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APPENDIX

PETER D. STERNLIGHT
NOTES FOR FOMC MEETING
DECEMBER 20-21, 1982
Desk operations since the last meeting were undertaken
against a background of fairly close-to-path performance for
the broad monetary aggregates that have been the main focus
of policy.

The narrow money supply continued to grow strongly,

and this was essentially accommodated by Desk operations, in
line with Committee instructions.

Punctuated by two cuts of

1/2 percentage point in the discount rate, most short-term
interest rates declined somewhat, in most cases by about 1/2
percentage point.

Most longer-term rates, in contrast, were

unchanged to slightly higher over the interval as the market
faced heavy current and prospective supplies and some market
participants expressed concern about the implications of recent developments for future inflation.
Early in the period, when estimates of M2 growth were
slightly ahead of path and generating reserve demands also
a little above path, the Desk was aiming for nonborrowed reserve levels consistent with borrowing in the $300 million
area, compared to the initial assumption of $250 million.
Later, as M2 was seen to be just about on or even a little
below path, the intended borrowing gap narrowed, to around
$230 million in the latter weeks of the interval.

Actual

borrowing levels occasionally exceeded intentions by a fair
margin, however, reflecting some overestimates of reserve
availability, and underestimates of demand for excess reserves.

-2The Federal funds rate, which had run quite close to
the 9 1/2 per cent discount rate from mid-October through
mid-November,

moved down just about coincidentally with the

November 19 posting of a 9 per cent discount rate to vary
just slightly below that new discount rate level.

The weekly

averages were in a range of about 8.70 to 8.90 per cent.

The

further reduction in the discount rate to 8 1/2 per cent
announced last

Monday,

December

13,

was not accompanied quite

so soon by a decline in the funds rate, probably because of
lingering effects of reserve scarcities carried over from
last Wednesday when a shortfall in reserve availability and
unexpectedly high demand for excess reserves caused a large
bulge in borrowing.

These effects seemed to be abating by

last Friday afternoon and today, as funds settled in to trade
at

8 1/2

-

5/8 percent,

The meeting of seasonal reserve needs, especially currency
outflows, and the accommodation of strong M1 growth, called for
large reserve injections in the recent period.

The System's

outright holdings of bills were increased by about $2.7 billion
including $1.1 billion bought from the market and $1.6 billion
from foreign accounts.

This nearly used up the $3 billion lee-

way for intermeeting changes in outright holdings.

The System

also took delivery of $900 million of coupon issues, bought
the day of the last meeting, which counted against the temporarily enlarged leeway of the previous period.
agreements,

either

for the System or customers,

Repurchase
were used on

a number of occasions to augment reserves temporarily, while
matched sales were employed once in the market as well as
each day with

foreign customer accounts.

Seasonal forces

will reverse ground soon after the turn of the year, releasing
a large volume of reserves that we will want to absorb.
Interest rates registered mixed changes over the intermeeting period, ranging from moderate declines at the short
end--not fully matching the 1 per cent decrease in the discount rate--to small increases for some longer term issues.
Aided by a lower Federal

funds rate and some decline in day-

to-day financing costs, bill rates were down roughly 50 basis
points over the period.

Today, 3 and 6-month issues were

auctioned at around 7.85 and 8.10 per cent, respectively compared with 8.45 and 8.54 per cent just before the last meeting.
It may be noted, though, that the mid-November bill rates were
about a half percentage point or so higher than
The Treasury continued to borrow heavily

in mid-October.

in the bill market

since the last meeting, raising about $15 billion in that sector.

Other short rates such as those on commerical

bank CDs

came down, net, about as much as bills.

paper and

Supplies of

private paper were more limited than bills, with some periods
of actual shrinkage in commercial

paper and CDs.

Major commer-

cial bank prime rates were reduced just 1/2 percentage point, early in
the interval

to 11

1/2 per cent,

Bank payments of temporarily

above-market rates on new money market accounts may be a factor
tending to hold up the prime rate

for the time being.

There was a different story in the longer-term market,
where rates were little changed or even slightly higher on
balance over the period.

The continued evidence of a weak

economy provided support to the market, but present and prospective supplies of new issues were huge, and there was some
concern that official encouragement of lower rates and complacency regarding strong money growth might be overdone.
Including issues still to be paid for, the Treasury raised
about $13 billion through coupon offerings during the period:
adding the 7 and 20-year issues to be sold tomorrow and Wed-

nesday,

that figure would be over $20 billion.

Not long ago,

that would have been a year's worth of additions to the coupon market.

For Treasury issues in the 3-10 year range, most

yields were about unchanged to down 20 basis points over the
period.

For issues over 10 years, most yields were up 20 to

30 basis points.
Corporate yields moved a little higher over the period
while the volume tapered off from the exceptionally high
October level.

In the tax-exempt market, yields also worked

higher for long-term issues while a record volume came to market in November.

December volume has abated somewhat, but is

still relatively high for the month as issuers have sought to
come to market before the turn of the year.

Legislation now

on the books would rule out issuance of bearer securities

after year-end, although a last minute effort is being made
to delay the deadline.

-5Reference was made earlier

to the likelihood of having

to undertake large reserve absorptions in the next several
weeks.

On present projections,

$3 and $4 billion.

the amount could run between

In light of this, I recommend that the

Committee temporarily enlarge to $4 billion

the standard lee-

way in the authorization for domestic open market operations.

James L. Kichline
December 20, 1982

FOMC BRIEFING

Since the last meeting of

the Committee signs of weak-

ness in aggregate economic activity have persisted.
now forecasting

a decline

in

percent at an annual rate.

real GNP this

the available

sense

quarter of

information on

than a month or two ago

the economy

that the

Obviously,

hand.

appointed

in

judgment earlier

making a similar
this

forecast may

Indeed, the economy remains quite
sustained

upturn

is

not yet

gives

recession

recovery is near at

that

1

to 2

have firmed a bit.

close and

could conceive

staff is

But the drop reflects a resumption of

inventory liquidation, as final demands
all,

The

a

Over-

greater

is drawing to a
we have been

this

year and

disone

still be premature.

sick and the basis for

assured given

the mixed

a

developments

to date.
The

labor market surveys

for November

sizable cutback in nonfarm employment -average monthly

in

durable

industries,

goods
where

10.8 percent.

manufacturing,
orders have

edged down 100,000 from

the

and a rise in the

losses were concentrated

such as machinery

been weak and

Initial claims for unemployment
first week of December at

Job

another

about the same as

declines earlier this year --

unemployment rate to

indicate

and metals

inventories

high.

insurance were still high in the

around 600,000 per week, but they have

the peak rates

in late September and

-

early October.
production

2

-

The information available

curtailments

of permanent job

also

points to a

on plant closings
slackening

0.4 percent decline in the index was half
preceding two months.
to expand,

tions in output.
ments,

including

Output of

success

while most other major

an upturn

in

oil

and

sectors

gas well

is on the rise

showed reduc-

stocks

Auto sales in November
more than 2 percent

year.

drilling

following

In addition, this

associated with the industry's
through a combination of

earlier cutbacks in production and sales

unit

that in each of the

However, there were a few encouraging develop-

in reducing excess

month.

in November, the

defense and space equipment con-

the steep declines through much of this
month auto output

the pace

losses and temporary layoffs.

While industrial production fell again

tinued

in

and

incentive programs.

in fact accounted for much of

increase in total retail

sales during that

Auto sales early in December slipped below a 6 million
which was not unexpected

rate,

weaker sales
sales other

following strong sales

given the usual

pattern

incentive programs.

than autos and nonconsumer items rose

nominal terms in November, not an especially

of
Retail

percent in

strong performance.

Reports on sales in December, from

the Redbook, the press, and

directly

generally

from major

only fair
tional

the

in

retail

the first

activity.

chains,
half

In the

rise in sales similar

suggest

of December amidst

staff

sales

aggressive

forecast we have assumed a

to November and

were
promosmall

the reports to date appear

consistent with
tern of

3

that assumption.

-

We also have assumed that pat-

sales will persist early in

on income

1983, reflecting constraints

growth.
In the housing sector,

firmly established.

the recovery in activity is

Housing starts

in November rose one-fourth

to over a 1.4 million unit rate with both single and multifamily
units contributing to the rise; permits also rose but by much
less than starts.
expected, and
weather.
jected

perhaps were affected by

In any event,

support

contrast, business

quarter seems

likely

for capital goods

first half

seems roughly
of

further,
The

but

in contrast

have not been inclined

to make

year.

quantitative and

incoming evidence,
the

in

however,

last meeting

to other recent projections, we

further appreciable downward revi-

spending,

the other major sectors

currently exhibiting a drag on activity --

is a

Shipments and

the forecast.
Along with capital

exports

this

smaller, declines

line with our expectations at

the Committee and,

sions to

investment spending

remain weak, and other

of next year.
in

fixed

is pro-

to activity overall.

to show another sizable drop.

qualitative evidence points to
the

the unseasonably good

the housing sector on average

to continue providing
In

orders

The November starts figures were higher than

-- also

seem

reasonable basis

inventories

and

to be going through the worst now and

there

for expecting smaller declines early next

Together with some growth of consumer spending and further

-

expansion
real

in

housing

growth next

activity,

4

-

this

should

lead

to a return of

quarter.

Both wages and prices have been behaving about as
expected and
changed.

that portion of

The wage

the hourly earnings

sector

in

index

this

little under 6 percent, 2

the staff

forecast is

particular
year

looks quite good,
likely

to show a rise

percentage points

Moreover, we are expecting productivity to
cent

ment
high,

On the price
this

year,

owing

to

percent --

less than half the

although
temporary

the

latest

factors

in

environment

of

a large

degree

of

of a

2 perthe

rate of a year

a substantial

improve-

monthly figures

were

measured

prices.

forecast contains further reductions in

kets.

expand around

there also has been

side

with

less than in 1981.

this year and unit labor costs in 1982 should be in

neighborhood of 4-4
ago.

little

slack

energy

a bit

inflation next year
in

labor and product

The
in an
mar-

NOTES FOR FOMC MEETING
December 20, 1982
Sam Y.
The dollar has

reversed

Cross

course in

recent weeks and entered

what many think might be an extended declining trend.
early November the dollar had traded at
in December it was
dollar moved

2.60 in terms

back down close to 2.40;

from a high of about

in terms

2.79 to a

major factor in the market's reappraisal

has been a

officials

pointing to a sharp

deterioration in the U.S.
Whereas,

felt that weak U.S.
trade balance,
in the U.S.

of yen, the
2.42.

A

series of

foreign officials
trade and

as well)

currency

previously, most market participants had

economic activity would

limit the worsening in

analysts are now looking for a move into deep

current account

competitiveness

(and by some

of German marks,

low of about

projections by U.S.

accounts next year.

Thus, while in

principally associated with

and even without much pick-up in

U.S.

our

deficit

eroding price

domestic

demand

and output.
Expectations

of lower U.S.

role in the market's thinking.
cut in the discount rate
the

in our

the German mark.

of record

the authorities were
Still,

triggered

where it dropped

Many in

interest rates would not be

projections

rates have also

As you know, the most recent

on December 13

dollar in the exchanges

against

interest

1-3/4 percent overnight

the market felt that

uncertainty about

a

rapid fall

thereby pushing nominal

exchange rates.

the future.
lead

(and real)

and cushioning the dollar's decline.

the Federal

encourage domestic

a rapid decline

facilitated--and official

comfortable with a drop in dollar

Reserve to tighten up,

feels

surprise

a sharp sell-off of

of thought maintains that inflationary concerns will

school

a

U.S. trade deficits would not be made--unless

there is considerable

interest rates higher

played

One school
the Federal
U.S.
Another

Reserve can go considerably farther to

recovery and would

in the dollar.

in any event

not move to

counter

Meanwhile, European officials,
prospect
in U.S.

of continued recession
interest rates,

rates were

reduced on December

EMS

2.

centers

lending

abroad official

In other centers

the authorities

reduction

exchange

rate

from lowering interest

This has been the case in the United Kingdom and in the weaker

currency countries

such as France

the EMS joint float have heated
European currencies have had

that large
rates,

up a

and Italy.
great deal

In fact, tensions in
recently.

question whether existing parities will

heavy before

Pressure

continue

adjustment programs,

to be

defended

particularly

optimism has developed in

bridging finance by central

growing resolve of countries

economic difficulties
One

exchange

on the French franc was

that international debt problems are being better

market.

seeing

last weekend's meeting of EMS Finance Ministers.

Tentative and cautious

and the

rise of

dollar, and market participants,

intervention has been needed to maintain the

for long at that cost.

Weaker

difficulty keeping pace with the

the mark against the declining

their

about the

1983, have welcomed the

and in several

pressures have constrained
rates.

in

deeply concerned

have all

like Brazil

the market

dealt with.

IMF

and private bankers,
and Mexico

to address

provided some reassurance

result has been a lessening

to the

of the demand for dollar

liquidity which previously had been an important source

of the

dollar's strength in the exchanges.
Recently the dollar's decline has been cushioned
corporate demand,

by good

in part related to year-end payment needs,

and by

professional short-covering in relatively thin end-of-year markets.
In fact,

the degree of support for the dollar that emerged

lower levels was
participants

sufficiently impressive as

to scale back their

to prompt

earlier estimates

at the

some

of how rapidly

dollar exchange rates would ease in the near term.
Since the last meeting of the Committee, the Bank of Mexico
was

granted

facility,

drawings of $190

million on the combined U.S. BIS

leaving $560 million

still available as of close

credit

of business

Also, the Mexican authorities were granted

yesterday.

renewals of two

earlier

drawings totalling $117.2

addition, it was announced

that

billion of short-term financing
Mr.
under the
extended

of the

$1.85

facility to Mexico--will
recommend

This will

Line in
continuous
use since

Institution

9/7/82

Bank

swap arrangement--

billion combined U.S.-

represent the

first renewal

Amount
($ millions)

of Mexico

BIS

credit
17,

1983.

for three

of the

drawings:

Current
Term

Maturity

I

Requires
Amendment

May be
made
Public

35.0 1st R.

1/7/83

3 mos.

N/A

Bank of Mexico

24.0

1/18/83

3 mos.

N/A

Bank of Mexico

35.0 1st

R.

1/25/83

3 mos.

N/A

Bank of Mexico

17.5

1st

R.

1/26/83

3 mos.

N/A

Bank of Mexico 35.0

1st

R.

1/27/83

3 mos.

N/A

Bank of Mexico

1st

R.

2/17/83

3 mos

N/A

In addition, the
Reserve

swap with

February 4,

1983.

part on the

due date,

is substantial.

14.0

1st R.

$160.5

$700 million swap
the Banco

but the

amount

repaid

Mexican situation is

likelihood of a need

regular

at the time.

in whole or in

still very

to request a

I would propose that we be

extension if needed,

drawing under the

de Mexico will fall due on

We hope to have this

uncertain, and the

further

totalling $160.5 million,

mature between now and February

Total

Federal

provided $1.23

that these drawings, listed below, be extended

more months.

In

to Brazil.

million Federal Reserve special

as part

million.

the U.S. Treasury has

Chairman, six swap drawings,

$325

three-month

further extension

prepared to

provide a