inception of the marginal reserve program.  Some agencies  and branches apparently exploited the latitude created by this technique and registered an increase in domestic loans over the last three months. Among the methods banks might employ to minimize the growth in covered managed liabilities while continuing to support expansion of domestic loans are:  1/ Historically, loan growth at small domestic chartered banks has been less volatile over the business cycle than loan growth at large banks. 2/ Sales of assets to affiliates would be reservable under the marginal program; however, if a loan on the books of a U.S. office matures and is subsequently renewed and booked offshore, the new loan would not be reservable. All of the loans to foreigners that have been shifted so far were loan's to foreign banks, which generally have very short maturities.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -6  1.  to increase reliance on managed liabilities exempt from the marginal reserve program (for example, borrowing federal funds from small member banks or those U.S. agencies and branches of foreign banks that are under their base, or issuing CDs with maturities over one year);  2.  to reduce assets supported by covered liabilities (for example, sales of securities and bankers acceptances, or shifting loans to foreigners to the books of foreign affiliates or shifting activities previously managed in the bank--leasing, etc.--to nonbank affiliates); and  3.  to channel bank credit growth to smaller banks below their bases (through increased participations or selling of loans).  In order to monitor more closely such actions, staff developed a set of surveillance tables that are discussed in detail in the appendix of this memo. Available data suggest that, so far, few of these methods have been utilized to any significant degree by the covered domestically chartered banks.  In contrast, the agencies and branches have been able  to reduce their foreign loan portfolios, thus allowing a drop in their managed liabilities well below their base levels, as reported above.  The  relatively low utilization of these methods by domestically chartered bnnks may reflect the relative costs of such adjustments.  For example, most large  banks cannot gain funds by selling off Treasury securities because they are fully used as collateral against RPs and government deposits; also, these banks could 1-1.:1: reduce loans to foreign businesses and banks by a large amount because such loans booked in domestic offices were small.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  7  In sum, it appears that the marginal reserve requirement program has yet to have had a pervasive impact on the cost of managed liabilities or the terms of lending in national loan markets.  The slow growth of  managed liabilities since October 6 likely reflects reduced loan demand, especially at large domestic banks, rather than a significant terms of lending to reflect increased funding costs.  shift in banks'  A few large member  banks reduced their managed liabilities considerably below base levels, largely due to their curtailment of weekend Eurodollar arbitrage activities. In addition, many U.S. agencies and branches of foreign banks have been able to reduce the amount of loans to foreign banks on their books and have developed a substantial cushion below their base period levels. The cushion at the agencies and branches reflects not only the $4.5 billion below base margin that these institutions have already developed but also the large amount of loans to foreigners still on their books which they can easily shift offshore as they mature.  This leeway at the agencies and  branches, along with the cushion that has developed at some large domestic member banks, makes it possible for a substantial resurgence in bank credit demand to be funded by the banking system without U.S. banking offices as a group incurring significant marginal reservable liabilities.  The agencies and  branches are in a position to expand their managed liabilities to extend credit for domestic economic activity either directly through loans or indirectly through federal funds sales to member banks.  Given the choice between direct  financing of U.S. business or other domestic borrowers and indirect financing through domestic banks, the U.S. offices of foreign banks might choose to bid more competitively for direct loan business and increase their share of domestic loan markets.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Thus, one prospective side effect of a prolonged  8 -  continuation of the marginal reserve program could be an even greater growth of the foreign banks' competitive position. Staff will continue to monitor developments in the use of managed liabilities at covered banks.  The tables discussed below summarized the data  available for our surveillance.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Appendix Description of the Marginal Reserve Program and Surveillance Tables Coverage of the Marginal Program The Board's reserve action of October 6 established an 8 percent marginal reserve requirement for member banks, Edge Act corporations, and U.S. agencies and branches of foreign banks against increases in managed liabilities above a base period level.  The liabilities covered by  ?/  ' Eurodollar borrowings, this requirement include large time deposits,  repurchase agreements against U.S. Government and federal agency Fecurities, and federal funds borrowings from institutions not covered by the program. -" The marginal reserves will also apply to loans made by foreign offices of member banks to U.S. residents and to assets sold by the above institutions to foreign related offices and non-banking Edge Acts as well as certain other obligations.  Loans by foreign offices of U.S. banks to foreign residents  are not covered, nor are any loans by foreign offices of foreign banks whether to U.S. or foreign residents.-' The base for calculating the marginal reserve is $100 million or the average amount of managed liabilities held as of the two statement weeks ending September 26, whichever is larger.  Since the marginal reserves are  calculated as a percentage of the aggregate increase above the base, an increase $100,000 and over with original maturity of less than one year. Eurodollar borrowings from non-affiliates with original maturities of more than one year are exempt. Borrowings from foreign affiliates are calculated on a net basis. 3/ Institutions are allowed to deduct from total repurchase agreements securities held in an institution's trading account. 4/ Federal funds borrowings from member banks, Edge Act corporations, and U.S. agencies and branches of foreign banks are exempt to avoid a double counting of reserve requirements. 5/ Other managed liabilities covered are: funds obtained by a member bank through the issuance of commercial paper by an affiliate; funds obtained through the sale of ineligible acceptances; and all repurchase agreements involving assets other than U.S. government or federal agency securities. 6/ While loans sold to foreign offices are subject to marginal reserve requirements, maturing loans on the books of U.S. offices may be rebooked offshore, and thus are not covered, except as noted above. 7/ If the average amount of managed liabilities during the base 2eriod is negative, the base is derived by adding $100 million to this average.  1/ 2/   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  2-.  in any one component may be offset by a decrease in another without any increase in reserve requirements.  Methods to Avoid Marginal Reserve Requirements It was expected that if credit demand were to remain strong, the increased cost of managed liabilities used to finance further credit growth would be reflected in bank lending terms and would tend to damp the rate of expansion of bank loans.  However, there remain opportunities for banks to  continue to fund domestic loan growth without increases in marginal reserves. Among the possible methods used to accomplish this objective are: 1.  to increase reliance on managed liabilities exempt from the marginal reserve program,  2.  to reduce assets (other than domestic loans) supported by covered liabilities, and  3.  to channel bank credit growth to banks below their base.  Using the first method, banks at or above their base may place increasing reliance on managed liabilities not covered by the new requirements.  These include large time deposits with initial maturities of  _§../ one year or more and "eligible" bankers acceptance liabilities.  Alternatively,  these banks nay acquire funds from small member banks and those U.S. agencies and branches of foreign banks below their bases.  Since federal funds and  repurchase transactions with member banks, Edge Acts, and U.S. agencies and branches are exempt from the new reserve requirements to avoid double counting, such funds acquired from those institutions that are below their bases allow for an increase in bank credit without an accompanying increase in reserve requirements.  8/  A bankers acceptance liability is associated with a bankers acceptance that is held by someone other than the accepting bank. Such acceptance liabilities outstanding of member banks and Edge Act corporations may not exceed 100% of the capital and paid-in surplus, thus limiting this option for these institutions.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  3  In the second category, banks may continue to fund domestic credit 9/ by reducing loans to foreign borrowers.— If these loans are not renewed at maturity, credit to domestic borrowers may be expanded without an increase in covered liabilities.  Or, if the loans are renewed at maturity,  they may be booked at foreign offices without incurring marginal resrerves. The benefits to domestic-chartered banks from "shifting" loans to foreign offices is limited to loans to foreigners, since loans to U.S. residents booked at foreign offices of domestic banks are also subject to marginal reserve requirements.  On the other hand, since loans to U.S. residents booked  at the foreign parent office are not covered, U.S. agencies and branches have the potential to increase credit to domestic borrowers by shifting all maturing loans offshore.  In general, however, loans to U.S. residents booked offshore  by foreign banks are unattractive, since interest payments by a U.S. resident borrower to a foreign banking office may be subject to U.S. withholding taxes. Shifting loans offshore may also result in a reduction in Eurodollar borrowing by the domestic office.  Loans booked in the U.S. but funded off-  shore involve a liability to a foreign office which, under the new program, is now subject to marginal reserve requirements,  Booking such loans offshore,  while continuing the funding pattern, would reduce these borrowings.  Similarly,  booking a loan offshore that is funded in the U.S. would create a claim on the foreign branch for the U.S. office, which reduces the U.S. office's Eurodollar borrowings.  In either of these cases, by shifting maturing loans offshore,  banks reduce covered managed liabilities relative to the level of credit.  9/   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  U.S. branches and agencies appear to have more latitude to shift maturing loans to foreigners offshore. Such loans on the books of U.S. domestic banks are relatively small, while there were roughly $40 billion of loans to foreigners at U.S. branches and agencies during the base period.  -4  In addition, banks may continue to fund new domestic loans by selling liquid assets, such as Treasury securities and eligible bankers acceptances. However, there are certain limitations on these actions.  For example, most  Treasury securities at large banks serve as collateral against repurchase Moreover, selling its own bankers  agreements and government deposits.  acceptances held in portfolio increases a bank's acceptance liability and may cause the bank to exceed its capital limitation. currently at or near their limits.  Many large banks are  Even without these external limitations,  the total amount of secondary reserves in banks' portfolios is  very low  relative to total assets, so that efforts toward further reduction are likely 10 to be small.---" affiliates.  Finally, banks may shift some lending activities to non-banking  Since commercial paper issued by affiliates is exempt from marginal  reserve requirements unless the funds are used by the bank, this would allow the bank's affiliates to fund increases in loan demand without increasing the bank's marginal reserves. Third, the new requirements may cause small banks to account for an increased proportion of bank credit.  Since the new reserve requirements apply  to increases in managed liabilities above the base level, small banks that were initially well below their base of $100 million may increase credit without being subject to higher reserve requirements.  The small banks have faced  increased competition in recent years from large regional and money center banks who have stepped up their campaigns for consumer lending and the business "middle market".  If the marginal reserve program begins to have an impact, this  could change the competitive balance in these markets.  10/  In addition, small banks  Banks may attempt to increase the proportion of Treasury securities held in their trading accounts (those intended for resale). Since these securities are deducted from repurchase transactions in calculating managed liabilities, this action would serve to reduce total managed liabilities. However, banks were cautioned not to reclassify Treasury securities merely to avoid reserve requirements, and may be reluctant to do so.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  5  may also get a larger proportion of bank credit normally taken by large banks, either through increasing their participations in syndications or through outright purchases of loans from large banks.  Surveillance Tables In an effort to monitor developments in the above activities, subject to the limits of data availability, the attached set of surveillance tables was constructed.  (These tables follow page 11 of this appendix.)  Tables 1 and 2 are  designed to survey the volume and composition of managed liabilities.  Tables  3a and 3b present comparisons of bank credit growth and credit levels for three classifications of banking institutions - large weekly reporting banks, small banks, and all foreign related institutions.  Tables 4 through 10 record  changes in selected categories designed to determine whether banking Institutions are financing credit growth in ways not subject to the new marginal reserve program.  These tables will be updated and and analyzed monthly and will be  circulated with commentary.  An explanation of the tables follows.  Table 1 surveys the volume and compositon of managed liabilities covered by the program for member banks while Table 2 applies to U.S. agencies and branches of foreign banks.  Member banks are required to report covered  managed liabilities only for those periods during which they exceed their base levels.  Thus, to derive a consistent sample, 25 large institutions were asked to  report weekly, whether or not they were above their base.  These banks accounted  for 60 percent of all covered managed liabilities during the base period. These sample data, which begin November 28, are reported in Table 1.  In Table 2  covered managed liabilities of all U.S. agencies and branches are recorded. Bank credit growth is presented in Table 3a.  The top panel presents  data for the weekly reporting banks and is intended to represent the majority   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  - 6 of banks initially subj-ct to marginal reserve requirements.  The figures  in the second panel are for all other domestic-chartered banks.  The bottom  panel presents data for U.S. agencies and branches of foreign banks and Edge Act corporations.  This table would reflect changes in the patterns of  bank credit as well as overall growth in these figures.  If, as a result of  the new requirements, banks not initially subject to the marginal reserve program increase their share of total bank credit, the figures since September should reflect this.  Further, to the extent foreign bank families  are better able to book maturing loans offshore while expanding loans to domestic borrowers, the new requirements should have less of an impact on their patterns of credit growth.  However, if domestic credit demand is weak,  booking loans at foreign offices would cause a decline in growth rates of bank credit originating at the domestic offices. Table  b shows the overall levels of bank credit outstanding for the  above three classifications.  This allows a comparison of total credit with  loans to foreigners shown on tables 9 and 10. For example, if loans to foreigners originating at U.S. member banks and branches and agencies declined while total credit remained flat, credit to domestic borrowers would have increased.  The  table also allows a comparison of the relative magnitudes of credit originating at the large banks, small bans an0 foreign related institutions. Table 4 is designed to determine if large banks are now borrowing moLe federal funds and RPs from small member banks. again the weekly reporting banks. requirements.  The large banks represented are  Such funds are not subject to the marginal reserve  If an increase in such borrowing were occurring, net purchases by  large banks could increase without a corresponding increase in marginal reserve requirements.  Small member banks could acquire these funds by purchasing additional  federal funds and RPs from nonmember banks, in which case gross sales and gross purchases of small banks would both increase.  Or, the small member banks may  rely on other managed liabilities, and gross sales and net sales of small   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  7  member banks may be expected to increase, while net purchases of large member banks may also increase. Table 5 represents large time deposits for two classes of banks-the 25 large banks that report weekly for the marginal reserve survey and weekly reporting banks with more than $1 billion in assets.  Large time deposits  with original maturities of more than one year a-J:e not subject to the marginal reserve requirements,while those with original maturities of less than one year are.  Total large time deposits with original maturities of more than  one year are shown in column 1 for the 25 bank sample for the September base period, and weekly beginning the week of November 28.111  If there is a shift  in funding, this total should show an increase relatiue to total large time deposits.  While not strictly comparable, large TDs with remaining maturity  greater than one year are shown for banks with total assets greater than $1 billion.  A sharp increase in large time deposits with original maturity  greater than one year should cause this total to increase as well.  For  comparison, total large time deposits for the same two categories of banks are shown. Table 6 shows money market assets of weekly reporting banks. table captures two effects.  This  First, banks may reduce covered RP liabilities by  increasing holdings of Treasury securities in trading occurring, column 2 would show an increase.  accounts.  If this is  Second, banks may fund additional  loan demand by reducing holdings of liquid assets.  The other columns would  then show decreases. Table 7 is designed to give evidence of banks' financing of credit by use of the acceptance instrument.  11/   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Column 1 reports total acceptances  Due to data limitations, these figures are not currently available, but will be forthcoming at a later date.  - 8executed and outstanding by all banking institutions in the U.S., including those held in the issuing banks' portfolios.  Thus, the total will increase  only if banks create additional acceptances, regardless of whether or not they are held by the issuing banks.  Since banks' acceptance liabilities are not  covered by the new program, banks may increase reliance on acceptances as a source of funds and this total would increase.  Column 2 represents total acceptances  held by all institutions that issue acceptances in the U.S.  Since banks  could fund new loan demand by reducing acceptances held in portfolio, this total may decline.  Column 3, which represents the ratio of column 2 to  column 1, would be expected to decline if either of the above two methods is utilized.  Member banks' acceptance financing is, however, limited by a  regulatory ceiling expressed as a ratio of such liabilities to a bank's capital and surplus, and several large banks are already at or near their limits. Column 4 shows total acceptances for 10 large domestic banks, and is intended to represent those banks at or near their regulatory limits.  The ratio of the  shown 10 large U.S. banks to the total volume of acceptance financing, which is is in column 5, is therefore included to indicate whether acceptance financing growing relatively more rapidly at other banking institutions not affected by the regulatory ceiling.  Relative strength in acceptance growth at U.S. agencies  column 6 and branches can be confirmed, but with a longer lag, by reference to of Table 10. Table 8 is designed to represent the use of commercial paper by bank affiliates.  Funds raised by the issuance of commercial paper by member bank  affiliates are subject to the new marginal reserve requirements if those funds are used by the member banks.  However, if used by other subsidiaries, the same  funds are not subject to these requirements.  Thus, expanded credit demand  could be funded without increasing reserves by increasing bank-related involvecommercial paper and using those funds to finance nonbank subsidiaries' ment in activities--leasing, factoring, etc.--normally done by the bank. 2 would then remain unchanged while columns 1 and 3 would increase.  http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Column  9-  _  Table 9 contains data showing possible effects of the program on member banks' lending to foreign residents and their lending from foreign facilities to U.S. residents.  The program generates incentives for members to  book new loans to foreign residents at the banks' foreign offices instead of their U.S. offices, since such bookings abroad do not need to be supported by reservable managed liabilities while U.S. bookings do.  (Existing bookings cannot  be shifted from U.S. offices to foreign offices without being included in a bank's managed liabilities, since sales of assets to foreign offices are covered by the program, but loans to foreign residents that mature after October 6 can be rebooked at foreign offices--or the proceeds lent to new foreign borrowers-without being included in the reservable total.)  Loans from foreign branches to  U.S. residents might be expected to decline in volume, because such lending would be included in a member banks' reservable managed liabilities.  Therefore, the  first two columns should increase, while the last three are expected to show declining volumes.  It should be noted, however, that bookings at foreign branches  of loans to foreign residents (columns 1 and 2) are observable only with a six-week lag, while the other categories of lending are reported with about a one-week lag. Table 10 presents data on certain activities of U.S. foreign-related institutions that might be affected by the program.  The first six columns  refer to liquid assets that could be reduced over time to provide funds for expanding such institutions' U.S. credit activities.  Columns 7 and 8 show  liabilities that could be issued without incurring reserve obligations under the program.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -10 As in the case of member banks, the program generates incentives for U.S. foreign-related institutions to rearrange their patterns of lending so as to concentrate at foreign affiliates their credit extensions to foreign residents.  Thus,bookings of loans to foreigners at U.S. offices can be expected  to stagnate or even decline as new lending is booked abroad and funds from past bookings that mature are redirected to U.S. customers. Liquidation of money-market assets, which include portfolio holdings of an institutions' own acceptances and those of other banks, could also be a source of funds to support other forms of credit extension to U.S. customers, potential but the relatively small volume of such assets outstanding limits the for such behavior. Under the program, acceptances issued do not incur reserve obligations, Column 8 gives  so the volume of liabilities shown in column 7 is likely to rise.  data from a survey of commercial paper dealers who report the issuance of such liabilities in the U.S. market by foreign residents.  Included here is the volume  of commercial paper issued by foreign affiliates of U.S. agencies and branches. Such liabilities could be used to raise funds outside the program for use by the U.S. foreign-related institutions in extInding credit to U.S. customers. Monthly data in Table 10 are available with a six-week lag except for the commercial-paper survey, which is done soon after monthend.  For loans to  -related institutions foreigners, however, data from a sample of 20 large foreign are available on a weekly basis with a one-week lag,  and weekly estimates of  figures for all foreign-related institutions have been projected from benchmarks relating the two series. An analysis of these tables indicates that since C'cto'7,er growth has slowed markedly, as shown in Tables 3a and 3b.  credLt  At the same time,  U.S. agencies and branches have exhibited a marked capacity to reduce their   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -11 managed liabilities subject to the marginal reserve program below base period levels.  Table 2 shows that total managed liabilities for foreign banks has  fallen sharply since October.  This is most likely due to the relative ease  for foreign banks of shifting maturing loans to foreign residents offshore, accompanied by a reduction in managed liabilities supporting these loans. This view is corroborated by the reduction shown in column 7 of Table 2 in net liabilities to parent banks for U.S. agencies and branches, as well as the reduction in loans to foreign banks by these institutions shown in Table 10.  Member banks as a group have reduced net liabilities to foreign offices  largely as a result in the reduction in weekend Eurodollar arbitrage that has occurred since October 6.  Table 9 shows little evidence of domestic banks  shifting maturing loans to foreigners offshore. While total credit growth has slowed, the pattern of credit growth differs among the three categories of institutions surveyed.  As shown in  Table 3a, credit growth has slowed most drastically at foreign-related institutions.  This implies that the U.S. agencies and branches have not used  fully the latitude achieved by shifting loans offshore to expand credit to U.S. residents.  At the same time, Table 3a and 4 through 9 show  little  evidence that large member banks have employed techniques to expand credit -by relying on funds not subject to .the new marginal reserve requirements.'  12/   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  In contrast, small banks have continued to expand credit at rates comparable to those prior to October 6, as shown in Table 3a. Note, however, that loan growth at these banks has moderated somewhat while investments have increased sharply.  Table 1. Member Bank Managed Liabilities 1/ (Weekly averages, billions of dollars)  Gross Federal All time deposits of $100,000 or funds and other borrow- more with original ings from coy- maturities of less ered entities than one year Col. 2 Col. 3 -  Reservable RPs Col, 1 BASE PERIOD 2/  13.2  1979 November 28 December 5 12 19 26  22.4  63.2  11.1  18.9  10.9 9.8 9.9 10.5  19.4 19.6 18.5 18.7  Total supplementary deposits with maturities of 30 days or more but less than one year Col, 4  -  Gross balancffidue to own nonU.S, branches Col. 5  Cross balances due from own nonU.S. branches Col. 6  Net balances due to own non-U.S. branches (column 5 minus column 6) Col. 7  Borrowings from non-U.S. banks and designated foreign entities Col. 8  .2  29.6  17.5  69.4  .3  27.9  14.5  13.4  3.2  70.0 70.3 70.4 70.9  .1 .2 .2 .2  26.5 25.6 27.0 24.0  15.0 15.8 16.2 17.0  11.5 9.8 10.8 7.0  3.5 3.3 3.8 3.8  12.1  4.2  Loans sold to affiliates Col. 9  4.6  Total liabilities subject to marginal reserve Credit extended by own non-U.S. requirements branches to U.S. (sum of Cols. 1,2,3 residents 4,7.8.9 and 10) Col. 10 Col. 11  3.0  122.8  4.0  2.6  122.9  4.0 4.0 3.9 3.9  2.7 2.7 2.7 2.6  122.1 119.6 120.3 117.6  ,  11 IC i. .. -.- ...  J ....  2/ Two weeks ending September 26, 1979.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Table 2. Agency and Branch Managed Liabilities (Weekly averages, billions of dollars)  Reservable RPs Col. 1  Gross Federal funds and other borrowings from covered entities Col. 2  All time deposits of $100,000 or more with original maturities of less tan one year  Funds obtained through the use of ineligible acceptances maturing in less than one year  Col. 3  Col. 4  Gross liabilities to parent and other designated non-U.S. affiliates  Gross claims on parent and other designated non-U.S. affiliates  Col. 5  Col. 6  Net liabilities to parent and other designated non-U.S. affiliates, less asset allowance 1/  Other borrowings from non-U.S. banks and other designated non-U.S. entities  Col. 7  Col. 8  Assets sold outright to foreign related institutions Col. 9  Total liabilities subject to marginal reserve requirements (Sum of Cols. 1,2, 3,4,7 and 9) Col. 10  BASE 2/ PERIOD-  .2  1.0  17.7  .1  47.5  23.1  18.5  5.8  .5  43.8  1979 Oct. 17 24 31  .3 .2 .2  .5 .6 .5  18.3 17.9 17.6  .1 .1 .1  51.4 49.0 50.0  25.6 24.2 26.4  19.7 18.8 17.7  6.4 6.6 6.1  .5 .5 .6  45.8 44.7 42.8  Nov.  7 14 21 28  .2 .2 .1 .1  .5 .5 .5 .5  17.2 17.0 16.6 16.5  .1 .1 .1 .1  49.0 49.0 48.5 48.3  25.8 26.2 26.3 26.3  17.2 16.8 16.2 15.9  5.5 4.9 5.1 5.4  .7 .7 .6 .6  41.4 40.1 39.3 39.0  Dec.  5 12 19 26  .1 .2 .2 .2  .5 .6 .5 .5  16.6 16.7 17.6 17.8  .1 .1 .1 *  48.9 49.5 49.8 49.5  27.9 28.6 29.6 28.2  14.9 14.9 14.1 15.0  5.2 5.1 5.4 5.2  .6 .5 .6 .5  38.0 38.0 38.4 39.3  1/ 2/ W/  Asset allowance is 8 percent of total assets less cash and due from related and unrelated entities. Two weeks ending September 26, 1979. Less than $50 million   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Table 3a Bank Credit Growth (Seasonally adjustd annual rates, percent)  Total Loans & Investments Excluding Bankers Total Acceptances  Total Loans Excluding Bankers Acceptances Total  Bankers Acceptances Held  Total Investments  Weekly Reporting Banks 1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. e Dec.  23.1 18.1 7.4 22.5 10.6 17.0 15.2 17.5 24.7 3.1 -6.8 4.1  23.3 16.9 8.3 22.4 10.7 16.1 13.5 18.2 23.9 5.9 -6.3 2.9  21.5 17.3 4.8 21.1 12.1 18.9 18.6 S. 27.8 4.6  21.4 15.8 6.2 21.0 12.2 18.1 16.5 20.5 26.9 8.1  8.0  16.8 13.7 8.4 11.2 7.9 5.3 10.0 6.5 9.9 8.3  6.6  38.7 150.0 -100.0 36.4 0.0 141.2 221.1 -53.3 83.7 -260.9 -33.3 171.4  -16.7 -11.3  n.a. n.a. n.a. n.a. n.a. n)a. n.a. n.a. n.a. n.a. n.a. n.a.  n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.  4.3 -4.9 -1.4 -9.2 3.6 3.6 11.4 -0.7 12.7 8.4 16.6 10.3  44.4 18.8 39.6 35.7 22.3 58.4 37.1 33.8 96.4 4.1 -52.5 -19.0  32.4 31.6 30.8 -30.0 -30.8 0.0 -31.6 0.0 97.3 90.0 -55.8 -58.5  0.0 0.0 0.0 48.0 138.5 0.0 -41.4 0.0 171.4 75.0 -35.3 -72.7  29.9 19.5 16.7 27.1 5.8 9.2 4.6 9.1 13.5  Other Domestic-chartered Banks 1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. e Dec.  12.8 7.8 5.1 5.1 6.4 5.0 10.2 • 4.3 11.0 8.3 11.0 5.2  n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.  3.0 1/ U.S. Agencies and Branches of Foreign Banks-  1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. e Dec.  43.8 21.1 36.9 31.3 21.8 51.4 28.8 30.1 97.9 14.5 -53.7 -22.5  44.7 20.3 37.4 36.3 25.8 55.2 33.0 32.1 97.9 7.7 -53.5 -20.0  n.a.--not available 1/ Includes Edge Act Corporations.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  43.5 19.8 38.9 30.6 18.4 54.2 32.4 31.6 96.4 9.5 -52.7 -21.7  Table 3h Bank Credit Outstanding (Billions of dollars, not seasonally adjusted)  Total Loans & Investments Excluding Bankers Acceptances Total  Total Loans Excluding Bankers Acceptances Total  Bankers Acceptances Held  Total Investments  Weekly Reporting Banks 1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  445.3 447.6 452.9 462.5 464.6 473.4 478.3 484.1 496.1 497.3 496.6 503.5  441.6 443.9 449.6 459.3 461.4 469.8 474.2 480.4 492.1 493.6 492.8 498.7  345.5 347.2 350.1 357.3 360.6 368.2 374.5 379.8 389.3 391.1 390.4 395.6  341.8 343.5 346.8 354.1 357.4 364.6 370.4 376.1 385.3 387.4 386.5 390.8  3.7 3.7 3.3 3.2 3.2 3.6 4.1 3.7 4.0 3.7 3.9 4.9  99.8 100.4 102.9 105.2 104.0 105.3 103.8 104.3 106.9 106.2 106.2 107.9  n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.  367.2 368.2 371.6 376.3 381.2 385.4 388.7 391.8 395.1 397.5 399.0 399.7  n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.  n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.  168.9 168.8 169.2 169.9 169.8 169.6 170.3 170.2 171.1 172.6 174.5 176.0  48.9 47.1 49.6 50.8 50.6 54.8 56.3 56.6 61.9 62.9 60.0 61.4  50.1 48.5 50.9 52.0 51.8 55.8 57.3 57.6 62.8 63.7 60.6 61.9  46.4 44.7 47.0 48.1 47.9 51.9 53.5 53.8 58.8 59.5 56.6 58.1  3.7 3.8 3.9 3.9 3.9 3.9 3.8 3.8 4.0 4.2 4.0 3.9  2.6 2.5 2.5 2.6 2.7 2.9 2.8 2.7 3.2 3.4 3.4 3.3  Other Domestic-chartered Banks 1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  536.2 537.1 540.8 546.0 551.0 555.2 559.0 561.9 566.4 570.1 573.5 575.8  1/ U.S. Agencies and Branches1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  52.6 50.9 53.5 54.7 54.5 58.7 60.1 60.4 65.9 67.1 64.0 65.2  n.a.--not available 1/ Includes Edge Act Corporations.  http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Table 4  Federal Funds and RPs (Billions of dollars, not seasonally adjusted)  Small Member Banks Net Gross Gross Sales Sales Purchases  Weekly Reporting Banks Net Gross Gross Purchases Purchases Sales  Monthly: 1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  cna cna cna cna cna cna cna cna 17.0 16.1 16.3 18.5  cna cna cna cna cna cna cna cna 2.3 2.1 1.2 1.5  cna cna cna cna cna cna cna cna 14.7 14.0 15.7 18.4  25.0 26.0 27.4 27.5 25.9 27.3 27.0 26.6 30.1 37.7 26.2 29.9  74.1 79.7 82.0 85.9 86.3 91.1 92.6 93.2 96.4 95.3 94.0 93.7  49.1 53.7 54.6 58.4 60.5 63.8 65.6 66.6 66.2 67.7 67.8 66.3  Weekly: Sept.  5 12 19 26  17.2 18.9 17.1 14.6  1.1 1.4 3.0 3.7  16.1 17.5 14.1 10.9  31.2 29.3 31.3 28.7  101.8 95.8 94.8 93.1  70.6 66.4 63.5 64.3  Oct.  3 10 17 24 31  18.1 14.0 18.1 14.7 15.5  2.9 0.9 2.1 2.5 2.2  15.2 13.1 16.0 12.2 13.3  31.8 31.0 26.1 24.2 25.3  94.4 100.8 96.4 91.3 93.8  62.6 69.8 70.3 67.2 68.5  Nov.  7 14 21 28  18.2 18.0 16.1 15.0  0.8 1.1 1.3 1.4  17.4 16.9 14.8 13.6  27.2 28.6 24.7 24.2  93.8 97.8 92.6 91.5  66.7 69.3 67.9 67.3  Dec.  5 12 19 26  18.6 19.8 18.3 17.3  0.4 0.6 2.2 2.6  18.2 19.2 16.1 19.9  26.2 25.3 27.3 30.9  95.8 95.7 92.7 90.6  69.6 70.4 65.4 59.7  Jan.  2  cna  cna  cna  34.1  100.6  66.5  cna--Currently not available.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Table 5 Large Time Deposits Domestic Chartered Banks Billions of dollars, not seasonally adjusted Large Time Deposits Maturing in Over 1 Year Banks with assets greater 25 large banks 1/ than $1 bil.2/  Total Large Time Deposits Banks with 25 large assets greater banks than $1 bil.  Monthly: n.a. n.a.  1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  n.a. n.a. n.a. n.a. n.a. cna n.a. n.a. n.a.  3.6 3.5 3.3 3.3 3.2 3.2 3.4 3.4 3.4 3.6 3.4 n.a.  83.0 81.0 78.7 73.6 70.3 66.3 65.9 67.4 69.7 72.5 75.5 n.a.  124.5 123.2 121.7 116.2 112.4 107.3 106.9 109.3 112.7 117.0 120.4 122.3  Weekly: 1979--Oct.  3 10 17 24 31  n.a. n.a. n.a. n.a. n.a.  n.a. n.a. n.a. n.a. n.a.  71.2 71.6 72.3 72.9 73.6  115.4 116.0 117.2 117.9 118.5  Nov.  7 14 21 28  n.a.  n.a. n.a. n.a. n.a.  73.9 75.1 76.1 76.4  118.7 119.8 121.2 121.9  5 12 19 26  cna cna cna cna  n.a.  n.a. n.a.  77.3 77.2 77.7 cna  122.6 122.4 122.4 :21.8  2  cna  n.a.  cna  120.2  Dec.  1980--Jan.  n.a.  n.a. cna  n.a.  n.a.--Not available. cna--Currently not available. 1/ Original maturity. 2/ Remaining maturity. 3/ Average for base period, two weeks ending September 26, 1979.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Table 6  Money Market Assets of Weekly Reporting Banks Billions of dollars, not seasonally adjusted  Secondary Reserve Assets Treasury Secutities Total Investment Trading Other Accounts Accounts Securities  Bankers Acceptances Held  Monthly: 1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  31.7 31.6 32.9 33.1 31.7 32.0 31.2 30.4 31.2 30.6 30.5  3.7 4.0 4.6 6.4 5.1 5.8 4.9 4.6 5.2 4.7 5.0  64.3 64.8 65.2 66.1 67.0 67.7 67.7 69.1 70.7 70.9 70.6  3.8 3.7 3.3 3.2 3.1 3.6 4.0 3.8 4.0 3.7 3.8  Weekly: 1979--Oct.  3 10 17 24 31  30.2 30.8 30.7 30.7 30.5  4.0 5.2 4.9 4.5 4.8  71.2 70.8 70.9 70.7 70.8  4.0 4.0 3.4 3.1 3.9  Nov.  7 14 21 28  30.4 30.5 30.4 30.5  4.3 5.5 5.1 5.2  70.5 70.8 70.4 70.6  3.8 3.8 3.9 3.7  Dec.  5 12 19 26  30.9 31.0 30.9 30.5  6.0 6.3 5.5 5.0  71.7 71.7 71.5 71.4  4.7 4.5 4.8 5.4  1980--Jan.  2  31.2  4.9  71.1  5.1   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Table 7 Bankers Acceptances (billions of dollars, not seasonally adjusted)  2  1  Column  Total acceptances (all banks in the U.S.)  Acceptances held by banks  3 ratio of 2 to 1  4 10 large member banks  5 ratio of 4 to 1  1979 Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov.  33.7 34.3 34.6 34.4 35.3 37.0 39.0 42.4 42.1 43.5 43.6  cna--currently not available.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  7.3 7.7 7.6 7.5 7.8 8.2 8.3 8.0 8.1 7.8 8.3  .217 .224 .220 .218 .221 .222 .213 .189 .192 .179 .190  cna cna cna cna cna 16.1 cna cna 17.5 18.2 cna  cna cna cna cna cna .434 cna cna .415 .418 cna  Table 8 Bank Related Commercial Paper Domestic Chartered Banks (Billions of dollars, not seasonally adjusted)  Total  Used by member banks  Used by affiliates  Monthly: 1979--Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  16.2 16.2 16.3 16.8 17.5 18.3 18.4 19.4 20.1 20.8 21.5 20.7  0.5 0.5 0.5 0.6 0.5 0.5 0.5 0.5 0.5 0.4 0.6 0.5  15.7 15.7 15.8 16.2 17.0 17.8 17.9 18.9 19.6 20.4 20.9 20.2  Weekly: 1979-41ct.  3 10 17 24 31  20.6 20.6 20.8 20.9 21.1  0.4 0.5 0.4 0.4 0.5  20.2 20.1 20.4 20.5 20.6  Nov.  7 14 21 28  22.0 21.3 21.5 21.3  0.7 0.4 0.7 0.5  21.3 20.9 20.8 20.8  Dec.  5 12 19 26  20.6 20.7 21.2 20.4  0.5 0.5 0.5 0.5  20.1 20.2 20.7 19.9  1980--Jan.  2  20.3  0.5  19.8   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  •  Table 9 Use of Foreign Facilities of Member Banks (Billions of dollars)  Loans from Foreign Branches of U.S. Banks To To To Foreign Foreign Non-Bank C&I Banks U.S. Residents  Loans from Home Offices of U.S. Banks To To Foreign Foreign C&I Banks  Monthly Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.  68.9 70.0 69.2 69.3 68.8 69.2 68.8 69.3 69.0 69.6  73.9 74.9 77.2 77.6 79.1 81.4 80.0 84.1 89.6 90.8  3 10 17 24 31 7 14 21 28 5 12 19 26  n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. u.a. n.a. n.a. n.a,  n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.  2  n.a•  n.a.  n.a. n.a. n.a. 1/  6.5 6.5 6.4 6.4 6.3 6.2 6.2 6.3 6.5 6.7 6.7 6.5  8.8 8.2 7.6 7.1 6.2 6.3 6.8 6.6 7.1 7.3 7.1 6.9  2.8 2.8 3.1 3.0 3.0 2.9 2.8 2.8 2.8 2,9 3.0 3.0 2.9  6.6 6.7 6.7 6.8 6.6 6.6 6.7 6.6 6.6 6.5 6.5 6.5 6.5  7.3 7.7 7.5 7.1 6.8 7.1 7.5 7.0 6.6 7.0 6,9 7,0 6.8  2.8  6.6  7.5  1.8 1.9 1.8 2.0 2.4 3.0 2.8  Weekly 1979--Oct.  Nov.  Dec.  1980--Jan.  n.a,--not available. lj based on 3 week average.  http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Table 10.  U.S. Agencies and Branches of Foreign Banks  Loans to Foreigners C&I  Monthly 1979-Jan. Feb. March April May June July Aug. Sept. Oct. Nov. , Dec.!  8.8 9.0 9.7 9.6 10.0 10.6 11.1 11.8 12.4 12.6 13.0 1!;-.2  / l979-Oct. 3 10 17 24 31  12.6 12.8 12.3 12.8 12.6  Weekly  e/ */ 1/  Banks Deposits Loans 2.5 2.9 3.9 3.1 3.4 4.6 3.4 2.7 4.0 3.1 2.0  10.1 9.8 12.6 10.1 11.8 14.7 11.2 12.2 16.0 9.6 9.6 10.7  Money Market Assets Treasury Other Bankers Securities Securities_ Acceptances  1.0 1.0 1.1 1.2 1.3 1.4 1.2 1.2 1.5 1.5 1.5 n.a.  .9 .9 1.0 1.0 1.0 1.0 1.0 1.0 1.5 1.3 1.2 n.a.  3.4 3.7 3.8 3.6 3.7 3.6 3.5 3.6 4.0 4.0 3.5 n.a,  14.1 15.0 14.1 13.1 12.7  Nov. 7 14 21 28 Dec. 5 12 19 26  12.8 11.6 12.3 11.4 12.1 11 1/ '2 1/ 13.0 (12.6)- 11.6 (11.0) 13.0 11.6 14.0 11.4 13.7 11.2 10.7 14.2  Jan. 2  14.7  11.2  estimated less than $500 million. Benchmark changes. Figures in parentheses are estimates using initial benchmark.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Nonreservable Liabilities Foreign Bankers Commercial Acceptances _ Paper  6.9 7.3 7.4 7.3 7.2 7.3 7.1 7.5 8.0 8.3 7.9 n.a.  -* * .1 .1 .1 .1 .1 n.a.  •.  G0vek..  .•  o  •  BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20551 4k1.' —C). • AL ike. •• • •1C). . ••  PAUL A. VD LEK ER CHAI R MAN  October 23, 1979  TO TBE CHIEF EXECUTIVE OFFICER OF EACH MEMBER BANK  Dear Sir or Madam: As you know, on October 6, the Federal Reserve System took a number of actions designed to reduce inflationary pressures by providing greater assurance that growth in the money supply will be within our targets for the year and that recent excessive rates of credit expansion will be curbed. While I have written earlier about some of the implications of those actions, the Board of Governors, after consulting with the Federal Advisory Council, believes that a further amplification of its views may be useful as you make adjustments in your own policies to the new situation. As a result of the Federal Reserve actions, growth in money and bank credit can be expected to moderate over the months ahead from the recent very rapid pace. However, consistent with the basic policies that have been pursued for some time, the Board fully intends that sufficient credit will continue to be available to finance orderly growth in economic activity. In that connection, I should emphasize that success in dealing with inflationary pressures offers the best prospect of an early return to more equable conditions in financial markets, a better balance between demands and supplies of credit, and lower interest rates. That prospect can only be speeded by responsible policies during this critical period. The Board has expressed particular concern about several aspects of credit extension under current conditions that I would like to bring to your attention. In doing so, I would underline our view that the effective distribution of credit among potential borrowers must, in the last analysis, rest with individual institutions responding to the continuing needs of those institutions, its customers, and the national economy within the framework of the market mechanism and incentives. We strongly believe that sound decisions in these respects   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2can only be made by your bank, and other banks, operating in the marketplace and able to evaluate the needs of millions of businesses and individuals. No regulatory agency can be in a position to substitute its own judgment in this area. As I indicated in my letter of October 10 to member banks with deposits in excess of $100 million explaining the new actions, the Board does request that banks take care to avoid financing essentially speculative transactions in commodity, gold, and foreign exchange markets. In addition, except as they may clearly involve an improvement in the nation's productive capabilities, credits advanced for extraordinary financial transactions would be viewed as questionable by the Board. Examples would include loans for the purpose of retiring stock or for corporate takeovers that simply substitute one source of financing for another and do not clearly promise improvement in economic performance. There should not, of course, be any questions about credit normally advanced to financial concerns and others in the ordinary course of business. Conversely, lending institutions need to be alert to the continuing need for credit to finance the basic needs of the economy. In accommodating these needs, we believe banks should take particular care that small businesses, consumers, home buyers, and farmers continue to receive a reasonable share of available funds. Loans to such borrowers, as well as to larger business customers that require bank credit in support of their normal operations, will encourage an orderly process of economic adjustment toward greater stability and help to sustain key sectors of local and national economies. In the judgment of the Board, the basic requirements of established customers deserve priority over opportunities that may arise in a period of unusual strain to reach out into new lending areas or to seek competitive advantage over other institutions seeking to meet such priority needs. The Board is also conscious that, with its new operating procedures, there may be more volatility of money market rates from dayto-day or week-to-week, although we note that, within already established criteria, borrowing from the discount window remains available to help member banks in making short-term adjustments. We are also conscious that costs will be higher than otherwise for incremental additions to "managed liabilities" as a result of the new reserve requirements. In these circumstances, we believe banks should take care, as they adjust lending rates in response to market forces, to appraise carefully underlying demand and supply conditions. Sharp but clearly temporary variations in the cost of a small amount of marginal funds should not be the occasion for adjustments in the basic lending rates, although we recognize that movements in such rates will be related to the underlying trend in interest rates generally. In adjusting loan rates, the Board would also call your attention to the desirability of considering the special problems of smaller customers who have limited financing alternatives.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -3-  As I indicated earlier, the Board has consulted on this matter with the Federal Advisory Council, a statutory body established by the Federal Reserve Act, and with other leading bankers. I am convinced that adherence to the principles set forth in this letter by the banking community as a whole will contribute importantly to the success of our efforts to deal with inflation during a period of difficult economic adjustment, and will serve the longer range objectives of your institutions as well as the nation. I would appreciate it if you would share the contents of this letter with your lending, credit, and money management officers.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Sincerely, aalQa411 APaul A. Volcker  • ,g  '441..044  A$411.1tAWAMA,M04416,60M0  _i'ttL BOARD OF GOVERNORS OF THE  FEDERAL RESERVE SYSTEM WASHINGTON, O. C. 20'551  October 10, 1979  PAUL A  VOLCKER  CHAIRMAN  TO THE CHIEF EXECUTIVE OFFICER OF EACH MEMBER BANK WITH DEPOSITS IN EXCESS OF $100 MILLION  Dear Sir or Madam: I am writing to ask for your support and cooperation with the series of actions announced by the Board and the Federal Open Market Committee last Saturday. This program--which is explained in the attached press release--is designed to dampen the inflationary forces in the United States and to curb speculative excesses. Your assistance will serve to strengthen the program. While sufficient credit will be available to finance orderly growth in economic activity, the Board of Governors has stressed its particular concern that banks should take care to avoid financing essentially speculative transactions in commodity, gold, and foreign exchange markets. I have no doubt that your bank knows what loans best serve the continuing needs of your business and personal customers and of the nation. I would underline to you, though, that this is not the time to finance activities that have little to do with the performance of the American economy, and indeed may detract from it. The Board recognizes that the new reserve requirement regulation is complex and burdensome. Your cooperation is needed to assure that the regulation both serves its purpose and can be relaxed as soon as economic and financial conditions permit. I am sure I can count on your bank avoiding transactions designed simply to by-pass the new marginal reserve requirement or frustrate its objective. I, of course, presume that your bank will not reallocate U.S. Government and agency securities held in investment account to trading account in order to reduce the volume of reservable repurchase agreements, but will instead make such allocations on the basis of bona fide underlying transactions. Commercial banks play a pivotal role in the country's overall economic performance. Success of the steps taken by the Federal Reserve implies heavy responsibilities for the banking system. We now have the opportunity to meet an immediate major challenge to our prosperity and stability and, at the same time, strengthen the base for improved economic performance and price stability in the decades ahead.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Sincerely,  4a  afAA  CHAIRMAN OF THE BOARD OF GOVERNORS FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 AL Rt. • •..• •'  October 10, 1979  TO THE OFFICER IN CHARGE OF EACH U.S. AGENCY OR BRANCH OF A FOREIGN BANK OPERATING IN THE U.S.  Dear Sir or Madam: I am writing to ask for your support and cooperation with the series of actions announced by the Board and the Federal Open Market Committee last Saturday. This program--which is explained in the enclosed press release--is designed to dampen inflationary forces in the United States and to curb speculative excesses. Your assistance will serve to strengthen the program. In its recent announcement, the Board of Governors stressed its particular concern that banking institutions should take care to avoid financing essentially speculative activity in commodity, gold, and foreign exchange markets. I have no doubt that your institution is in the best position to make a judgment about what loans serve the continuing needs of your customers and the country alike. I would underline to you, however, that--while sufficient credit will be available to finance orderly growth in economic activity--this is not the time to finance activities that have little to do with the economy's performance, and indeed may detract from it. The Board recognizes that the new reserve requirement regulation is complex and burdensome. Your cooperation is needed to assure that the regulation both serves its purpose and can be relaxed as soon as economic and financial conditions permit. I am sure I can count on your bank avoiding transactions, or bookkeeping adjustments, designed simply to by-pass the new marginal reserve requirement, or frustrate its objective. Moreover, I would also expect that credit normally extended by your office to U.S. residents is not instead booked by your affiliates located outside of the United States and that, in general, lending to U.S. residents by these affiliates does not depart from normal patterns.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2The Board of Governors is fully aware that the imposition of a complicated marginal reserve requirement structure on your institution's use of managed liabilities comes at a time when proposals for implementing Federal reserve requirements on the U.S. offices of foreign banks are still in the public comment stage. I am sure, however, that you will appreciate that the urgent problems facing the U.S. economy require that all major banking institutions be brought within the ambit of the new program. You soon will be receiving information from your Reserve Bank that will clarify the mechanics and procedures of the marginal reserve requirement. I would emphasize that this action in no way affects the reserve requirement proposals now out for comment nor prejudices final regulations that the Board will promulgat6 after the comment period is over. The success of the steps taken 6Y the Federal Reserve imply heavy responsibilities for your institution, particularly in view of the growing importance of U.S. offices of foreign banks to this nation's financial system. I feel certain that I can count upon your support in meeting the challenges facing the United States.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Sincerely,  dall0  'Lei  111;j:li   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  „ g'  T N tfri_c00 1  ,  2.5-6
Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102