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OF SHADOW OPEN MARKET COMMITTEE Policy Statement and Position Papers September 13-14,1987 PPS 87-02 CENTER FOR RESEARCH IN GOVERNMENT POLICY & BUSINESS Public Policy Working Paper Series U N I V E R S I T Y OF ROCHESTER TABLE OF CONTENTS Table of Contents i Shadow Open Market Committee Members ii Shadow Open Market Committee Policy Statement 1 Position Papers 9 The Federal Budget Tangle Mickey D. Levy, Fidelity Bank 9 Recent Behavior of Ml Velocity Robert H. Rasche, Michigan State Economic Outlook Jerry L. Jordan, First 25 Interstate Monetary Policy and the Outlook Jerry L. Jordan, First Interstate Tables H. Erich 19 University Bancorp 33 Bancorp 41 Heinemann, Moseley Securities Corporation i SHADOW OPEN MARKET COMMITTEE MEMBERS The Committee September 13, 1987. met from 2:00 p.m. to 7:00 p.m. on Sunday, Members of the SOMC: PROFESSOR KARL BRUNNER, Director of the Center for Research in Government Policy and Business, William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, New York. PROFESSOR ALLAN H. MELTZER, Graduate School of Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pennsylvania. MR. H. ERICH HEINEMANN, Chief Economist, Moseley Securities Corporation, New York, New York. DR. JERRY L. JORDAN, Senior Vice President and Economist, First Interstate Bancorp, Los Angeles, California. DR. MICKEY D. LEVY, Pennsylvania. Chief Economist, Fidelity Bank, Philadelphia, PROFESSOR WILLIAM POOLE, Department of Economics, Brown University, Providence, Rhode Island. PROFESSOR ROBERT H. RASCHE, Department of Economics, Michigan State University, East Lansing, Michigan. DR. ANNA J. SCHWARTZ, National Bureau of Economic Research, New York, New York. ii SHADOW OPEN MARKET COMMITTEE Policy Statement September 14, 1987 AN OPEN LETTER TO ALAN GREENSPAN Dear Mr. Chairman: Congratulations Governors. Board of You have inherited an organization that will soon have its 75th birthday. new on your appointment as chairman of the Organizations, chairman, particularly like people, get set in their ways. one who is knowledgeable about A economic policy and new to the Federal Reserve, has an opportunity to make some needed changes. We recommend major changes in three areas: (1) monetary policy, (2) international debt, and (3) financial regulation and reform. MONETARY POLICY For the year ending in August 1987, the growth rate of the monetary base was 7.5%, very near the recommendation of the Shadow Open Market Committee. the The excessive growth during the two years ending in fall of 1986 has been followed by relatively slow after January. of growth Real output has continued to grow at or slightly above the long-term average for the U.S. year. average economy. Inflation has risen this To limit further increases, we urge that the annual growth rate the monetary base be reduced to 6% as the next step in a policy of achieving sustained price stability. We are rate of urge you pleased that the Federal Reserve has reduced the monetary base in 1987 from the high levels of to avoid the errors that have 1 produced the growth 1986. volatile We and unpredictable changes in monetary growth. compatible fall with economic stability. Monetary instability is not The faster money growth in the and the slower money growth this spring were both a result policy to adjust the dollar exchange rate. produced slower devaluation money First, faster money growth of the dollar against growth boosted of a other the value of the currencies; dollar or later prevented further declines. This was a mistake. Devaluation achieved by faster money and inflation will have little lasting effect on exports, the trade balance. growth imports and Faster money growth to push the dollar down not move toward a long-term solution but, instead, does produces a short- lived expansion, higher inflation and a lower standard of living. Trying to maintain the dollar exchange rate in the face of international differences in productivity, economic growth, real aftertax rates of return on investment, is no less mistaken. saving rates and rates of inflation If the exchange rate is held within major currencies, adjustment of prices and a narrow range against production costs to real differences in productivity and saving rates in various countries will occur through other, no less costly, adjustments. Monetary Raising policy interest short-term money growth. on short-term objectives. rates to stabilize the dollar and improve the balance is a mistake. the should not be based trade Higher interest rates strengthen the dollar mainly by slowing economic expansion and by in reducing Slower growth of output lowers imports. This effect on trade is short-lived. The real. problem with U.S. trade and payments is not monetary; Required adjustments in trade and payments can be achieved by a fall in the real exchange rate, by increasing saving and it is 2 productivity or some combination of the two. Monetary policy can do little to force or prevent a permanent decline in the real exchange rate. Adjustment real of the payments and trade balances by a fall exchange rate will raise the U.S. price level. one-time increase in level, not a return of in the This rise is a inflation. This distinction, often neglected, is important. The price rise following a devaluation will not persist if the Federal Reserve maintains non- inflationary policies. Intervening dollar will Allowing way to not prevent avoid a decline in the external value an adjustment in the real of the exchange rate. exchange rates to adjust in response to market forces is one to adjust U.S. prices and costs of production relative to foreign prices and costs of production. The main alternative to exchange rate adjustment is to force prices, wages and other costs of production fall relative to prices and costs abroad. to This approach would likely require a severe recession and will prove more costly. The task you face is a hard one --to resist the pressures to to try solve problems that you cannot solve and to concentrate on policies that restore stable prices. The latter is something that only you and your colleagues at the Federal Reserve can accomplish. succeed if you avoid the attempt to set interest You will only rates or exchange rates. The alleged disadvantages of fluctuating exchange rates are widely advertised; the advantages are neglected. fluctuating rates both to variability of real growth. achieve price Germany and Japan have used stability They have done this, and reduce in part, by adopting and following medium-term strategies for monetary policy. 3 to The United States has taken a different approach to policy and has experienced Many in less stability of prices and output than Germany or Japan. the marketplace refer to the U.S. Standard." approach as the A standard of this kind substitutes the decisions person or a small group for predictable monetary policies. lower "Volcker of one The way to the uncertainty and variability that people face is to adopt a predictable monetary policy. You have inherited an inflation rate that has been reduced substantially since 1981. However, inflation remains at rates that are high by past standards. rate of inflation. strategy of We urge you to adopt a policy of reducing the This is best accomplished by adopting a long-term consistently lowering the annual growth rate of the monetary base and maintaining the fluctuating exchange rate system. A step 6% growth rate of the monetary base in the next 12 months is a in a program to achieve price stability. They talk about testing Others urge different directions. your inflation or your commitment to current exchange rates. you in opposition to It is a mis- take to be driven by the changing views of day traders and speculators in the markets. You cannot prevent changes in the value of the dollar, you can only delay them. It is a mistake to try. INTERNATIONAL DEBT For five years, the international debt resolving it. Fortunately, to the U.S. government talked problem but has failed to develop a about the strategy for the Baker Plan that calls for more lending debtors appears to be moribund. plans and opt for a market solution. has 4 You should avoid government In the summer of 1982, when the problem first came to public attention, the World Bank estimated the total outstanding external debt of developing year, the countries at about $800 billion. face value nearly $1.1 trillion. Mexico, Brazil faster. By the end of of the debt will have grown more than this 30% to Even with relatively rapid growth of exports by and some other debtor countries, the debt has grown The ratio of the debt to exports is now higher in most debtor countries than in 1982. The table shows these data for four large debtors. Foreign Debt as a Percentage of Exports Argentina Brazil Mexico Venezuela 1982 1986 405 339 299 84 536 425 413 322 Source: Morgan Guaranty Trust A debtor real depends on costs. The existing real country1s debt. 554 471 366 278 ability to service internal growth rates and debt-to-exports 1987 estimate ratio real its foreign external often summarizes the debt borrowing burden Each 1% increase in debt at a constant interest requires a permanent increase in exports of 1% to prevent the of rate debt- to- export ratio from rising further. A reduced common rule of thumb is that the debt-to-export ratio has to be to marketplace. on about two before countries can return A successful financial strategy for periodic rescheduling crises must encourage countries to foster internal growth and limit the role of government. the In practice, a country's ability to service debt depends its rate of growth and other factors. ending to 5 This will not occur under to a policy of concessional lending and pressuring reluctant lend. borrows could The U.S. cannot lend to developing more or sells assets to foreigners. countries unless Even if these pay the interest on their current debts, it would banks it countries make little sense for the U.S. to sell its assets so as to lend more. Large creditor banks have recently recognized that many of these debts sell at a discount. solution Reserve a of the debt problem. The recent decision by the Federal to permit ownership by bank holding companies of up to 100% of non-bank step This is a useful first step toward a market toward foreign subsidiary for up to five years is a enhancing the opportunities for constructive debt-equity swaps and resolution of the international debt problem. Markets are now working to develop debt-equity swaps types of exchanges that lower the amount of the debts. committee the other Since 1982 this has urged the Federal Reserve and the Treasury to exchanges of debt for equity at market prices. and encourage Exchanges will shrink value of the debt denominated in dollars and move debtor countries in the direction of a return to the marketplace. FINANCIAL DEREGULATION AND REFORM The Federal Reserve has been one of the roadblocks on the way financial deregulation. to This has had two unfortunate consequences. First, the U.S. financial system has been hampered in its efforts to adapt to changing conditions in the world marketplace. Second, adjustment and adaptation have come piecemeal, either in response to particular problems, often bank insolvency, or through state action. The Federal Deposit Insurance Corporation (FDIC) has now proposed a complete restructuring of financial regulation. for Its proposal repeal of the Glass-Steagall Act, which separates commercial 6 calls and investment banking, and repeal of the Bank Holding Company Act, which sets the structure within which banks can expand into other activities. The Federal Reserve should support this approach. These are first steps. past policies. vent. The financial system has been weakened by Many thrift associations, and some banks, are insol- They continue to operate only because deposits are guaranteed by government agencies. These technically insolvent institutions make large, risky loans and investments knowing that losses will be borne by the taxpayers. The Federal Reserve should press for reform of the deposit insur- ance system to remove the incentive for weak financial institutions make high-risk loans and investments. placed on market-based measures of risk. risk-based capital requirements. Greater reliance to should be However, we do not endorse Greater attention should be given to the development of market measures of valuation. Financial reform and deregulation are urgent. that suggest the Federal Savings and Loan Insurance Corporation (FSLIC) faces losses of $40 billion, far in excess of the $10 billion scheme that recently became law. prolonged economic recovery. risk Estimates of larger refinancing Losses have been rising during a Recognition of these large losses and the future losses reveals the weakness in the present system. We urge that saving association assets be valued at market, that insolvent association be closed as soon as possible to prevent losses that mounting thrift are institutions should associations to day by day. be retire financed The cost of by a surcharge any debt incurred by the process of closing insolvent institutions. closing 7 on failed the regulators remaining in the THE FEDERAL BUDGET TANGLE Mickey D. LEVY Fidelity Bank The Fiscal Year 1987 deficit will dip below $160 billion, billion decline from the FY1986 deficit. However, this a $62 improvement reflects one-time boosts to tax revenues and cuts in government outlays that will not legislation, be sustained. Without enactment of pending budget the deficit will rise into the $180-$200 billion range in FY1988-1989 before gradually declining again. Faced with this outlook, Congress attempted this summer to reach a compromise on deficit cutting legislation, but failed. The political battle over the FY1988 budget is resuming this fall. In order to keep the federal government functioning, current budget law, Congress has to pass any appropriations budget reconciliation bill, gress and another debt ceiling bill. bill, FY1988 budget, or GRH). including separate and very complex skirmishes on each Clearly, political upcoming Presidential current is Presidency, fiscally (Gramm- There is a heated political battle over the these budget initiatives, which have important ments. a Also, Con- is trying to fix the ailing Balanced Budget Act of 1985 Rudman-Hoilings, of and to abide by the elections. general countered maneuvering interlocking is being influenced The most common attempt by Democrats ele- by the political under- to embarrass the by Republican efforts to appear to behave in a responsible manner while avoiding undesired tax increases or spending cuts in an election year. The requests billion President's budget (Mid-Session a Review of the FY1988 $35.1 billion deficit cut in FY1988, yielding deficit. It includes the same requests made in 9 Budget) a $123.3 the FY1988 Budget presented adjusted by in January 1987, with the revised economic assumptions and magnitude technical of savings reestimates. Approximately half of the requested savings would come from non-defense spending cuts. The remainder of savings would come from higher revenues achieved through tighter compliance, user fees, credit reform, privatization and other loan asset sales. Included is a request for increased budget authority for defense, which declined in real terms in both FY1986 and FY1987. The Presidents projected deficit exceeds the original $108 billion GRH deficit target for FY1988. A Congressional Concurrent Resolution on the FY1988 Budget (HConRes 93), passed in June 1987, calls for budget deficit targets of $146 billion in FY1988, $140 billion in FY1989, and $108 billion FY1990. The $146 billion target was based on a CBO baseline in deficit estimate of $183 billion and would require $37 billion in deficit cuts. The resolution included $19.3 billion in tax increases for FY1988. A reconciliation bill detailing how the cuts in the concurrent resolution would be achieved was due July 28, but a compromise has not yet been reached. Meanwhile, a GRH progress report issued August 19, prepared jointly by the CBO and 0MB, estimated the FY1988 deficit, calculated on a so-called "Gradison base," to be $153.4 billion. •! GRH law, this Under original would mean $45.4 billion of across-the-board cuts. would require cuts of approximately 13% in This FY1988 defense spending and •"The "Gradison base" essentially calculates the deficit without the effects of inflation from the previous fiscal year. The CBO deficit estimate was $169.9 billion while 0MB's deficit was $136.8 billion. Some policymakers believe the huge $33.1 billion difference, and the averaging technique used to determine the magnitudes of across-theboard cuts, argues for an established cut in each year that does not depend on such a base. 10 19% in non-defense spending. across-the-board and, in However, the process of the cuts imposed by GRH has been any case, found automatic unconstitutional the Administration and Congress oppose such large cuts. Consequently, GRH, recent Congressional efforts have sought to "fix" making its sequestration process constitutional and relaxing deficit targets. promise on a "fix." However, The House and Senate have not reached a final comthey agree generally to a modified that would involve a substantially smaller deficit cut in FY1988 is required in Congress's concurrent resolution. GRH or its GRH than The House's proposed fix would either raise the FY1988 deficit target to $144 billion, cut a maximum of $23 billion from the FY1987 deficit, while the Senate has proposed a $150 billion deficit. The Administration has stayed on the sidelines as the House and Senate debate specific provisions of a modified GRH, repeating only its standard call for a balanced budget and expressing concern about main- taining its defense authorization requests. One key issue of disagreement between the House and Senate is the amount of flexibility given to the have the President on defense spending. While both the House and agreed to exempt military personnel outlays from automatic Senate cuts, Senate also would allow the President to propose reducing cuts for specific defense spending accounts, while the House would not allow this flexibility. Earlier Congressional initiatives to fix GRH were tied to federal debt-ceiling limitation legislation (HJRes 324). Apparently, President Reagan's rejection of a $23 billion deficit cut in FY1988 as part of a GRH fix forced a breakdown of the compromise proposal. The Administra- tion asserted that the proposed GRH fix would "front-load" deficit cuts 11 into FY1988 increase in or order to force Republicans into an undesirable spending cut in an election year. tax This failure to com- promise led to a temporary rise in the statutory debt ceiling, which is scheduled to expire September 23, 1987. Consequently, the Congress must immediately pass a bill that debt ceiling limitation and a reconciliation bill that details the deficit cuts established by the concurrent resolution. ciliation Pending recon- instruction proposals by the House and Senate would approximately $30.5 billion of the required $37 billion in remainder must come from the appropriations process. lies ahead. President's cuts. debt ceiling legislation. added weight if the reconciliation bill is Also, some of the Such attached actions to appropriating and do not see eye-to- legislation. Moreover, proposed appropriations are significantly different than those requested by Administration. a the House and Senate disagree about important details in the concurrent resolution, tion The Much negotiating opposition to tax increases may generate a veto. carries on achieve The concurrent resolution includes tax increases, and the veto eye extends the For example, the House, which must initiate appropriain Congress has passed an authorization bill that would provide $289 billion in defense budget authority in FY1988, compared to $302.9 billion in the Senate bill, and $312 billion requested by the 21 President. J 21JThese differences involve substantive policy issues: for example, the House bill would ban tests on space-based anti-ballistic missile systems (ABMs), require the U.S. to resume observance of the SALT II limits, and ban nearly all nuclear weapons tests, if the Soviet Union observes the same restraints. In contrast, the higher budget authority requested by the Administration and favored by Senate Republicans is based in part on the belief that more testing should be acceptable under the 1972 U.S.-Soviets treaty limiting ABMs. 12 If Congress passes a GRH fix with lower required deficit cuts for FY1988 before a reconciliation bill is passed, then the new GRH deficit target will dominate. A GRH fix currently under consideration includes a $23 billion deficit cut in FY1988. tax required revenue increase in FY1988 to approximately $11-12 billion, com- pared to proposed It This would reduce the $19.3 in the Congress's concurrent resolution. Whether a GRH fix is passed before a reconciliation bill is uncertain. depends in part on whether a GRH proposal is attached required debt ceiling legislation -- also an uncertainty. Congress fails to compromise on a GRH fix, tion dominates. vetoed, However, budgeting in to the Moreover, if then the concurrent resolu- since it includes a tax increase and may be FY1988 may be conducted under a continuing resolution. The highly bottom line uncertain, is the final outcome for the FY1988 and this affects future budgets. budget Simply the is fact that all of the major required initiatives may be bunched into a single bill reflects a faulty political maneuvering. process bogged down by pre-election year Is this any way to conduct fiscal policy? BUDGET REVIEW The budget deficit of $160 billion in FY1987 will be approximately 4.0% of GNP, 1986. This down from 5.3% in FY1986 and an average 4.8% for FY1982will be achieved by a rise in spending of only 2% from FY1986, and a very rapid 11% increase in revenues. This pattern reflects several special, one-time impacts that will not persist. Economic and The Congressional Budget Office's baseline budget Budget OUtlook: An Update, August (The 1987) forecasts deficits of $183 billion in FY1988 and $192 billion in FY1989 (3.6% and 13 3.2% of GNP). The Administration, using more optimistic economic assumptions, also forecasts a rise in its current services deficit (see table 1). Several special factors generated the temporary improvement in the FY1987 budget. The Tax Reform Act of 1986, which boosted personal tax revenues approximately $20 billion in FY1987, will reduce them approximately $12 billion in FY1988 and $18 billion in FY1989. Additionally, the tax reform generated an unanticipated surge in capital gains realization, which future provided added tax revenues. capital approximately gains taxes. That will take away from Consequently, revenues 5% in FY1988, less than half of their FY1987 Also, spending growth will accelerate in FY1988. repayments Furthermore, rise increase. Asset sales and loan under the reconciliation bill of 1986 provided saving to the FY1987 budget. of should a one-time including the last payment revenue sharing into FY1986, and postponing certain military pay- checks and Medicare payments into FY1988 have also temporarily lowered FY1987 outlays. Recent legislation will also add to higher deficits. The Supple- mental Appropriations Act of 1987 reflects the Administrations trophic health insurance proposal, several other policy proposals. provides the failing banks catas- the timing of Medicare outlays, and Recently enacted banking legislation FDIC with alternative financing methods for assisting and contributes additional funds to the FSLIC fund for failing savings institutions. A sizeable significant Interest rise rise rates in interest rates will in net interest outlays and result in a further deficit projections. have risen significantly since January 1987, and 14 the Administration and CBO have revised up their interest rate forecasts, particularly for the 10-year government bond (see table 2). Presently, rate yields are above 1988 forecasts and, unless they recede, will add to deficits. Moreover, higher inflation has raised outlay and deficit forecasts by raising COIAs for social security and certain programs. entitlement The Administration forecasts peak rates of CPI inflation to occur in 1987. If CPI inflation accelerates in 1988, as the CBO fore- casts, outlays for indexed federal programs will be higher. Under current law, FY1989, but healthy at least economic the deficit should resume its two caveats apply to growth must continue, adversely affect the budget outcome. forecasts though include since forecast. any removing deficit First, weakness would and benefits, even the social security accounts will be removed from surpluses, after Secondly, these declining budget social security payroll taxes budget beginning in 1990. the this decline the unified Since social security is accumulating large it from budget calculations adds significantly to (the social security surplus will be approximately billion in FY1988, and will rise to over $60 billion in FY1991). implies $38 This that without deficit cutting legislation,the on-budget deficit (excluding social security) will remain above $220 billion through FY1992 (see table 1). Clearly the budget outlook is not encouraging. rise in federal debt and avoiding potentially adverse sequences requires more deficit cutting legislation. depend on political, not economic, considerations. Stemming the rapid 15 economic con- The outcome will Table 1 Budget Projections (in billions) Fiscal Years 1989 1988 1990 1991 1032 1064 1080 1085 1131 1146 1129 1186 1212 1176 1244 1280 858 858 853 909 903 897 973 965 954 1049 1040 1036 1131 1121 1115 -158 -158 -157 -123 -161 -183 -113 -166 -192 - 80 -146 -176 - 45 -123 -165 Memo: Deficit, On-Budget (Excluding Social Security) President's Current Services CBO Baseline 179 177 -200 -221 -214 -236 -206 -229 -195 -227 Off-Budget (Social Security Surplus) President's Current Services CBO Baseline 20 19 38 38 48 44 60 54 71 63 1986 1987 Outlays President's Proposal President's Current Services CBO Baseline CBO Estimate of President 989.8 989.8 989.8 989.8 1017 1017 1010 Receipts President's Proposal Current Services CBO Baseline CBO Estimate of President 769.1 769.1 769.1 769.1 Deficit (-) President's Proposal Current Services CBO Baseline CBO Estimate of President -220.7 -220.7 -220.7 -220.7 16 Table 2 Administration and CBO Economic Projections 1987 1988 1989 1990 1991 Real GNP Administration CBO 3.2 3.1 3.5 2.6 3.4 3.4 3.3 Nominal GNP Administration CBO 7.6 7.2 7.6 6.8 7.3 7.0 6.4 CPI-W Administration CBO 4.7 5.1 4.4 5.2 4.0 3.5 3.0 6.1 5.9 7.5 6.9 7.4 6.7 7.1 6.8 6.6 6.8 Real GNP Administration CBO 2.6 2.6 3.3 2.7 3.4 2.6 3.4 2.7 3.3 2.7 GNP Deflator Administration CBO 3.3 3.3 4.1 4.1 3.9 4.0 3.6 4.0 3.2 4.0 Interest rates, percent, calendar year averages: 3-Month T-Bill Administration CBO 5.7 5.9 5.5 6.6 5.3 5.8 5.0 5.7 4.5 5.7 10-Year Government Bond Administration CBO 8.0 8.1 7.6 8.5 7.0 7.8 6.3 7.4 5.5 7.1 Memo: January 1987 Estimates 3-Month T-Bill Administration CBO 5.4 5.6 5.3 5.6 4.7 5.5 4.2 5.3 10-Year Government Bond Administration CBO 6.7 7.2 6.1 6.6 5.5 6.2 5.0 5.9 Percent change, fourth quarter over fourth quarter: Percent change, calendar Nominal GNP Administration CBO years: 17 RECENT BEHAVIOR OF Ml VELOCITY Robert H. RASCHE Michigan State University At our research last meeting, on Ml velocity that I had prepared for Carnegie-Rochester behavior since I presented some updated results Public Policy Conference. the of November, I concentrated the 1986 on the of the monthly values of the ratio of personal income to Ml, the relatively few post-sample observations on quarterly (3) and annual (1) available at that time provided little information about the great velocity slowdown of 1986. trate on both annual and monthly data. because are My present discussion will concenThe former are interesting revised estimates of annual personal income for 1985 and now available. The latter are interesting, that the month to month wiggles tell us much, possible to because 1986 not because I think or that it will ever be forecast these wiggles with great accuracy, but rather they provide a larger sample of data with which to assess the question of whether the old relationships are stable. You will recall that last March I presented some that beginning around the end of 1981 was probably part of a change in the change "shift in velocity drift" that I had that suggested long-run the estimates relationship between Ml velocity and interest can be characterized as an increase in the elasticity of velocity rates. long-run brought about by a rotation of velocity-interest rate relationship. identified the This interest long-run My conclusion was that since late 1981 Ml velocity will be roughly constant in the absence of trends in interest rates, but will respond with greater sensitivity to changes in interest rates. You will also recall that at that time the latest data available were through October 1986, and that 19 extrapolation of my estimated relationship through the first ten months of 1986 indicated large forecast errors for the period May through October. The 1987 revisions of the money stock data have now been released, and apart from changes in the seasonal adjustments appear to have very little effect on the estimates of the money stock. of The 1987 revisions personal income were announced at the end of July Wall Street Journal) interpretation interesting. of recent and appear to be (July 28, 1987 significant velocity behavior. The annual for the data are A comparison of old (March 1987) and new (September 1987) annual estimates of personal income velocity is: Old Estimates New Estimates Percent Change Velocity Percent Change Year Velocit 1983 5.5779 1984 5.7120 2.38 5.7161 2.33 1985 5.5800 -2.34 5.6020 -2.02 1986 5.1832 -7.38 5.2503 -6.48 5.5779 It is clear from these numbers that the 1984 and 1985 estimates are not affected to any significant degree, but that almost an entire percentage point of the great velocity decline of 1986 has been revised away. With these equation for a that it is possible to reestimate the I constructed in the Carnegie-Rochester paper change in the interest elasticity beginning extrapolate income. estimates in annual allowing 1982, and to the equation through 1986 on both the old and new personal The resulting estimates are: 20 1986 Revisions 1987 Revisions Constant .0321 (.0024) .0321 (.0024) D82 -.0321 (.0024) -.0321 (.0024) AlnRTB .0033 (.0008) .0033 (.0008) D82*AlnRTB .0064 (.0031) .0059 (.0031) R2 se d-w .68 .0130 1.67 .67 .0130 1.68 .0218 .0531 .0207 .0442 Predicted (86) Error (86) This equation is estimated with the post 1981-drift constrained to zero because of the limited degrees of freedom (4) in the annual data. Clearly the equation did not catch all of the great velocity decline of 1986, though it did predict a decline in velocity from the annual from 1985 as a result of the decline in Treasury bill rates from an average of 7.48 in 1985 to an average of 5.98 in 1986. Since average the estimates revisions, are essentially the forecast unaffected by the personal income error has been reduced by nine-tenths of a percent by the data revisions. As of this writing sufficient data are available to extrapolate the monthly equation that I presented last March through The revised money stock data leave the estimates for the sample period ending in December coefficients period 1985 essentially The estimated of the monthly velocity equation over the 53-85 sample with the revised money data but unrevised personal income are: unchanged. April 1987. 21 data 1986 Revisions 1987 Revisions Constant .0310 (.0024) .0306 (.0025) D82 -.0305 (.0071) -.0297 (.0075) AlnRTB .0053 (.0006) .0053 (.0006) AlnY/P .8351 (.0385) .8225 (.0403) D82*AlnRTB .0122 (.0024) .0114 (.0026) R2 se d-w .62 .0434 1.84 .59 .0455 1.74 The actual velocity and predicted values of monthly personal and the prediction errors for monthly velocity are shown in the attached Figures for January 1985 through April 1987. from income both graphs that the equation systematically It is clear overestimates velocity changes for the period May 1987 through November 1987. not known at this time how the personal income revisions will It is affect these forecast errors though from the annual results presented above I expect that the average forecast error over the twelve months of 1986 will be reduced. Whatever is going on in the May through November 1986 period is that not captured by our specification appears to have come to an end in December. given Personal income velocity dropped remarkably the large jump in Ml at that time. predicts that drop almost perfectly, 22 However, in December, the specification and since November seems to have tracked the behavior of velocity quite well. am prepared namely Based on this evidence I to stick with the conclusion that I reached last March, that we should expect that over the long-run in the absence of significant interest changes that Ml velocity will exhibit zero drift. 23 Percentage Change in M1 Velocity January, 1 9 8 5 - April, 1 9 8 7 Time Predicted Velocity Velocity M1 Velocity Errors Jonuary, 1 9 8 5 - time 2k April, 1 9 8 7 ECONOMIC OUTLOOK Jerry L. JORDAN First Interstate Bancorp I. ASSUMPTIONS AND CONCLUSIONS The disparity in the performance of world economies --by by region, sector, and by industry -- that was so pronounced in 1985 and 86, began to narrow in 1987. In 1988 -- the sixth year of the current U.S. economic expansion -- further recovery in the sectors, regions and industries will be accompanied by further slowing of the previously strong segments of the economy. of performance continues through the next year, previously depressed As this convergence the current expansion will become increasingly vulnerable to potential destabilizing shocks. Further ahead, the odds of a mild recession occurring in 1989 have risen substantially, expansion forecast to of and we do not expect this longest reach its seventh birthday. a modest non-war-time The primary reason decline in economic activity in 1989 for a is an expectation that monetary policies will become sufficiently restrictive after inflation passes the 6% rate in the second half of next year to produce a downturn. Vulnerable Expansion Although output our "most likely" forecast is for continued at about a 3% rate in 1988, there is an increasing growth risk of that some type of shock will throw the national economy into a nose dive. A sudden tightening of monetary policy to "save the dollar" on foreign exchange markets, another "supply disruption" of oil flowing from the middle east, or a puncturing of one or more of the speculative bubbles in a few of the world1s major financial and real estate markets, could 25 bring an end to the expansion before 1989, even if in the middle of a presidential election year. Debt. Debt, and More Debt It is well known that Federal budget deficits in the 1980s pushed debt the national debt to the $2 trillion level. stock of has risen relative to national income, and "real" interest rates have trended higher, risen, the burden of servicing this mountain of debt has as interest expense has become the fastest growing component of the Federal budget. to As the have Not unrelated, the U.S. became a net debtor notion the rest of the world in 1985 for the first time in over 70 years. In 1986, the U.S. passed both Brazil and Mexico combined as the world1s largest early debtor, 1989, and by the time a new administration takes office the U.S. will owe the rest of the world trillion dollars. about in one-half Since we have been borrowing to finance consumption of other countries output, we have added greatly to foreigners claims on our future output without adding to our ability to meet these obligations. Within the country, the restructuring of corporate balance sheets -- sometimes as a result of and sometimes to head off outs added -- has corporate sector. leveraged buy- significantly to the debt-service burdens of the Furthermore, the consumer-spending led expansion of 1983-86 resulted in net consumer indebtedness rising to a record share of personal income. While of the economy, that the existing levels of debt incurred by the various sectors U.S.economy the are still serviceable by trends are not encouraging. it has no fiscal discipline, a $5 dollar The U.S. has demonstrated and consequently 26 trillion is unlikely to achieve and maintain a non-inflationary monetary discipline. world's numeraire biggest debtor, obligations increase 1989. the reserve currency country, and now the also the the real temptation to attempt to inflate away includes an of inflation from about 5% in 1987 to 5.5% in 1988 and 6% in We of and As debtors expect is considerable. Our forecast that once the 6% threshold has been reached, monetary authorities will adopt a restrictive monetary policy, the even at the expense of a relatively mild recession. II. U.S. ECONOMY -- SUMMARY POINTS •Current expansion is already of record length for peacetime. •Nearly 16 million jobs have been created so far in the expansion. *U.S. is approaching below 6%. full employment as unemployment drops further *Real GNP growth will average 3.2% in 1987-88, versus 2.75% in 1985-86. --Consumers less dominant. Auto sales average 10.4 million in 1987-88 vs. 11.2 million in 1985-86. --Housing minus instead of plus. Housing starts average 1.6 million in 1987-88 vs. 1.77 million in 1985-86. --On the other side, revival in business spending for new equipment. --Narrowing rather than widening of trade balance. --Moderate building of inventories instead of cutbacks. •Revival of U.S. manufacturing key element in 1988 picture; disparity among sectors, industries, and regions to remain, but less than in 1985-86. •"Misery Index" of 11% in inflation and unemployment. 1988 -- split roughly evenly between •Inflation moves from low point of 1986 to 4.8% in 1987, 5.5% in 1988, and 6.2% in 1989. --Important prices will be rising at rate of about 10% during all three years, and employee costs will start to increase more rapidly. 27 ^Increases in short-term interest rates with faster economic growth, higher inflation, and stronger credit demand. One percentage point rise between end of 1987 and 1988. *Much smaller increase in long-term rates as financial markets already incorporated a higher long-run expectation of inflation. III. have INTERNATIONAL ECONOMIC OUTLOOK -- SUMMARY POINTS The mirror image of rising U.S. exports and declining real imports is an opposite shift within the Japanese and European economies. The strong currency countries have experienced a significant contraction of net exports in 1987, and that trend is expected to continue forecast period. in most other in the Meanwhile, strong monetary and fiscal "pump pricing" countries is causing faster growth in real domestic purchases. Better been consumption accompanied internationally by levels in a strong currency a substantial increase traded commodities. in environment foreign demand The firming of dollar prices has for of most world-traded goods is, in part, a reflection of the sharply lower foreign currency prices of such goods. commodities traded The dollar prices of goods and on world markets are expected to continue to rise from their 1986 lows. industrial-country real GNP growth (large countries) continuing in the 2-3% range through 1988. *However, this masks major shifts in the composition of growth. The drop in the $ is hurting export industries, but domestic demand in 1986 grew more strongly in Germany and Japan than did GNP. This should continue, and implies major structural changes for those economies. *U.S. recession, if it were to occur by 1989, would cause some slowdown in other industrial countries, but may not be severe. Countries will allow currencies to depreciate rather than follow U.S. interest rates upward. They have lower inflation than the U.S. and therefore won't mind a mild acceleration resulting from currency depreciation. (This is during the second half of 1989.) 28 ^Effects of expansionary monetary policies followed in most industrial countries (partly due to currency-market intervention) will cause inflation to rise, but not by as much as in the United States. ^Dollar will continue to decline through 1988 and early 1989. Could lose another 15% against the yen during the coming 18 months. Reasons: U.S. inflation risking more than in other major countries; trade deficit has remained large, implying further build-up of foreign debt. *U.S. trade deficit will fall in 1988 and 1989, after risking slightly in 1987. Continued large increases in the deficit in next external investment position of the United States. Japan will continue to be the major source of funding. *Developing-country debt: Lack of new funds from commercial banks; increasing resistance to making debt service payments under existing conditions in a number of countries. Implies that banks may be forced to use at least part of the reserves recently established. However, on balance, because of relatively good financial position of some countries (Mexico and Chile), reserves are probably adequate for the near term. 1989 recession likely to cause more problems. Demand for paper in secondary market to pick up, but prices may remain weak. 29 GROWTH OF M1 NET OF OTHER CHECKABLES (Percent change, annual rate) -21 82:1 83:1 84:1 85:1 86:1 87:1 3e GROWTH OF MONETARY BASE (Percent change, annual rate) 82:1 83:1 84:1 85:1 86:1 87:1 3e MONETARY POLICY AND THE OUTLOOK U) n> Jerry L. Jordan Senior Vice President & Chief Economist First Interstate Bancorp Shadow Open Market Committee Harmonie Club New York September 13-14,1987 1 MONETARY BASE AND Ml NET OF OTHER CHECKABLES MONEY GROWTH AND INFLATION (Quarterly percent change over year ago) (Four-quarter percent changes of four-quarter average levels) -6.0 II111II tl H t II ft It I lift fit It ftl H III II It 1 It It W t It I I H I tt ft It Hf » ft t tf H It t It H MIH It III H ttt W III II 80:1 81:1 82:1 83:1 84:1 85:1 86:1 87:1 64 67 70 73 76 79 82 85 88 89 * Consumption fixed-weighted price Index M\ narrowly defined to include only currency and demand deposits, has tracked the monetary base relatively closely in recent years. (JO Money growth has tended to predict changes in the inflation rate which would occur two years later. The acceleration in money growth during the past two years points to higher inflation in *88 and '89. NUMBER OF FAILURES PER 10,000 & THE INFLATION RATE WAGES, IMPORT PRICES AND CONSUMER PRICES (Percent changes, fourth quarter to fourth quarter) 1926 1931 The low point for inflation in terms of consumer prices was reached in 1986. Import prices are climbing at a 10% annual rate and employee costs are also expected to rise more rapidly. 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 Business failures tend to be inversely related to inflation. During periods of low inflation rates, failures per 10,000 concerns are higher. 2 REAL GNP SPENDING VS. PRODUCTION (Cumulative change from 2nd qtr. 1984, lndex»1.G0) (Percent change, 4th quarter to 4th quarter) ST Real Domestic Final Sates S 1.02 1.00 |i III IV 84 The current expansion will be of record length for a non-war period. GNP is expected to be fairly strong through 1988 before the economy slips into a recession in 1989. I II 85 III IV I II III 86 IV I II III B7* IV I II III 88f IV I II III IV 89f The growth of spending has outpaced the increase in production significantly since the middle of 1984. Expansive fiscal and monetary policies have fueled domestic demand, which has been met in sizable part by rising imports. Output growth, however, is now outpacing the increase in domestic spending. DOMESTIC FWAL SALES & LAGGED MONETARY BASE SECTORAL CONTRIBimONS TO GNP GROWTH (Quarterly percent change over year ago) (Percent share of two-year real GNP growth, fourth quarter data) Monetary Base Lagged 2 Qtrs. 2.0 I I I I | | | i | | | | | | | | | | | t | | | | | | i l | | | | | | | i | | | | | | 80:1 81:1 82:1 83:1 84:1 85:1 86:1 87:1 88:1 Inventories 89:1 Domestic final sales is a good indicator of demand and it generally tracks the monetary base lagged two quarters. The recent divergence reflected the inpact of lower inflation and interest rates on money holdings during the past two years. That pattern is now reversing. Consumer The consumer will be a much less dominant contributor to GNP growth in the 1987-88 period compared with 1985-86. 3 FEDERAL DEFICIT (Billions of dollars, fiscal years) NET INTEREST EXPENSE AS A PERCENT OF TOTAL FEDERAL OUTLAYS (Fecal years) 86 The federal deficit reached a peak in 1986 of $221 billion. Deficits are likely to remain large during 1988-89, exceeding significantly Gramm-RudmanHollings targets. 88(f) The amount of federal outlays that is required to finance the debt has grown at a rapid rate since the mid 1970s, reaching 14% in 1986, with a further increase expected. LO PUBLICLY H a D DEBT OUTSTANDING AS A % OF GNP NET INTEREST EXPENSE AS A PERCENT OF GNP (Fiscal years) (Fiscal years) 3.5 34 2.5 4 1.5 1 1 I I I I I I I 1 I I I I I I I I I I I I I I I > I I t 79 80 01 82 83 84 85 86 87e 88f 89f Publicly held debt will continue to climb to nearly 40% of GNP by 1989. 62 64 66 68 70 72 74 76 78 80 82 84 86 88(f) The share of GNP that is required to finance the deficit reached 3.4% in 1986, up from only about 1% in the early 1960s. 4 YIELD CURVE, ANNUALLY 1 TO 30 YEARS 1 YEAR TREASURY BILL & INFLATION RATE* (Percent) 10.00 T Percent 0.00 + 0.0 l l l l l l l t l l H I I I H I I I I I i l l l l l l l l l l i n H l l l l l l l l H H I I I I I H U l l l l l H I H t l l l t H l l l i n i l H I I I I I 80:1 81:1 82:1 83:1 84:1 85:1 86:1 87:1 * Percent change In CPI over year ago The yield curve has steepened considerably since last year, as well as risen over 200 basis points. The one-year T-Bill rate also follows the trend rate of inflation. The increase in prices over the previous year is here used as a proxy for the expected inflation rate in the year ahead. 3-MOMTH TREASURY BILL & INFLATION RATE* 10 YEAR TREASURY BOND & EXPECTED INFLATION * (Percent) 20.00 T 15.00 (Percent) 16.00 T 10 Year Bond 14.00 + 10.00 4 5.00 0.00 -5.00 IniiiiiiiiiiiiiiiiiiiniiniinwimHHuiiiiiiiiiiiwiniwiiiiniiiiiiiiiiiiiiitiiiiH 80:1 81:1 82:1 83:1 84:1 85:1 86:1 87:1 * Percent change In CPI from 3 months ago, annual rate The 3-month T-Bill rate tends to track the 3-month inflation rate. With policy actions that allow inflation to increase, interest rates also move upward. 4.00 11 im t m t ti 11 im n w t tt it i • m i ii imt 11111111 m m H i tt i m 111 m i it 11 H m i tt i tt t n t H 80:1 81:1 82:1 • Drexel Bumham Poll 83:1 84:1 85:1 86:1 87:1 The spread of the 10-year bond rate over the inflation rate expected for the next ten years has been abnormally high over much of the 1980s. Some narrowing occurred in 1986, but renewed uncertainty has caused the difference to again widen in 1987. U.S. NET INVESTMENT M1 GROWTH AND THE TRADE-WEIGHTED DOLLAR (% change from prior year) 18 (Billions of dollars) 82 63 84 85 86 87e 881 891 The net position of the U.S. in international investment markets turned negative in 1985 and 1986 after reaching a peak in 1981. For the first time since 1914, the U.S. became a net debtor, the largest debtor in the world. This trend will continue in 1987,1988, and 1989. OD (Monthly averages) M l GROWTB-U.S., JAPAN, AND GERMANY (Quarterly, percent change over year ago) The Fed trade-weighted dollar on an inverted scale has been closely correlated with monthly M1 growth in the past four years. More rapid money growth in the U.S. has contributed to a weaker dollar. GOLD PRICES AND THE TRADE-WEIGHTED DOLLAR (Monthly averages) (1973=100) 80 250 lit I H I I H H I M III II II III I III II II III I tit II II M i l III II I III 160 83 84 85 86 87 Monetary growth trends in Germany, Japan and the U.S. have followed similar patterns in the past four years. It is difficult for other countries to follow monetary policies independent of the U.S. because of the impact on their exchange rates and export sectors. Monthly average gold prices and the trade-weighted dollar (inverted scale) have continued to move in tandem following a trough in early 1985. Expansive money growth and a declining dollar have driven gold prices higher. 6 GROWTH OF TOTAL BANK RESERVES FEDERAL RESERVE DOLLAR INTERVENTION IN FOREIGN EXCHANGE MARKETS Four-Week Moving Average, Percent Change from 13 Weeks Ago, SAAR (Positive denotes dollar purchases) 50 T Week 2,1987 4,034 3,911 -7,502 -9.000 ' 1/81 7/81 1/82 7/82 1/83 7/83 1/84 7/84 1/85 7/85 1/86 7/86 1/87 4/87 7/87 Period ends the last day of the month cited Dollar intervention in foreign exchange markets under most of the Reagan Administration has been minimal, with the exception of the latter portion of 1985 and the more recent interventions of 1987. In 1981 and 1985, the U.S was selling dollars. In 1987, the U.S. has tried to support the currency. -10-H1 5 I I I 1 1I I I I I I I I I I I t I I I I I I I I I I I I I 9 13 17 21 25 29 33 37 1986 41 45 49 53 4 8 12 16 20 24 28 32 1987 Total bank reserves increased at an explosive rate during the first two weeks of 1987, on a four-week moving average basis. They then slowed abruptly over the next 14-week period and again in the most recent weeks, indicating a tightening by the Fed to support the dollar. u> vo EXCHANGE RATES - D M * , Y E W U.S. BANK RESERVES AND FOREIGN EXCHANGE PURCHASES (Weekly) (Millions of Dollars) (Weekly averages) 2.5 T 210.00 2.25 t f 180.00 ($Bill(ons, seas, ad).) T59 $3,000 f 150.00 175 MiwiiiiiiiummmimtiiHiHiitHiiniiiHiininiiiiiiiiniiiiiiiiiiwiiiiitniil 120.00 J F M A M J J 1986 A S O N D J F M A M J J 1987 A The dollar has generally trended tower against the yen and the DM throughout 1986 and 1987, with recent episodes of rapid decline causing turbulence in financial markets. 87:2 87:6 *= Dollar Sates Heavy U.S. purchases of dollars starting late in March could have caused a contraction in bank reserves, but the official policy is "sterilization". 7. QUARTERLY MAJOR ECONOMIC INDICATOR 9 1987 II IV 1 1988 II III 4815.1 4712.2 4807.7 4905.1 IV Forecast 5004.3 I 8.6 6.6 7.1 8.3 8.7 8.4 8.4 8.3 7.1 REALGNP (Billions of 1962 S. a.r.) % Change, annual rate 3772.2 3793.7 3824.6 3858.6 3894.7 3925.5 3952.7 3976.2 3986.1 4.4 2.3 3.3 3.6 3.8 3.2 2.8 2.4 1.0 REAL FINAL DOMESTIC SALES (Billions of 1982 $, a.r.) % Change, annual rate 3859.7 3889.3 3934.2 3966.7 3992.9 4017.3 4038.0 4061.2 4060.9 -3.8 3.1 4.7 3.3 2.5 2.7 2.1 2.3 III IV 5167.5 5203.5 5250.8 6.2 2.8 3.7 3986.1 3955.9 3936.0 0.0 -3.0 -2.0 4064.3 4050.4 4020.9 0.3 -1.4 -2.9 1987 7.6 % Change % Chsngs 88/87 1989 89/98 Forecast 5004.3 8.4 5250.8 4.9 3.4 3976.2 3.0 3936.0 -1.0 1.8 4061.2 2.4 4020.9 -1.0 % Change •87/,08 Estimate 4377.7 4447.7 1989 II 5090.4 GROSS NATIONAL PRODUCT (Billions of $, annual rate) % Change, annual rate REAL CHANGE IN INVENTORIES (Billions of 1982 $, a.r.) 1988 4615.1 3858.6 3966.7 0.0 47.6 37.8 16.0 10.0 17.0 20.0 23.0 18.0 24.0 16.0 -7.0 -2.0 10.0 N/A 18.0 N/A -2.0 N/A 116.1 117.2 118.3 119.6 121.0 122.5 124.1 125.9 127.7 129.6 131.5 133.4 119.6 4.1 125.9 5.2 133.4 6.0 4.2 3.8 3.8 4.5 4.7 5.0 5.4 5.8 6.0 6.2 6.0 5.8 335.0 339.0 342.4 346.5 350.8 355.4 360.2 365.5 371.1 376.9 382.7 388.3 346.5 4.8 365.5 5.5 388.3 6.2 5.3 4.9 4.1 4.9 5.0 5.3 5.6 6.0 6.2 6.5 6.2 6.0 ALfTOSALES (Millions, annual rate) 9.5 10.0 11.7 10.1 10.5 10.5 10.8 10.1 9.8 9.3 8.7 8.5 10.3 ' -9.8 10.5* 1.5 9.0* -13.1 HOUSNGSTARTS (Millions, annual rate) 1.79 1.62 1.61 1.60 1.60 1.58 1.57 1.50 1.38 1.35 1.37 1.50 1.65 ' -8.4 1.56* -5.5 1.40* -10.4 127.0 128.2 129.9 131.4 133.1 134.5 135.7 136.6 136.9 136.4 134.3 132.7 3.2 3.7 5.5 4.7 5.1 4.4 3.5 2.8 0.7 -1.4 -5.9 -4.8 101.1 101.7 102.3 103.1 103.8 104.5 105.2 105.8 106.3 106.8 106.5 6.6 6.1 6.0 5.9 5.8 5.8 5.7 5.8 6.0 6.2 294.0 296.5 298.0 300.0 305.0 307.0 308.0 309.0 309.0 306.0 2.1 5.0 4.1 6.7 3.7 3.5 3.4 3.0 1.3 NET CASH FLOW (Billions of $, annual rate) % Change over year ago 378.7 384.6 386.5 391.0 393.0 397.0 398.0 399.0 3.9 5.9 4.2 3.8 3.8 3.2 3.0 2.0 MONETARY BASE (Billions of $, a.r.) % Change, annual rate 243.7 247.8 250.8 254.8 259.5 263.3 267.8 11,8 7.0 5.0 6.5 7.5 6.0 7.0 GNP DEFLATOR (1982-100) % Change, annual rate CONSUMER PRCE INDEX (1967-100) % Change, annual rate 4w O III Ettimatt 4524.4 4th QUARTER INDUSTRIAL PRODUCTION (1977-100) % Change, annual rate NONFARM EMPLOYMENT (Millions) UNEMPLOYMENT RATE. ALL WORKERS (Percent) CORPORATE OPERATING PROFITS (Billions of $. annual rate) % Change over year ago NOTE: All quarterly series are seasonally adjusted; % change, annual rate calculated from prior quarter; calculations based on unrounded data; a.r. - annual rate; e - estimate. 131.4 4.3 136.6 3.9 132.7 -2.9 106.3 103.1 2.7 105.8 2.6 106.3 0.5 7.0 5.9 N/A 5.8 N/A 7.0 302.0 299.0 300.0 6.7 309.0 3.0 299.0 -3.2 -0.3 -1.9 -3.2 399.0 396.0 392.0 389.0 391.0 3.8 399.0 2.0 389.0 -2.5 1.5 -0.3 -1.5 -2.5 272.7 276.0 277.4 280.8 285.6 254.8 7.6 272.7 7.0 285.6 7.5 5.0 2.0 5.0 7.0 'Annual total; N/A • Not applicable. Tables H. Erich HEINEMANN Moseley Securities Corporation 41 H-SOP-87 Table 1 - Part 1 Federal Reserve Action and Monetary Growth M Billions) (2) (31 Monetary Base Currency Total Adjusted Bank Reserves 218.6 221.2 221.5 222.1 224.2 225.7 227.4 229.6 230.8 232.0 233.0 234.9 235.7 237.7 238.7 239.9 242.3 243.4 245.7 247.7 248.7 250.8 252.8 255.3 258.9 259.0 260.1 262.2 263.4 263.4 264.3 266.2 15°.5 160.6 161.3 161.9 163.1 164.5 165.3 166.9 167.8 168.7 169.9 170.6 171.8 172.7 173.8 174.4 175.8 176.7 177.6 179.0 179.7 181.2 182.4 183.5 186.0 187.2 187.7 188.9 190.2 191.1 192.1 193.2 (1) Date Jan 1985 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jar. 1986 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 1987 Feb Mar Apr Hay Jun Jul Aug P (4) 59.1 60.6 60.2 60.2 61.1 61.2 62.1 62.7 63.0 /? 7 63.1 64.3 63.« 65.0 64.9 65.5 66.5 66.7 68.1 68.7 69.0 69.6 70.4 71.8 72.9 71.8 72.4 73.3 73.2 72.3 72.2 73.0 Detand Deposits 397.4 403.8 406.3 409.2 413.5 420.3 425.0 431.3 437.8 439.5 443.7 450.5 451.2 453.4 460.6 467.6 477.7 484.6 492.7 501.6 506.9 513.8 523.7 540.6 545.2 543.7 545.0 554.6 556.1 548.6 548.7 550.8 (5) Savings I Stall Tise Deposits* 787.8 795.2 799.3 802.6 806.6 Sit." 822.8 826.0 828.7 831.6 836.1 841.0 847.6 849.1 854.0 859.7 862.8 869.0 873.8 878.8 884.1 888.4 892.0 898.2 906.2 905.5 906.5 905.1 900.5 903.2 905.2 907.3 * Includes Honey Market Deposit Accounts « (445*647+8+9) Source: Federal Reserve Board:tieineaannEconoiic Research k2 (b) (?) (8) (9) 110) Large Tiie Deposits Nondeposit Liabil. Foreign Deposits Treasury Deposits Total Deposits 267.1 267.4 171.1 175.6 178.3 170.6 173.0 170.1 168.0 173.0 174.5 173.8 176.3 179.0 178.6 183.4 187.3 185.3 184.1 180.1 183.2 185.9 189.8 189.8 192.9 195.2 201.7 200.8 197.4 195.8 199.6 199.6 193.8 205.1 18.5 15.8 12.8 15.4 20.9 14.9 23.1 13.4 16.9 lt.S^.G 3668.6 1&78.». 1604.:' l6g8.° 1705.1 171°.4 1726.4 1745.2 1741.1 1756.8 1779.8 1805.4 1815.1 1820.5 1834.6 1847.0 1850.3 1867.6 1878.7 1900.5 1907.3 1925.6 1956.7 1988.5 1986.1 1976.2 1994.6 2009.4 2003.5 1999.5 2009.8 •>T> 0 276.8 274.8 272.9 270.3 272.6 276.6 280.3 282.3 284.1 292.9 294.8 292.7 293.5 289.9 289.4 289.5 290.1 289.8 288.3 290.0 291.8 295.7 296.0 299.0 305.9 310.7 314.9 313.5 313.6 10.9 10.8 9.7 9.6 10.1 10.0 10.2 10.1 10.7 J0.5 10.6 10.7 11.0 10.1 10.1 10.6 10.8 11.1 11.6 11.2 11.7 11.8 11.7 11.7 12.2 11.6 11.2 11.6 11.7 11.8 11.7 11.4 5.4 7.8 14.5 24.1 24.3 15.8 17.9 21.7 16.1 16.8 11.1 18.2 15.2 15.3 19.2 27.5 28.5 17.1 21.6 30.8 25.4 26.6 21.6 Table 1 - Fart 2 federal Reserve Action and Honetary Growth (11) Date 3an 1985 Feb Har Apr May Jun Jul Aug Sep Oct Nov Dec Jan 1986 Feb MatApr May Jun Jul Aug Sep Oct Nov Dec Jan 1987 Feb Hat Apr Hay Jun Jul Aug 112) (13) Hi' (15) do) (1?) US) Large Tise Deposit Ratio Nondeposit Liabil. Ratio Foreran Deposit Ratio Treasury Deposit Ratio '.Honey Multiplier (2+4/1) Adjusted Reserve Ratio Currency Ratio Savings I Stall Tiie Deposit Ratio (3/10) (2/4) (5/4) (6/4) (7/4) (8/4) (9/4) 0.4014 0.3977 0.3970 0.3957 0.3O44 0.3914 0.3689 0.3870 0.3833 0.3838 0.3829 0.3787 0.3808 0.3809 0.3773 0.3730 0.3680 0.364o 0.3605 0.3569 0.3545 0.3527 0.3483 0.3394 0.3412 0.3443 0.3444 0.3406 0.3420 0.3483 0.3501 0.3508 1.9824 1.9693 1.9673 1.9614 1.9507 1.9436 1.93*0 1.9151 1.8929 1.8922 1.8844 .1.8668 1.8785 1.672? 1.8541 1.8385 1.8062 1.7932 1.7735 1.7520 1.7441 1.7291 1.7033 1.6615 1.6621 1.6654 1.6633 1.6320 1.6193 1.6464 1.6497 1.6472 (U72! 0.6622 O.t.69" 0.6764 0.6646 0.6493 0.6360 0.6320 0.6318 0.6378 0.63o2 0.6306 0.6492 0.6502 Q.b355 0.6277 0.6069 0.5972 0.5876 0.5783 0.5717 0.5611 0.5538 0.5398 0.5424 0.5444 0.5486 0.5516 0.5587 0.5740 0.5714 0.5694 0.4305 0.434" 0.4388 0.4169 0.4184 0.4047 0.3953 0.401! 0.3986 0.3O54 0.3973 0.3973 0.3958 0.4645 0.4066 0.39o3 0.3854 0.3716 0.3718 0.3706 0.3744 0.3694 0.3683 0.36.1! 0.3700 0.3693 0.3622 0.3530 0.3589 0.3638 0.3532 0.3724 0.0274 0.0267 0.0239 0.0235 0.0244 0.0238 0.0240 0.0234 0.0244 0.0239 0.0239 0.0238 0.0244 0.0223 0.0219 0.022? 0.0226 0.0229 0.0235 0.0223 0.0231 0.0230 0.0223 0.0216 0.0224 0.0213 0.0206 O.O209 0.0210 0.0215 0.0213 0.0207 0.0466 0.0391 0.0315 0.0376 0.0505 0.0355 0.0544 0.0311 0.0386 0.0123 0.0176 0.0322 0.0534 0.0536 0.0343 0.0383 0.0454 0.0332 0.034! 0.0221 0.0359 0.0296 0.0292 0.0355 0.0504 0.0524 0.0314 0.0389 0.0554 0.0463 0.0485 0.0392 0.0358 0.0363 0.0359 0.0357 0.0360 0.0359 0.036) 0.0363 0.0361 0.0364 0.035" 0.0361 0.0354 0.0358 0.0356 0.0357 0.0360 0.0360 0.0365 0.0366 0.0363 0.0365 0.0366 0.0367 0.0367 0.0362 0.0366 0.0367 0.0364 0.0361 0.0361 0.0363 Source-. Federal Reserve Board; Heineaann Econoaic Research 43 2.54/t. 2.5515 2.5625 2.5714 2.5718 2.591! 2.5959 2.6054 2.6239 2.6216 2.6335 2.644! 2.6432 2.6340 2.6577 2.6761 2.6971 2.7169 2.7281 2.747? 2.7608 2.7711 2.7931 2.83o3 2.8243 2.8220 2.8170 2.8356 2.8333 2.8083 2.8029 2.7949 Table 1 - fari 3 federal Reserve Action and Hcnetary Growth This is accounted for by changes in the: Date Jan 1985 Feb Mar API May Jun Jul Aug Sep Oct Nov Dec Jan 1*86 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 1987 Feb Har Apr Hay Jun Jul Auq P Federal Reserve Actions Monetary (Monetary Growth Base Growth) IH-l) 10.5 17. 4 7.0 7.7 12.2 18.S 11.9 17.3 15.9 5.3 11.2 15.7 3.7 6.1 17.1 15.4 23.7 15.3 17.6 20.1 11.1 15.7 20.9 35.3 12.4 -0.5 3.0 19.2 4.6 -10.J 1.8 5.3 1983 9.56 1984 S.87 1985 12.54 1986 16.84 1987 4.4? 11.0 15.2 1.6 3.3 12.0 8.3 9.4 12.2 6.5 6.4 5.3 10.2 4.2 10.7 5.2 6.2 12.7 5.6 11.9 10.2 5.0 10.6 10.0 12.5 18.3 0.5 5.2 10.1 5.6 0.0 4.2 9.0 1983 9.35 1984 7.15 1985 8.47 1986 8.73 1987 6.61 tontiibution of the Money Multiplier -0.6 2.2 5.4 4.4 0.2 10.1 2.5 5.0 9.4 -1.1 5.9 5.5 -0.4 -4.5 12.0 9.2 11.1 9.7 5.7 9.9 6.2 5.1 10.9 22.7 -5.9 -1.0 -2.2 9.1 -1.0 -10.1 -2.4 -3.7 1983 0.21 1984 -1.28 1985 4.07 1986 8.11 1987 -2.15 Adiusted Reserve Ratio -1.4 -5.1 4.3 1.1 -1.8 0.7 -2.1 -2.0 0 -) -2.6 4.3 -2.0 2?.7 -4.1 1.6 -0.5 -3.1 -0.4 -4.0 -1.1 2.6 -1.9 -0.7 -1.4 0.4 6.4 -4.8 -1.1 3.5 3.2 -0.2 -2.1 1983 2.29 1984 -0.01 1985 -0.37 1986 1.21 198? 0.65 Currency Ratio 1.8 5.1 1.0 1.9 1.5 4.8 3.6 3.1 5.8 -0.* 1.4 6." -11.5 -0.2 5.7 7.1 8.7 5.7 7.1 6.4 3.9 8.1 18.0 -3.2 -6.7 -0.2 7.1 -2.7 -9.8 -2.9 -1.1 1983 -0.80 1984 -0.65 1985 2.98 1986 5.18 1987 -2.43 Source: Federal Reserve Board; Heineiann Econotic Research HU Savinas I Stall Tite Deposit Ratio -1.0 1.1 0.2 0.5 0.8 0.6 0.6 1.9 2.0 0.1 0.? 1.6 0f5 i.? 1.4 3.1 1.2 1.9 2.1 0.7 1.5 2.6 4.5 -0.1 -0.4 0.2 3.3 1.4 -2.5 -0.3 0.2 1983 -2.10 1984 -0.41 1985 0.75 1986 1.46 1987 0.23 Large Ties Deposit Ratio 1.2 0.8 -0.6 -0.5 0.9 1.4 1.1 0.4 0.0 -0.5 0.1 0.5 -6.1 -0.1 1.3 0.7 2.0 0.9 0.9 0.9 0.6 1.1 0.7 1.5 -0.3 -0.3 -0.4 -0.3 -0.8 -1.4 0.3 0.2 1983 1.21 1984 -0.49 1985 0.39 1986 0.37 1987 -0.3? NonDeposi t Liability Ratio 0.3 -0.3 -0.3 1.8 -0.1 1.2 0.8 -0.5 0.2 0.3 -0.2 0.0 0.5 -0.8 -0.2 0.9 1.0 1.3 -0.0 0.1 -0.4 0.5 0.1 0.8 -1.0 0.1 0.7 0.9 -0.6 -0.5 1.0 -1.9 1983 -0.45 1984 0.30 1985 0.26 1986 0.32 1987 -0.14 Foreign Deposit Ratio 0.0 0.1 0.? 0.0 -0.1 0.1 -0.0 0.1 -0.1 0.1 0.0 0.0 -o.? 0.2 0.0 -0.1 0.0 -0.0 -0.1 e.i -0.1 0.0 0.1 0.1 -0.1 0.1 0.1 -0.0 -0.0 -0.0 0.0 0.1 1983 0.03 1984 0.00 1*85 0.C3 1966 0.01 198? 0.01 Treasury Deposit Satio -1.4 O.t. O.o -0.5 -0.9 1.4 -1.6 2.1 -0.7 2.4 -0.5 -1.3 -'.(' -0.0 i.7 -0.4 -0.7 1.1 -0.1 1.2 -1.3 0.6 0.0 -0.7 -1.6 -0.2 2.1 -0.8 -1.8 0.8 -0.2 0.9 1983 0.02 1984 -0.03 1*85 o.o: i«8o -0.44 l«lf.;7 -0.09 Table 1 * Part 3 Federal Reserve Action and Honetary Growth THREE- IfdNTH H0VING AVERAGES This is accounted for by changes in the: Date Jan Feb Mar Apr Hay Jun Jul Auq Sep Oct Nov Dec Jan Feb Har Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Hay Jun Jul Aug 1985 1986 1987 P Federal ReserveActions Honetary (Honetary Base Growth <H-1) Grctith) 9.43 12.49 11.63 10.70 8.95 12.77 14.18 15.88 15.03 12.82 10.79 10.72 10.21 8.52 9.00 12.87 18.74 18.14 18.89 17.66 16.27 15.63 15.92 23.97 22.88 15.73 4.98 7.23 8.93 4.57 -1.23 -1.00 6.53 9.70 9.31 6.73 5.63 7.86 9.90 10.00 9.38 8.37 6.06 7.32 6.57 8.3b 6.67 7.35 8.02 8.16 10.07 9.25 9.04 8.60 8.52 11.05 13.61 10.43 7.99 5.27 6.99 5.25 3.27 4.38 Cont but ion of the Honey Hult:iplier ?.% 2.7° 2.32 3.97 3.32 4.91 4.28 5.88 5.65 4.45 4.73 3.40 3.64 0.16 2.33 5.53 10.72 9.98 8.81 8.41 7.23 7.04 7.40 12.92 9.2? 5.30 -3.02 1.96 1.94 -0.69 -4.50 -5.39 Adjusted Reserve Ratio 1.63 -0.80 -0.73 0.13 1.21 0.02 -1.07 -1.14 -0.66 -0.80 1.31 -0.10 C^w7 7.16 8.38 -1.02 -0.6? -1.35 -2.52 -1.84 -0.84 -0.12 0.00 -1.33 -0.59 1.78 0.66 0.16 -0.82 1.83 2.14 0.30 Currency Ratio 1.83 3.30 2.62 2.66 1.4? 2.73 3.30 3.84 4.17 2.6' 2.09 2.41 -1.14 -1.68 -2.00 4.20 7.16 7.14 7.14 6.39 5.82 4.54 5.09 9.77 7.60 2.70 -3.36 0.10 1.43 -1.77 -5.12 -4.61 Source: Federal Reserve Board: Heineaann Econoaic Research 45 Savings I Saall Tiae Deposit Ratio -0.90 -0.27 0.0c 0.5? 0.48 0.63 0.69 1.07 1.52 1.33 0.92 0.7? -0.53 -0.59 -0!55 1.20 2.07 1.91 2.06 1.74 1.58 1.46 1.62 2.88 2.35 1.34 -0.09 1.02 1.62 0.72 -0.47 -0.85 Large Tiae Deposit Ratio 0.75 0.80 0.44 -0.12 -0.10 0.57 1.12 0.96 .0.51 -0.05 -0.13 0.03 -1.81 -1.89 -1.61 0.64 1.34 1.20 1.26 0.91 0.81 0.87 0.81 1.09 0.65 0.32 -0.32 -0.33 -0.50 -0.83 -0.64 -0.32 NonDeposit Liability Ratio 0.13 0.10 -0.13 0.39 0.46 0.98 0.64 0.50 0.17 -0.01 0.12 0.04 0.11 -0.09 -0.16 -0.01 0.59 1.08 0.77 0.46 -0.09 0.09 0.08 0.46 -0.03 -0.04 -0.05 0.58 0.34 -0.05 -0.03 -0.43 .Foreign Deposit Ratio -0.01 0.05 0.11 O.H 0.07 0.01 -0.01 0.03 -0.02 0.00 -0.01 0.02 -0.06 -0.00 0.00 0.05 -0.01 -0.03 -0.03 0.01 -0.00 0.02 0.00 0.05 0.02 0.04 0.04 0.06 0.01 -0.03 -0.01 0.01 Treasury Deposit Ratio -0.53 -0.40 •\K'Jl 0.24 -0.2" -P. 07 ~0.3'"* 0.63 -0.04 1.30 0.44 0.23 -2/-'0 -2. ""5 -l.'A 0.46 C.24 0.03 0.13 0.75 -O.Ot 0.10 -0.21 0.00 -0.75 -0.84 0.09 0.37 -0.13 -0.56 -0.38 0.52 Federal Eeserve Action and Honetary Growth (Heio) Reserve Growth Three-tooth Moving Average Reset ve Growth Rate Month to Month Jan 1985 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 1986 Feb Har Apr May Jun Jul Aug Sep Oct Nov Dec Jan 1987 Feb Har Apr Hay Jun Jul Aug P Source: Board: 1Hem 6.75 17.76 15.89 9.15 3.95 "Ut. 13.54 11.12 12.42 8.00 2.68 9.17 4.81 13.63 4.56 10.86 20.22 35.0" -7.64 0.00 19.4" 1.98 19.15 1?.?3 5.90 5.87 -3.73 25.37 -7.21 22.73 -1.83 11.66 19.94 3.67 28.31 11.10 5.37 10.95 14.70 26.65 20.02 -16.68 10.50 15.96 -1.62 -13.80 -1.65 14.14 1983 7.17 1984 8.93 1985 11.16 1986 12.17 198? 3.36 1987 3.36 . . . V 11.76 L7.31 14.36 14.93 9.14 10.34 17.43 20.46 10.00 4.61 3.27 8.29 0.19 -5.69 -0.44 H6