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http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Business Council-Hot Springs, Va. October 9, 1982  Collection: Paul A. Volcker Papers Call Number: mcr9  Box t3  Preferred Citation: Business Council - Hot Springs, Va., 1982 October 9; Paul A. Volcker Papers, Box 13; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c230 and https://fraser.stlouisfed.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. Nludd 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. They further agree to request permission of the Princeton University Library (and pay any fees, if applicable) if they plan to publish, broadcast, or otherwise disseminate this material. This includes all forms of electronic distribution. Copyright The copyright law of the United States (Tide 17, United States Code) governs the making of in photocopies or other reproductions of copyrighted material. Under certain conditions i.i1III !he law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or other reproduction is not to be "used for any purpose other than private study, scholarship or research." If a user makes a request for, or later uses, a photocopy or other reproduction for purposes not permitted as fair use under the copyright law of the United States, that user may be liable for copyright infringement.  I  Policy on Dzed 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  • a.  Excerpt from Informal Talk of Paul A. Volcker to Business Council At Hot Springs, Va. 10/9/82  As you know, yesterday we made a further reduction in the discount rate to 9-1/2 percent.  As is usually the case,  that change was, in an immediate sense, designed to maintain an appropriate alignment with short-term market rates.  It was, of  course, also taken against a background of continued sluggishness in business activity, the exceptional recent strength of the dollar on the exchange markets, and indications of strong demands •• for liquidity in some markets. In the light of all the potentially confusing comment in the press in recent days,  which seemed to be based on a combination  of partial information and reportorial speculation, it may be desirable to reiterate what seems to me obvious; the small reduction in the discount rate -- as in the case of the four changes of similar magnitude in July and August -- represents no change in the basic thrust of policy. In assessing economic and financial developments over recent months, I would also point out again what I have said on a number of occasions before:  there is growing evidence that the  inflationary momentum has been broken.  Indeed, with appropriate  policies, the prospects appear good for continuing moderation of inflation in the months and years ahead.  Continuing progress toward  restoring price stability is an essential part of building a solid base, not just for recovery but for sustaining expansion over a long period.  Concern about inflation, and monetary discipline,  is not something we can turn on and off; it will be a continuing priority concern of policy.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  0  •  DigitizedIFfor FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2-  What does inevitably change is the financial and business environment in which we operate.  Unfortunately from  the standpoint of reporting and communication, the continuing thrust of monetary policy cannot be adequately measured by any single or simple symbol.  Headlines can be misleading.  I hope we have all learned that the level or direction of interest rates is not, by itself, a reliable test of "ease" or "restraint" -- it all depends upon the circumstances.  Lower  interest rates in an economy in recession are not unusual, and are consistent with the need for recovery.  But lower interest  rates do not in themselves indicate a change in basic policy approach.  Over longer periods of time, achieving and maintaining  the lower level of interest rates we would all like to see must, in a sense, be a reward for success in dealing with inflation; artificially forcing the process would in the end be counterproductive.  What is needed is market conviction that the funda-  mentals are consistent with lower interest rates, and I believe that is what we have been seeing for some months. The emphasis on monetary and credit aggregates in conducting and interpreting policy during recent years is, of course, useful in part because of the unreliability of interest rate measures in gauging the necessary degree of restraint.  We express policy  in terms of broad targets for the various definitions of money on the basic thesis that, over time, the inflationary process is related to excessive growth in money and credit.  But you have  also heard me repeatedly express caution about the validity of any single measure, or even all the measures in the short run.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -3-  We have to be alert to the possibility that relationships may be disturbed by technological or regulatory changes in banking, or more broadly by shifts in liquidity preferences and velocity. We face over the next few months, not just the possibility but the virtual certainty of distortions -- distortions growing out of legislation and regulation -- in the M1 number that is so widely followed in the markets.  Right now, and over the next few  weeks, some $31 bon ofSavers Certificates" are maturing, and in large part will not be rolled over.  As thosefunds move  to other investments, some amount will temporarily pass through checking accounts, or be "parked" in those accounts for a time awag new investment decisions.  We know M1 will be affected,  but we simply have no way of measuring the degree of that shifting. And, just as that process is expected to unwind over the next month or so, the new "money market fund-type" deposit account for banks and thrifts will be introduced.  Sizable transfers of funds into  those accounts, which will have considerable checkable and transactions capabes, are anticipated, including shifts from regular checking and NOW accounts.  The result will probably be  to depress M1 growth for a while  assuming the new accounts are  not included in Ml.  But again we have no way of anticipating the  magnitude, or even the direction of impact should the new accounts be tied to existing NOW accounts.  Both the "ups" and "downs" in  M1 reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in "money" and liquidity.  The potential problems have been common knowledge in  market circles.  1  Digitized for -FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  In the circumstances, I do not believe that, in actual implementation of monetary policy, we have any alternative but to attach much less than usual weight to movements in Ml, over the period immediately ahead.  We will, of course, analyze the data  carefully to assist us in assessing underlying trends, but it is likely to take some months before new relationships can be judged with any degree of reliability in a world of radically new deposit instruments with transactions capability. Fortunately, while the M2 and M3 aggregates,may also be affected by the new deposit instruments, the impact should be relatively much less.  Those aggregates are not only much larger,  but most of the shifts among financial instruments are expected to take place within those large aggregates.  For instance, shifts  by individuals among "All Savers Certificates," checking accounts, money market certificates, money market mutual funds, and the new account would all leave M2 unaffected because they'are all counted within that aggregate.  If the shifts are into (or out of) market  instruments, such as tax-exempt bonds or Treasury bills, the totals would be affected, but probably to a limited degree. The fact that, for the time being, underlying monetary growth and reserve provision cannot sensibly be gauged by directly observing movements in M1  IMP ,IMM,  up or down  is a technical fact of  life; it has no broader policy significance. It is true that for some time (before the new distortions that will be induced by legislation and regulation) the various monetary aggregates have in general been somewhat above the growth  -5_  4   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  paths targeted for the year.  I would also point out, though,  that indications suggest an appreciable recent slowing in growth of both M2 and M3, and it so happens -- perhaps fortuitously that last week's Ml figure is very close to target.  411••  That is part  of the setting of the discount rate change. You may recall that, when reiterating our annual targets in July, I emphasized that "growth somewhat above the targeted ranges would be tolerated for a time in circumstances in which it appeared that precautionary or liquidity motivations, during a period of economic uncertainty and turbulence, were leading to stronger than anticipated demands for money.  We will look  to a variety of factors in reaching that judgment, including such technical factors as the behavior of different components in the money supply, the growth of credit, the behavior of banking and financial markets, and more broadly, the behavior of velocity and interest rates."  I believe reasoned assessment  of recent developments in the light of those factors does suggest that preferences for liquidity have generally been relatively strong, reflected in part in some abnormal pressures in parts of the private credit markets.  In that light, the fact that some of  the aggregates have tended to run somewhat above their target ranges has been fully acceptable to the Federal Open Market Committee. I believe I can speak for all members of the Committee in saying that those judgments have been reached, and will continue to be reached, in full recognition of the need to maintain the heartening progress toward price stability.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Excerpt from Informal Talk of Paul A. Volcker to Business Council At Hot Springs, Va. 10/9/82  As you know, yesterday we made a further reduction in the discount rate to 9-1/2 percent.  As is usually the case,  that change was, in an immediate sense, designed to maintain an appropriate alignment with short-term market rates.  It was, of  course, also taken against a background of continued sluggishness in business activity, the exceptional recent strength of the dollar on the exchange markets, and indications of strong demands for liquidity in some markets. In the light of all the potentially confusing comment in the press in recent days,  which seemed to be based on a combination  of partial information and reportorial speculation, it may be desirable to reiterate what seems to me obvious; the small reduction in the discount rate -- as in the case of the four changes of similar magnitude in July and August -- represents no change in the basic thrust of policy. In assessing economic and financial developments over recent months, I would also point out again what I have said on a number of occasions before:  there is growing evidence that the  inflationary momentum has been broken.  Indeed, with appropriate  policies, the prospects appear good for continuing moderation of inflation in the months and years ahead.  Continuing progress toward  restoring price stability is an essential part of building a solid base, not just for recovery but for sustaining expansion over a long period.  Concern about inflation, and monetary discipline,  ing is not something we can turn on and off; it will be a continu priority concern of policy.  4  Digitizedonfor FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2-  What does inevitably change is the financial and business environment in which we operate.  Unfortunately from  the standpoint of reporting and communication, the continuing thrust of monetary policy cannot be adequately measured by any single or simple symbol.  Headlines can be misleading.  I hope we have all learned that the level or direction of interest rates is not, by itself, a reliable test of "ease" or "restraint" -- it all depends upon the circumstances.  Lower  interest rates in an economy in recession are not unusual, and are consistent with the need for recovery.  But lower interest  rates do not in themselves indicate a change in basic policy approach.  Over longer periods of time, achieving and maintaining  the lower level of interest rates we would all like to see must, in a sense, be a reward for success in dealing with inflation; artificially forcing the process would in the end be counterproductive.  What is needed is market conviction that the funda-  mentals are consistent with lower interest rates, and I believe that is what we have been seeing for some months. The emphasis on monetary and credit aggregates in conducting and interpreting policy during recent years is, of course, useful in part because of the unreliability of interest rate measures in gauging the necessary degree of restraint.  We express policy  in terms of broad targets for the various definitions of money on the basic thesis that, over time, the inflationary process is related to excessive growth in money and credit.  But you have  also heard me repeatedly express caution about the validity of any single measure, or even all the measures in the short run.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -3-  We have to be alert to the possibility that relationships may be disturbed by technological or regulatory changes in banking, or more broadly by shifts in liquidity preferences and velocity. We face over the next few months, not just the possibility but the virtual certainty of distortions -- distortions growing out of legislation and regulation -- in the M1 number that is so widely followed in the markets.  Right now, and over the next few  weeks, some $31 bon ofSavers Certificates" are maturing, and in large part will not be rolled over.  As those,funds move  to other investments, some amount will temporarily pass through checking accounts, or be "parked" in those accounts for a time awag new investment decisions.  We know M1 will be affected,  but we simply have no way of measuring the degree of that shifting. And, just as that process is expected to unwind over the next month or so, the new "money market fund-type" deposit account for banks and thrifts will be introduced.  Sizable transfers of funds into  those accounts, which will have considerable checkable and transactions capabes, are anticipated, including shifts from regular checking and NOW accounts.  The result will probably be  to depress M1 growth for a while -- assuming the new accounts are not included in Ml.  But again we have no way of anticipating the  magnitude, or even the direction of impact should the new accounts be tied to existing NOW accounts.  Both the "ups" and "downs" in  M1 reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in "money" and liquidity.  The potential problems have been common knowledge in  market circles.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  In the circumstances, I do not believe that, in actual implementation of monetary policy, we have any alternative but to attach much less than usual weight to movements in Ml, over the period immediately ahead.  We will, of course, analyze the data  carefully to assist us in assessing underlying trends, but it is likely to take some months before new relationships can be judged with any degree of reliability in a world of radically new deposit instruments with transactions capability. Fortunately, while the M2 and M3 aggregates may also be affected by the new deposit instruments, the impact should be relatively much less.  Those aggregates are not only much larger,  but most of the shifts among financial instruments are expected to take place within those large aggregates.  For instance, shifts  by individuals among "All Savers Certificates," checking accounts, money market certificates, money market mutual funds, and the new account would all leave M2 unaffected because they are all counted within that aggregate.  If the shifts are into (or out of) market  instruments, such as tax-exempt bonds or Treasury bills, the totals would be affected, but probably to a limited degree. The fact that, for the time being, underlying monetary growth and reserve provision cannot sensibly be gauged by directly observing movements in Ml  =IMP  up or down  is a technical fact of  life; it has no broader policy significance. It is true that for some time (before the new distortions that will be induced by legislation and regulation) the various monetary aggregates have in general been somewhat above the growth   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  5-  paths targeted for the year.  I would also point out, though,  that indications suggest an appreciable recent slowing in growth of both M2 and M3, and it so happens -- perhaps fort uitously that last week's Ml figure is very close to target.  IMMO.  That is part  of the setting of the discount rate chan ge. You may recall that, when reiterating our annual targets in July, I emphasized that "growth somewhat abov e the targeted ranges would be tolerated for a time in circumstances in which it appeared that precautionary or liquidity motivations, during a period of economic uncertainty and turbulence, were lead ing to stronger than anticipated demands for money.  We will look  to a variety of factors in reaching that judgment, incl uding such technical factors as the behavior of different componen ts in the money supply, the growth of credit, the behavior of banking and financial markets, and more broadly, the beha vior of velocity and interest rates."  I believe reasoned assessment  of recent developments in the light of those factors does suggest that preferences for liquidity have generally been rela tively strong, reflected in part in some abnormal pressures in parts of the private credit markets. In that light, the fact that some of the aggregates have tended to run somewhat above their target ranges has been fully acceptable to the Federal Open Market Committee. I believe I can speak for all members of the Committee in saying that those judgments have been reached, and will cont inue to be reached, in full recognition of the need to maintain the heartening progress toward price stability.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Excerpt from Informal Talk of Paul A. Volcker to Business Council At Hot Springs, Va. 10/9/82  As you know, yesterday we made a further reduction in the discount rate to 9-1/2 percent.  As is usually the case,  that change was, in an immediate sense, designed to maintain an appropriate alignment with short-term market rates.  It was, of  course, also taken against a background of continued sluggishness in business activity, the exceptional recent strength of the dollar on the exchange markets, and indications of strong demands •• markets. some in liquidity for In the light of all the potentially confusing comment in the press in recent days,  which seemed to be based on a combination  of partial information and reportorial speculation, it may be desirable to reiterate what seems to me obvious; the small reduction in the discount rate -- as in the case of the four changes of similar magnitude in July and August -- represents no change in the basic thrust of policy. In assessing economic and financial developments over recent months, I would also point out again what I have said on a number of occasions before:  there is growing evidence that the  inflationary momentum has been broken.  Indeed, with appropriate  policies, the prospects appear good for continuing moderation of inflation in the months and years ahead.  Continuing progress toward  restoring price stability is an essential part of building a solid base, not just for recovery but for sustaining expansion over a long period.  Concern about inflation, and monetary discipline,  is not something we can turn on and off; it will be a continuing priority concern of policy.  •  DigitizedU.for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -2-  What does inevitably change is the financial and business environment in which we operate.  Unfortunately from  the standpoint of reporting and communication, the continuing thrust of monetary policy cannot be adequately measured by any single or simple symbol.  Headlines can be misleading.  I hope we have all learned that the level or direction of interest rates is not, by itself, a reliable test of "ease" or "restraint"  it all depends upon the circumstances.  Lower  interest rates in an economy in recession are not unusual, and are consistent with the need for recovery.  But lower interest  rates do not in themselves indicate a change in basic policy approach.  Over longer periods of time, achieving and maintaining  the lower level of interest rates we would all like to see must, in a sense, be a reward for success in dealing with inflation; artificially forcing the process would in the end be counterproductive.  What is needed is market conviction that the funda-  mentals are consistent with lower interest rates, and I believe that is what we have been seeing for some months. The emphasis on monetary and credit aggregates in conducting and interpreting policy during recent years is, of course, useful in part because of the unreliability of interest rate measures in gauging the necessary degree of restraint.  We express policy  in terms of broad targets for the various definitions of money on the basic thesis that, over time, the inflationary process is related to excessive growth in money and credit.  But you have  also heard me repeatedly express caution about the validity of any single measure, or even all the measures in the short run.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -.3-  We have to be alert to the possibility that relationships may be disturbed by technological or regulatory changes in banking, or more broadly by shifts in liquidity preferences and velocity. We face over the next few months, not just the possibility but the virtual certainty of distortions -- distortions growing out of legislation and regulation widely followed in the markets.  ••••  in the M1 number that is so  Right now, and over the next few  weeks, some $31 billion of "All Savers Certificates" are maturing, and in large part will not be rolled over.  As those fundsmove  to other investments, some amount will temporarily pass through checking accounts, or be "parked" in those accounts for a time awaiting new investment decisions.  We know M1 will be affected,  but we simply have no way of measuring the degree of that shifting. And, just as that process is expected to unwind over the next month or so, the new "money market fund-type" deposit account for banks and thrifts will be introduced.  Sizable transfers of funds into  those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from regular checking and NOW accounts.  The result will probably be  to depress M1 growth for a while  assuming the new accounts are  not included in Ml.  But again we have no way of anticipating the  magnitude, or even the direction of impact should the new accounts be tied to existing NOW accounts.  Both the "ups" and "downs" in  M1 reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in "money" and liquidity.  The potential problems have been common knowledge in  market circles.  -FRASER Digitized for http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  In the circumstances, I do not believe that, in actual implementation of monetary policy, we have any alternative but to attach much less than usual weight to movements in Ml, over the period immediately ahead.  We will, of course, analyze the data  carefully to assist us in assessing underlying trends, but it is likely to take some months before new relationships can be judged with any degree of reliability in a world of radically new deposit instruments with transactions capability. Fortunately, while the M2 and M3 aggregates may also be affected by the new deposit instruments, the impact should be relatively much less.  Those aggregates are not only much larger,  but most of the shifts among financial instruments are expected to take place within those large aggregates.  For instance, shifts  by individuals among "All Savers Certificates," checking accounts, money market certificates, money market mutual funds, and the new account would all leave M2 unaffected because they are all counted within that aggregate.  If the shifts are into (or out of) market  instruments, such as tax-exempt bonds or Treasury bills, the totals would be affected, but probably to a limited degree. The fact that, for the time being, underlying monetary growth and reserve provision cannot sensibly be gauged by directly observing movements in Ml  IMD  up or down  1•••  is a technical fact of  life; it has no broader policy significance. It is true that for some time (before the new distortions that will be induced by legislation and regulation) the various monetary aggregates have in general been somewhat above the growth   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -5-  paths targeted for the year.  I would also point out, though,  that indications suggest an appreciable recent slowing in growth of both M2 and M3, and it so happens  perhaps fortuitously  that last week's Ml figure is very close to targ et.  MID IMO,  That is part  of the setting of the discount rate chan ge. You may recall that, when reiterating our annual targ ets in July, I emphasized that "growth somewhat above the targeted ranges would be tolerated for a time in circumstance s in which it appeared that precautionary or liquidity motivati ons, during a period of economic uncertainty and turbulence, were leading to stronger than anticipated demands for money.  We will look  to a variety of factors in reaching that judgment, incl uding such technical factors as the behavior of different comp onents in the money supply, the growth of credit, the behavior of banking and financial markets, and more broadly, the behavior of velocity and interest rates."  I believe reasoned assessment  of recent developments in the light of those factors does suggest that preferences for liquidity have generally been relatively strong, reflected in part in some abno rmal pressures in parts of the private credit markets. In that light, the fact that some of the aggregates have tended to run somewhat above their targ et ranges has been fully acceptable to the Federal Open Market Committee. I believe I can speak for all members of the Committee in saying that those judgments have been reached, and will cont inue to be reached, in full recognition of the need to maintain the heartening progress toward price stability.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Excerpt from Informal Talk of Paul A. Volcker to Business Council At Hot Springs, Va. 10/9/82  As you know, yesterday we made a further reduction in the discount rate to 9-1/2 percent.  As is usually the case,  that change was, in an immediate sense, designed to maintain an appropriate alignment with short-term market rates.  It was, of  course, also taken against a background of continued sluggishness in business activity, the exceptional recent strength of the dollar on the exchange markets, and indications of strong demands •• some in markets. liquidity for In the light of all the potentially confusing comment in the press in recent days,  which seemed to be based on a combination  of partial information and reportorial speculation, it may be desirable to reiterate what seems to me obvious; the small reduction in the discount rate -- as in the case of the four changes of similar magnitude in July and August -- represents no change in the basic thrust of policy. In assessing economic and financial developments over recent months, I would also point out again what I have said on a number of occasions before:  there is growing evidence that the  inflationary momentum has been broken.  Indeed, with appropriate  policies, the prospects appear good for continuing moderation of inflation in the months and years ahead.  Continuing progress toward  restoring price stability is an essential part of building a solid base, not just for recovery but for sustaining expansion over a long period.  Concern about inflation, and monetary discipline,  is not something we can turn on and off; it will be a continuing priority concern of policy.  ..  i  -2-  What does inevitably change is the financial and business environment in which we operate.  Unfortunately from  the standpoint of reporting and communication, the continuing thrust of monetary policy cannot be adequately measured by any single or simple symbol.  Headlines can be misleading.  I hope we have all learned that the level or direction of interest rates is not, by itself, a reliable test of "ease" or "restraint"  M• dWr  it all depends upon the circumstances.  Lower  interest rates in an economy in recession are not unusual, and are consistent with the need for recovery.  But lower interest  rates do not in themselves indicate a change in basic policy approach.  Over longer periods of time, achieving and maintaining  the lower level of interest rates we would all like to see must, in a sense, be a reward for success in dealing with inflation; artificially forcing the process would in the end be counterproductive.  What is needed is market conviction that the funda-  mentals are consistent with lower interest rates, and I believe that is what we have been seeing for some months. The emphasis on monetary and credit aggregates in conducting and interpreting policy during recent years is, of course, useful in part because of the unreliability of interest rate measures in gauging the necessary degree of restraint.  We express policy  in terms of broad targets for the various definitions of money on the basic thesis that, over time, the inflationary process is related to excessive growth in money and credit.  But you have  also heard me repeatedly express caution about the validity of any single measure, or even all the measures in the short run.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis , W   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -.3-  We have to be alert to the possibility that relationships may be disturbed by technological or regulatory changes in banking, or more broadly by shifts in liquidity preferences and velocity. We face over the next few months, not just the possibility but the virtual certainty of distortions -- distortions growing out of legislation and regulation -- in the M1 number that is so widely followed in the markets.  Right now, and over the next few  weeks, some $31 billion of "All Savers Certificates" are maturing, and in large part will not be rolled over.  As those fundsmove  to other investments, some amount will temporarily pass through checking accounts, or be "parked" in those accounts for a time awaiting new investment decisions.  We know M1 will be affected,  but we simply have no way of measuring the degree of that shifting. And, just as that process is expected to unwind over the next month or so, the new "money market fund-type" deposit account for banks and thrifts will be introduced.  Sizable transfers of funds into  those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from regular checking and NOW accounts.  The result will probably be  to depress M1 growth for a while  assuming the new accounts are  not included in Ml.  But again we have no way of anticipating the  magnitude, or even the direction of impact should the new accounts be tied to existing NOW accounts.  Both the "ups" and "downs" in  M1 reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in "money" and liquidity.  The potential problems have been common knowledge in  market circles.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  In the circumstances, I do not believe that, in actual implementation of monetary policy, we have any alternative but to attach much less than usual weight to movements in Ml, over the period immediately ahead.  We will, of course, analyze the data  carefully to assist us in assessing underlying trends, but it is likely to take some months before new relationships can be judged with any degree of reliability in a world of radically new deposit instruments with transactions capability. Fortunately, while the M2 and M3 aggregates may also be affected by the new deposit instruments, the impact should be relatively much less.  Those aggregates are not only much larger,  but most of the shifts among financial instruments are expected to take place within those large aggregates.  For instance, shifts  by individuals among "All Savers Certificates," checking accounts, money market certificates, money market mutual funds, and the new account would all leave M2 unaffected because they are all counted within that aggregate.  If the shifts are into (or out of) market  instruments, such as tax-exempt bonds or Treasury bills, the totals would be affected, but probably to a limited degree. The fact that, for the time being, underlying monetary growth and reserve provision cannot sensibly be gauged by directly observing movements in Ml  MEI =Om  up or down  is a technical fact of  life; it has no broader policy significance. It is true that for some time (before the new distortions that will be induced by legislation and regulation) the various monetary aggregates have in general been somewhat above the growth   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  _5_  paths targeted for the year.  I would also point out, though,  that indications suggest an appreciable recent slowing in growth of both M2 and M3, and it so happens  perhaps fortuitously  that last week's Ml figure is very close to target.  1•••  That is part  of the setting of the discount rate change. You may recall that, when reiterating our annu al targets in July, I emphasized that "growth somewhat above the targeted ranges would be tolerated for a time in circumst ances in which it appeared that precautionary or liquidit moti y vations, during a period of economic uncertainty and turbulen ce, were leading to stronger than anticipated demands for mon ey.  We will look  to a variety of factors in reaching that judg ment, including such technical factors as the behavior of diff erent components in the money supply, the growth of credit, the behavior of banking and financial markets, and more broa dly, the behavior of velocity and interest rates."  I believe reasoned assessment  of recent developments in the light of thos e factors does suggest that preferences for liquidity have gene rally been relatively strong, reflected in part in some abnormal pressures in parts of the private credit markets. In that light, the fact that some of the aggregates have tended to run somewhat abov thei e r target ranges has been fully acceptable to the Fede ral Open Market Committee. I believe I can speak for all members of the Committee in saying that those judgments have been reached, and will continue to be reached, in full recognition of the need to maintain the heartening progress toward price stability.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Excerpt from Informal Talk of Paul A. Volcker to Business Council At Hot Springs, Va. 10/9/82  As you know, yesterday we made a further reduction in the discount rate to 9-1/2 percent.  As is usually the case,  that change was, in an immediate sense, designed to maintain an appropriate alignment with short-term market rates.  It was, of  course, also taken against a background of continued sluggishness in business activity, the exceptional recent strength of the dollar on the exchange markets, and indications of strong demands •• for liquidity in some markets. In the light of all the potentially confusing comment in the press in recent days,  which seemed to be based on a combination  of partial information and reportorial speculation, it may be desirable to reiterate what seems to me obvious; the small reduction in the discount rate -- as in the case of the four changes of similar magnitude in July and August -- represents no change in the basic thrust of policy. In assessing economic and financial developments over recent months, I would also point out again what I have said on a number of occasions before:  there is growing evidence that the  inflationary momentum has been broken.  Indeed, with appropriate  policies, the prospects appear good for continuing moderation of inflation in the months and years ahead.  Continuing progress toward  restoring price stability is an essential part of building a solid base, not just for recovery but for sustaining expansion over a long period.  Concern about inflation, and monetary discipline,  is not something we can turn on and off; it will be a continuing priority concern of policy.  t   Pr http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  0  -2-  What does inevitably change is the financial and business environment in which we operate.  Unfortunately from  the standpoint of reporting and communication, the continuing thrust of monetary policy cannot be adequately measured by any single or simple symbol.  Headlines can be misleading.  I hope we have all learned that the level or direction of interest rates is not, by itself, a reliable test of "ease" or "restraint" -- it all depends upon the circumstances.  Lower  interest rates in an economy in recession are not unusual, and are consistent with the need for recovery.  But lower interest  rates do not in themselves indicate a change in basic policy approach.  Over longer periods of time, achieving and maintaining  the lower level of interest rates we would all like to see must, in a sense, be a reward for success in dealing with inflation; artificially forcing the process would in the end be counterproductive.  What is needed is market conviction that the funda-  mentals are consistent with lower interest rates, and I believe that is what we have been seeing for some months. The emphasis on monetary and credit aggregates in conducting and interpreting policy during recent years is, of course, useful in part because of the unreliability of interest rate measures in gauging the necessary degree of restraint.  We express policy  in terms of broad targets for the various definitions of money on the basic thesis that, over time, the inflationary process is related to excessive growth in money and credit.  But you have  also heard me repeatedly express caution about the validity of any single measure, or even all the measures in the short run.  •   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  We have to be alert to the possibility that relationships may be disturbed by technological or regulatory changes in banking, or more broadly by shifts in liquidity preferences and velocity. We face over the next few months, not just the possibility but the virtual certainty of distortions  distortions growing  out of legislation and regulation -- in the M1 number that is so widely followed in the markets.  Right now, and over the next few  weeks, some $31 billion of "All Savers Certificates" are maturing, and in large part will not be rolled over.  As thosefunds move  to other investments, some amount will temporarily pass through checking accounts, or be "parked" in those accounts for a time awaiting new investment decisions.  We know M1 will be affected,  but we simply have no way of measuring the degree of that shifting. And, just as that process is expected to unwind over the next month or so, the new "money market fund-type" deposit account for banks and thrifts will be introduced.  Sizable transfers of funds into  those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from regular checking and NOW accounts.  The result will probably be  to depress M1 growth for a while  assuming the new accounts are  not included in Ml.  But again we have no way of anticipating the  magnitude, or even the direction of impact should the new accounts be tied to existing NOW accounts.  Both the "ups" and "downs" in  Ml reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in "money" and liquidity.  The potential problems have been common knowledge in  market circles.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -4-  In the circumstances, I do not believe that, in actual implementation of monetary policy, we have any alternative but to attach much less than usual weight to movements in Ml, over the period immediately ahead.  We will, of course, analyze the data  carefully to assist us in assessing underlying trends, but it is likely to take some months before new relationships can be judged with any degree of reliability in a world of radically new deposit instruments with transactions capability. Fortunately, while the M2 and M3 aggregates may also be affected by the new deposit instruments, the impact should be relatively much less.  Those aggregates are not only much larger,  but most of the shifts among financial instruments are expected to take place within those large aggregates.  For instance, shifts  by individuals among "All Savers Certificates," checking accounts, money market certificates, money market mutual funds, and the new account would all leave M2 unaffected because they are all counted within that aggregate.  If the shifts are into (or out of) market  instruments, such as tax-exempt bonds or Treasury bills, the totals would be affected, but probably to a limited degree. The fact that, for the time being, underlying monetary growth and reserve provision cannot sensibly be gauged by directly observing movements in Ml -- up or down -- is a technical fact of life; it has no broader policy significance. It is true that for some time (before the new distortions that will be induced by legislation and regulation) the various monetary aggregates have in general been somewhat above the growth   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -5-  paths targeted for the year.  I would also point out, though,  that indications suggest an appreciable recent slowing in growth of both M2 and M3, and it so happens  perhaps fortuitously  that last week's Ml figure is very close to targ et.  MO OOP  That is part  of the setting of the discount rate chan ge. You may recall that, when reiterating our annual targets in July, I emphasized that "growth somewhat above the targ eted ranges would be tolerated for a time in circumstances in which it appeared that precautionary or liquidity motivations, during a period of economic uncertainty and turbulence, were lead ing to stronger than anticipated demands for money.  We will look  to a variety of factors in reaching that judgment, incl uding such technical factors as the behavior of different comp onents in the money supply, the growth of credit, the behavior of banking and financial markets, and more broadly, the beha vior of velocity and interest rates."  I believe reasoned assessment  of recent developments in the light of those factors does suggest that preferences for liquidity have generally been rela tively strong, reflected in part in some abno rmal pressures in parts of the private credit markets. In that light, the fact that some of the aggregates have tended to run somewhat above their target ranges has been fully acceptable to the Federal Open Market Committee. I believe I can speak for all members of the Committee in saying that those judgments have been reached, and will continue to be reached, in full recognition of the need to maintain the heartening progress toward price stability.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Excerpt from Informal Talk of Paul A. Volcker to Business Council At Hot Springs, Va. 10/9/82  As you know, yesterday we made a further reduction in the discount rate to 9-1/2 percent.  As is usually the case,  that change was, in an immediate sense, designed to maintain an appropriate alignment with short-term market rates.  It was, of  course, also taken against a background of continued sluggishness in business activity, the exceptional recent strength of the dollar on the exchange markets, and indications of strong demands for liquidity in some markets. In the light of all the potentially confusing comment in the press in recent days,  which seemed to be based on a combination  of partial information and reportorial speculation, it may be desirable to reiterate what seems to me obvious; the small reduction in the discount rate -- as in the case of the four changes of similar magnitude in July and August  represents no change in  the basic thrust of policy. In assessing economic and financial developments over recent months, I would also point out again what I have said on a number of occasions before:  there is growing evidence that the  inflationary momentum has been broken.  Indeed, with appropriate  policies, the prospects appear good for continuing moderation of inflation in the months and years ahead.  Continuing progress toward  restoring price stability is an essential part of building a solid base, not just for recovery but for sustaining expansion over a long period.  Concern about inflation, and monetary discipline,  is not something we can turn on and off; it will be a continuing priority concern of policy.  _ 2-  What does inevitably change is the financial and business environment in which we operate.  Unfortunately from  the standpoint of reporting and communication, the continuing thrust of monetary policy cannot be adequately measured by any single or simple symbol.  Headlines can be misleading.  I hope we have all learned that the level or direction of interest rates is not, by itself, a reliable test of "ease" or "restraint" -- it all depends upon the circumstances.  Lower  interest rates in an economy in recession are not unusual, and are consistent with the need for recovery.  But lower interest  rates do not in themselves indicate a change in basic policy approach.  , I  DigitizedOrfor FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  Over longer periods of time, achieving and maintaining  the lower level of interest rates we would all like to see must, in a sense, be a reward for success in dealing with inflation; artificially forcing the process would in the end be counterproductive.  What is needed is market conviction that the funda-  mentals are consistent with lower interest rates, and I believe that is what we have been seeing for some months. The emphasis on monetary and credit aggregates in conducting and interpreting policy during recent years is, of course, useful in part because of the unreliability of interest rate measures in gauging the necessary degree of restraint.  We express policy  in terms of broad targets for the various definitions of money on the basic thesis that, over time, the inflationary process is related to excessive growth in money and credit.  But you have  also heard me repeatedly express caution about the validity of any single measure, or even all the measures in the short run.  •   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  -3-  We have to be alert to the possibility that relationships may be disturbed by technological or regulatory changes in banking, or more broadly by shifts in liquidity preferences and velocity. We face over the next few months, not just the possibility but the virtual certainty of distortions  distortions growing  out of legislation and regulation -- in the M1 number that is so widely followed in the markets.  Right now, and over the next few  weeks, some $31 billion of "All Savers Certificates" are maturing, and in large part will not be rolled over.  As thosefunds move  to other investments, some amount will temporarily pass through checking accounts, or be "parked" in those accounts for a time awaiting new investment decisions.  We know M1 will be affected,  but we simply have no way of measuring the degree of that shifting. And, just as that process is expected to unwind over the next month or so, the new "money market fund-type" deposit account for banks and thrifts will be introduced.  Sizable transfers of funds into  those accounts, which will have considerable checkable and transactions capabilities, are anticipated, including shifts from regular checking and NOW accounts.  The result will probably be  to depress M1 growth for a while -- assuming the new accounts are not included in Ml.  But again we have no way of anticipating the  magnitude, or even the direction of impact should the new accounts be tied to existing NOW accounts.  Both the "ups" and "downs" in  M1 reflecting these regulatory changes will be artificial and virtually meaningless in gauging underlying trends in "money" and liquidity.  The potential problems have been common knowledge in  market circles.   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  In the circumstances, I do not believe that, in actual implementation of monetary policy, we have any alternative but to attach much less than usual weight to movements in Ml, over the period immediately ahead.  We will, of course, analyze the data  carefully to assist us in assessing underlying trends, but it is likely to take some months before new relationships can be judged with any degree of reliability in a world of radically new deposit instruments with transactions capability. Fortunately, while the M2 and M3 aggregates may also be affected by the new deposit instruments, the impact should be relatively much less.  Those aggregates are not only much larger,  but most of the shifts among financial instruments are expected to take place within those large aggregates.  For instance, shifts  by individuals among "All Savers Certificates," checking accounts, money market certificates, money market mutual funds, and the new account would all leave M2 unaffected because they are all counted within that aggregate.  If the shifts are into (or out of) market  instruments, such as tax-exempt bonds or Treasury bills, the totals would be affected, but probably to a limited degree. The fact that, for the time being, underlying monetary growth and reserve provision cannot sensibly be gauged by directly observing movements in Ml -- up or down  is a technical fact of  life; it has no broader policy significance. It is true that for some time (before the new distortions that will be induced by legislation and regulation) the various monetary aggregates have in general been somewhat above the growth   http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis  paths targeted for the year.  I would also point out, though,  that indications suggest an appreciab le recent slowing in growth of both M2 and M3, and it so happens  perhaps fortuitously  that last week's Ml figure is very clo se to target.  111M4111=  That is part  of the setting of the discount rate change. You may recall that, when reiterating our annual targets in July, I emphasized that "growth som ewhat above the targeted ranges would be tolerated for a time in circumstances in which it appeared that precautionary or liq uidity motivations, during a period of economic uncertainty and tur bulence, were leading to stronger than anticipated demands for money.  We will look  to a variety of factors in reaching tha t judgment, including such technical factors as the behavi or of different components in the money supply, the growth of credit, the behavior of banking and financial markets, and mor e broadly, the behavior of velocity and interest rates."  I believe reasoned assessment  of recent developments in the lig ht of those factors does suggest that preferences for liquidity hav e generally been relatively strong, reflected in part in some abnormal pressures in parts of the private credit markets. In that lig ht, the fact that some of the aggregates have tended to run somewhat above their target ranges has been fully acceptable to the Fed eral Open Market Committee. I believe I can speak for all members of the Commit tee in saying that those judgments have bee rea ched, and will continue n to be reached, in full recognition of the need to maintain the heartening progress toward price stability .
Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102