Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, February 5-6, 1991 : Transcript

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Meeting of the Federal Open Market Committee
February 5-6, 1991

A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System in
Washington, D.C., on Tuesday, February 5, 1991, at 2:30 p.m. and was
continued on Wednesday, February 6, 1991, at 9:00 a.m.
PRESENT:

Mr. Greenspan, Chairman
Mr. Corrigan, Vice Chairman
Mr. Angell
Mr. Black
Mr. Forrestal
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Mullins
Mr. Parry
Ms. Seger
Messrs. Guffey, Hoskins, Melzer, and Syron, Alternate
Members of the Federal Open Market Committee
Messrs. Boehne, McTeer, and Stern, Presidents of the
Federal Reserve Banks of Philadelphia, Dallas,
and Minneapolis, respectively
Kohn, Secretary and Economist
Bernard, Deputy Secretary
Coyne, Assistant Secretary
Gillum, Assistant Secretary
Mattingly, General Counsel
Prell, Economist
Messrs. Beebe, Broaddus, R. Davis, Lindsey,
Promisel, Scheld, Siegman, Simpson, Slifman,
and Ms. Tschinkel, Associate Economists
Mr. Sternlight, Manager for Domestic Operations,
System Open Market Account
Mr. Cross, Manager for Foreign Operations,
System Open Market Account

Mr. Ettin, Deputy Director, Division of Research and
Statistics, Board of Governors
Mr. Stockton, Associate Director, Division of Research
and Statistics, Board of Governors
Mr. Hooper, Assistant Director, Division of International
Finance, Board of Governors
Mr. Rosine, Senior Economist, Division of Research and
Statistics, Board of Governors
Mr. Fisher, Economist, Division of Monetary Affairs,
Board of Governors
Ms. Low, Open Market Secretariat Assistant, Division of
Monetary Affairs, Board of Governors
Messrs. J. Davis, T. Davis, Lang, Rolnick, and
Rosenblum, Senior Vice Presidents, Federal Reserve
Banks of Cleveland, Kansas City, Philadelphia,
Minneapolis, and Dallas, respectively
Mr. McNees, Vice President, Federal Reserve Bank
of Boston
Mr. Thornton, Assistant Vice President, Federal Reserve
Bank of St. Louis
Ms. Krieger, Manager, Open Market Operations,
Federal Reserve Bank of New York

Attended portion of meeting relating to the Committee's discussion
of the economic outlook and its longer-run objectives for monetary
and debt aggregates.

Transcript of Federal Open Market Committee Meeting of
February 5-6, 1991
February 5, 1991--Afternoon Session
CHAIRMAN GREENSPAN. Good afternoon, everyone. Welcome, Bob
McTeer; it's nice to see you at the table. You're sitting between two
formidable characters but I suspect you'll survive.
MR. SYRON.

What do mean by that?

CHAIRMAN GREENSPAN. The first item on my agenda is not on
the [meeting] agenda but it's something I'd like to bring up because I
know a number of you felt quite uncomfortable about the need [for the
Board] to take the action that we took on Friday and the way we had to
The action, in my judgment, had to be done and I think in
take it.
retrospect it clearly was right.
I thought waiting until this meeting
[would have] put policy behind formidably, which I think we have to
avoid. As we discussed at that time, we moved under the directive de
jure, which was still targeting borrowing and not the funds rate.
And, obviously, under those conditions, there's an immediate basis
point-for-basis point passthrough with the discount rate.
De facto,
it's very hard to believe that that is what we're doing. As a
consequence, I think we have to resolve this question in a manner that
is consistent with the rules of this Committee. Unless somebody has
an objection, I would suggest that we form a small committee--and I'm
recommending Messrs. Kohn, Sternlight, Mattingly, and a Federal
Reserve Bank economist of their choice--to prepare a paper on this
issue and how it should be handled for inclusion on the agenda of our
March 26th meeting. We have so much ambiguity on this particular
issue that I think we have to get some clarification so that the
Board, the Desk, and the Committee know where we are under all
conditions on this issue.
If anyone has anything to add to that, I'd
If not, I'd just like to go forward and
appreciate [hearing] it.
officially appoint that committee to prepare a paper and put this
issue on the agenda next time.
MR. HOSKINS.
Just a clarification on the paper:
The mandate
is to look at the operating instruments as well as the relationship of
the discount rate to the funds rate?
CHAIRMAN GREENSPAN. The mandate is basically to evaluate our
procedures and give options on what the alternative actions are when
the Federal Reserve Board chooses to move the discount rate.
We are into the formal meeting. Since at the moment we have
no chairman, I will turn [the meeting] over to Governor Seger, who is
our senior [Board] member, to obtain a chairman and vice chairman for
us.
MS. SEGER. As Mr. Greenspan says--I shouldn't call him
chairman at this point--we have to select a new chairman and vice
chairman for this FOMC year.
I would entertain a motion for chairman.
MR. ANGELL.
MS. SEGER.

Oh, you want them separately.
Yes.

2/5-6/91

MR. ANGELL.
MS. SEGER.
more nominations?

I move Mr. Greenspan be chairman.
Okay, thank you.

SPEAKER(?).

May I have a second or some

Second.

MR. SYRON.

Move the nominations closed.

MS. SEGER.

All in favor?

SEVERAL.

Aye, aye.

MS. SEGER.
MR. KELLEY.
MS. SEGER.
chairman, please.
MR. ANGELL.
MS.

SEGER.

MR. KELLEY.
MS. SEGER.
SEVERAL.
MS. SEGER.

Thank you.
You were just in time, Dick!
Right.

Now we need a nomination for vice

I move Mr. Corrigan.
All right.

Any additional nominations?

I'll second Mr. Corrigan.
Thank you.

All in favor?

Aye, aye.
Thank you.

CHAIRMAN GREENSPAN.

I guess we have our officers.

Congratulations, Mr. Vice Chairman.

VICE CHAIRMAN CORRIGAN.

Condolences, Mr. Chairman.

CHAIRMAN GREENSPAN. We now have to elect staff officers and
I ask the Secretary, technically the Deputy Secretary--he's just been
promoted--to read them.
MR. BERNARD.
Secretary and Economist, Donald Kohn
Deputy Secretary, Normand Bernard
Assistant Secretaries:
Joseph Coyne and Gary Gillum
General Counsel, Virgil Mattingly
Deputy General Counsel, Ernest Patrikis
Economists:
Michael Prell and Edwin Truman
Associate Economists from the Board:
David Lindsey;
Larry Promisel;
Charles Siegman;
Thomas Simpson; and
Lawrence Slifman.
Associate Economists from the Federal Reserve Banks:
Alfred Broaddus, proposed by President Black;
Richard Davis, proposed by President Corrigan;
Karl Scheld, proposed by President Keehn;

2/5-6/91

Sheila Tschinkel, proposed by President Forrestal; and
Jack Beebe, proposed by President Parry.
That's the list, Mr. Chairman.
CHAIRMAN GREENSPAN. If there are no objections, I will
consider the list to be approved. The next item on the agenda is to
select a Federal Reserve Bank to execute transactions for the System
Open Market Account, and we recommend the New York Bank unless I hear
any objections. Without objection, I assume that is approved.
MS. SEGER.

I was going to push Kansas City!

CHAIRMAN GREENSPAN. I knew you were! That's the reason [I
made a prompt recommendation.]
We need to select the Manager for
Domestic Operations and the Manager for Foreign Operations, System
Open Market Account. The incumbents, of course, are Messrs.
Sternlight and Cross. Unless I hear objections, I will assume that we
approve their carrying on for the next year. I assume you have
reviewed the Authorization for Domestic Open Market Operations and
again, without objection, I will assume that that is also approved.
Mr.
I'll now call on Mr. Cross for a series [of recommendations].
Cross.
MR. CROSS.

Mr. Chairman, this is the warehousing agreement

proposal?
CHAIRMAN GREENSPAN.

MR. CROSS.

Yes.

Mr. Truman circulated a memorandum on this matter

to the Committee and I concurred in the memorandum. The Committee
will recall that at its meeting last March it agreed to a proposal to
increase the warehousing maximum by $5 billion, from $10 billion to
In the
This was made subject to a Treasury request.
$15 billion.
event, the additional amount of $5 billion was not needed during the

year and was not used; there was no Treasury request to use it.
Indeed, the Treasury has taken an initiative, with our aid and
encouragement, to reduce the amount outstanding under the present
warehousing agreement. As you know, the amount outstanding has been
reduced in the past months from $9 billion, which is where it stood
when the Committee approved the increase, to $4-1/2 billion. The
Treasury in reversing these amounts and reducing the outstandings to
$4-1/2 billion has always urged that a cushion of unused capacity be
retained in case there is a requirement for it, even though [the need]
has been going the other way. We have made the point that we don't
think the warehousing facility should be in continuous use and we have
been helping and encouraging them in bringing the amount down from $9
billion to $4-1/2 billion. Our view is that the correct approach at
this point would be to drop the additional $5 billion that was added
last year and to seek the renewal of the facility at the present time
with the pre-existing maximum of $10 billion. And I so recommend, Mr.
Chairman.
CHAIRMAN GREENSPAN.
MR. HOSKINS.

Questions for Mr. Cross?

I have a couple, Sam.

One is:

What happens if

we don't renew it?
Does it automatically expire or is this a process
that the FOMC has set up to review this annually?
If so, I guess the
idea is that the Committee is endorsing this kind of activity.

2/5-6/91

MR. CROSS.
Well, there have been warehousing arrangements
with the Treasury going back to the early 1960s.
I would have to seek
legal guidance on what would happen if at the time when there were
outstandings the Committee did not authorize their continuance.
MR. KOHN.

I assume they would run off as they mature.

MR. CROSS.
I assume so, yes.
The next ones that fall due
are in May and June. Well, I don't know what the legal position would
be.
If there were no warehouse facility, I don't know whether that
would mean that the whole $4-1/2 billion would have to be ended at

this moment or-MR. MATTINGLY.
there a term on them?
MR. KOHN.
MR. CROSS.

They would go off according to the terms.

Yes.
There are terms on them.

MR. MATTINGLY.
[Each] would roll off according to its terms;
there would be no additional warehousing after the resolution.
MR. HOSKINS. So, if we endorse the recommendation of $10
billion, would that essentially mean that the FOMC endorses the
activity of warehousing?
MR. CROSS.
It means that the FOMC endorses the continuance
of this facility up to a maximum of $10 billion, yes.
MR. KOHN. The FOMC has been authorizing the warehousing on
an annual basis when it votes on this.
MR. GUFFEY. Sam, what's magic about $10 billion as opposed
to $5 billion, for example?
MR. CROSS. Well, as I say, the Treasury has taken the
initiative and has acted to bring down the amount outstanding quite
substantially in this past period. They have always made the point
very clearly that in doing so they urge and would expect that there
would be a continuation of this [facility] so that if conditions
should change--and they can change--it would be available to them
quite promptly in order to continue further warehousing. At this
point conditions are such that it certainly does not look like that's
the way it's going; it's going the other way. We're in the process of
reducing our foreign currency holdings.
MR. GUFFEY. A follow-up question:
If we were to authorize
$10 billion, then it's up to them? We don't trigger it but they do?
They could do this anytime they want to and we have to take it?
MR. CROSS.
If we authorize the $10 billion, then typically
we act on their request in providing the warehousing. Now, obviously,
this is not an adversarial relationship, as far as I'm concerned.
It's something that we talk to them about, work with them on, and deal
with them on a daily basis. It has always worked satisfactorily on
that basis.

2/5-6/91

CHAIRMAN GREENSPAN.
you'd like to add?

Charlie Siegman, do you have anything

MR. SIEGMAN. No.
I think the Treasury's need for some
contingency or a cushion for reserve is appropriate, given the
uncertainties. Otherwise, we'd have to review this on an emergency
basis rather than-MR. CROSS. Any action to change this does get reported.
If
we leave it at $10 billion, that's outstanding until we choose to act
otherwise or we look at it again next year.
CHAIRMAN GREENSPAN. I think we're still in the mode of
trying to reduce our holdings [of foreign currencies] and that will
continue. We have communicated that periodically to the Treasury, and
I think we are just going to bring down gradually what we all think is
an excessive position in this respect.
It will take a while, but I
think we're moving in the right direction.
MR. CROSS. We've made clear to the Treasury many, many times
that we don't visualize this as a facility that should be in
continuous use. It's there when conditions are such that it's
required and it should be drawn down, or reversed, at times when
conditions warrant. That's the basis we've been working on and the
basis on which it has been reduced to $4-1/2 billion in recent months.
CHAIRMAN GREENSPAN.

Governor Angell.

MR. ANGELL. Mr. Chairman, for two years I was rather
I am not uncomfortable with this
uncomfortable with this position.
$10 billion request.
I feel that the Treasury was rather generous in
moving in this direction, [based on] the Federal Open Market
It seems to me that they gave heed to the
Committee's objections.
size of the fund, which was one basis for the objections. The second
area that I was objecting to as a matter of principle is no longer
valid in that we did call to the attention of the Congress [issues]
about the appropriations process.
If the Congress feels comfortable
with the arrangement, I'm certainly on board in this context.
CHAIRMAN GREENSPAN. Any further questions?
like to move approval of Sam's request?
VICE CHAIRMAN CORRIGAN.
CHAIRMAN GREENSPAN.
MR. SYRON.

Would somebody

I'll move it.

Is there a second?

Second.

CHAIRMAN GREENSPAN. Without objection, it is approved. We
have three additional foreign currency instruments, which have to be
approved. Would somebody like to move them?
VICE CHAIRMAN CORRIGAN.
CHAIRMAN GREENSPAN.
MR. SYRON.

Second.

I would move that.

Second?

2/5-6/91

CHAIRMAN GREENSPAN. Without objection. The next item on the
agenda is the memorandum from Mr. Mattingly, which is dated January
25th, on the Committee's Rules Regarding the Availability of
Information.
I specifically requested that individuals on the
Committee be contacted to see what the general response to that draft
memorandum was.
There were several who had problems with it. My view
is that if there isn't [virtual] unanimity on an issue such as this,
it would be inappropriate for us to [approve] it or move on it.
And I
would suggest that it just be dropped at this stage. Hopefully we'll
get our issues in this area resolved in a somewhat better manner.
Nonetheless, we have to have a vote on the technical part of that
memorandum before publication. Would somebody like to move that?
MS.

SEGER.

MR. SYRON.

I'll move it.
Second.

CHAIRMAN GREENSPAN.
Is there a second?
discussion?
Without objections.
MR. KEEHN.
the objections was?
MR. KELLEY.

Is there any

Would it be appropriate to ask what the nature of

Yes,

I'd be interested also.

CHAIRMAN GREENSPAN.

Don, why don't you comment?

MR. KOHN. Several members of the Committee and other
presidents questioned the need for it.
Several expressed the view
that, indeed, whoever was doing this leaking knew it was wrong, so why
do we have to pass more rules? A couple members of the Committee were
concerned that the language having to do with verbal or unwritten--as
well as written--material was overly broad and might end up gagging
their ability to discourse in public even in the normal course of
business without [divulging] anything that could be used in that way.
Why do we
Let's see, those were two of the reasons. Really, it was:
need this?
It could be misinterpreted; it could be used against the
It seems unnecessary, so why go forward with
Committee at some point.
Norm,
it?
That was, I think, the general nature of the objections.
do you-MR. BERNARD. Yes, in line with your comment, the observation
was made that the rules already contained the prohibitions and the
authority for the Chairman [on this matter], so there was really no
need to be more specific and draw attention to this.
MR. SYRON. Mr. Chairman, I understand that it is your intent
just to drop this now, but do you anticipate that this will be
reexamined and revisited?
CHAIRMAN GREENSPAN. No, if there is concern in the Committee
that in order to respond to a specific problem we are creating too
[cumbersome] an instrument--which is what I infer, basically, from the
comments--then I would recommend that we just drop it and live with
Maybe
the problem that we have and hope that it does not get worse.
we'll be fortunate and it will disappear.

2/5-6/91

MR.SYRON. I hope I'm not being gratuitous, but my own
concern is that I think the problem that we have, if it continues, is
a problem that threatens the viability of how we approach both the
discussion and formulation of policy. So, if the problem were to
continue, I think we would have to do something.
CHAIRMAN GREENSPAN. Well, unless somebody can find a means
that is acceptable to the Committee on a virtually unanimous basis, I
think we will have to live with this until we find some alternative.
MR. KEEHN. I don't have a solution to that problem, but just
to express my view:
I thought a greater degree of specificity was
appropriate, and given the problems that we've experienced, I
understand that it could be contentious.
CHAIRMAN GREENSPAN. If the issue comes up again and it is
creating significant difficulties for deliberations in this
organization, then it will be appropriate to [revisit] it.
But
somebody has to have an idea that is [unintelligible] formality.
Okay, do we have to a motion?
[Secretary's note:
The motion was
made, seconded, and approved.]
Can we now have a motion to approve the minutes of the
previous meeting for December 18?
VICE CHAIRMAN CORRIGAN.
MR. SYRON.

So moved.

Second.

CHAIRMAN GREENSPAN. Without objection. Sam Cross, would you
now bring us up-to-date on your operations since December 18?
MR. CROSS.

[Statement--See Appendix.]

CHAIRMAN GREENSPAN.

Questions for Sam?

MR. HOSKINS.
I have a question on intervention activities
with respect to the mark, since that's the only currency involved in
the intervention we've been doing.
I presume that is supposed to be a
sterilized intervention. The question really is:
If we're pegging a
rate like the funds rate, how do we know we're sterilizing it?
MR. CROSS.

I think it happens automatically, but I defer--

MR. KOHN. If we didn't sterilize it, the supply of reserves
would be changed and the funds rate would be different. So, I think
in order to peg the funds rate, we have to sterilize it.
If I can see
that the funds rate is being basically determined by supply and demand
for reasons-MR. HOSKINS.
Yes, but you're sterilizing around the funds
rate and not around total reserves.
MR. KOHN.

Either way I think it's--

MR. HOSKINS.
Total reserves is what we think drives money
and we're trying to get money to grow. So, if one is worried about
the slowness of monetary growth, one might worry about this practice.

2/5-6/91

MR. KOHN. If we didn't sterilize it, then it would show
through presumably to total reserves, to interest rates, to borrowing,
or whatever it is the Committee is targeting.
CHAIRMAN GREENSPAN.

Other questions?

Bob.

MR. MCTEER. I guess the most striking thing about the real
GNP forecast was the abrupt turnaround from the current quarter to the
next quarter. I notice from your Chart 13 that over 1/3 of it is
inventory investment and, since that happens again in the next
quarter, I assume that's intended inventory investment rather than
involuntary. What makes you think that inventory investment is going
to be so strong in the next three quarters?
MR. SLIFMAN. First, it turns out that in the second quarter
itself we still actually have some liquidation going on but the rate
of liquidation is slower than in the first quarter, so in a GNP
accounting sense it shows up as a positive number here. We do,
however, start to get some accumulation beginning in the second half
of the year. But the amounts of accumulation are very, very small in
dollar terms. Again, it's because of these swings from rapid
liquidation to slower liquidation to a small accumulation that in GNP
terms that winds up adding to real GNP. That is really what I was
trying to show on the preceding chart, Chart 12, where you can see
that even during part of that projection period we still have GNP
below final sales and then it rises just very gradually. We think
it's a very modest amount of inventory accumulation that takes place;
in fact, the inventory/sales ratio that's consistent with this
actually falls for a while and then basically just flattens out at
these historically low levels.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN CORRIGAN. Mike, several people have commented
on the chart show, which really was first-rate, but let me just add to
that. I thought the paper that you circulated on potential GNP, etc.,
was absolutely marvelous. I don't know what your practices are about
publishing those kinds of things but I would hope it would be
published. It's really an excellent piece of work.
MR. PRELL. Thank you. We haven't really thought about
publication but we'll have to give it some thought.
VICE CHAIRMAN CORRIGAN. It really is, as I said, an
absolutely first-rate piece of work.

2/5-6/91

-18-

CHAIRMAN GREENSPAN.

Dick Syron.

MR. SYRON. Mike, just a question, going back to what Bob
asked. Though it's not enormous, the swing in the impact of
How much of that
government [spending] in the second quarter is 0.3.
It may be reflecting what
is state and local and how much is federal?
we see all the time but I'm becoming more and more bearish on the
state and local [sector].
MR. SLIFMAN. Actually, it's a very small amount, as you can
In terms of our forecast we see it basically all coming from
see.
state and local purchases. But they're very small; they're growing
0.3 percent, which is a very small number. The federal net real
purchases are falling. What we really have in terms of the state and
local sector is some construction going on but not very much.
MR. SYRON.

But the 3/10ths might be just GNP?

MR. SLIFMAN. Right. And it turns out that that also happens
to be the growth rate as well.
MR. SYRON.
MR. SLIFMAN.

Okay.
They happen to match up in that one instance.

MR. PRELL.

Are you referring to the second quarter?

MR. SYRON.

Yes.

MR. PRELL. Well, in the second quarter there's actually a
But
little uptick in federal spending, but it's only 2-1/2 percent.
your point on state and local [spending] is well taken. In fact,
we've lowered our projection of state and local real purchases in this
forecast and we only have a 1/2 percent increase this year, which
assumes probably some decline in construction spending--an area that
really had been surprisingly strong through last year. We've been
surprised on the up side fairly frequently over the past year or so
that this apparent fiscal problem has not shown through on spending.
Obviously, on some of it there's a lag. They sold bonds earlier and
are going to go ahead with some of these infrastructure investments.
But we expect that there will be some crunch there; obviously, a
number of you are familiar with rather dire situations in your
locales.
MR. SYRON.

Thank you.

CHAIRMAN GREENSPAN.

Bob Black.

MR. BLACK. I have a question to which probably everybody
except me knows the answer on Chart 3.
MR. PRELL.

That's promising; that's my kind of question!

MR. BLACK. This is shown as a percent of real federal
purchases. What is the fiscal impetus there?
I'd be happy to send you a descriptive memo, but
MR. PRELL.
it's a measure we developed that unlike the high [employment] budget

2/5-6/91

-19-

surplus--which you know is a measure of discretionary fiscal policy-basically rates various components of the budget according to their
impact on aggregate demand as revealed by econometric relations.
It
strips out some of the trend elements and gets rid of some of the onetime sorts of financial effects that at times distort the high
employment budget.
For example, in the high employment budget
currently those contributions from foreign countries would show up in
the normal calculation as additional revenues and greater fiscal
restraint. And it's somewhat counter to [logic] to think that if
somebody else pays for it instead of having to pay for it ourselves
that that's additional restraint on aggregate demand.
So, this
measure doesn't include that sort of thing. And we think it's
probably a better way of capturing things. We've run this in terms of
horse races against other measures of fiscal policy in determining GNP
and this seems to work better.
MR. BLACK. Yes, I would be interested in seeing your memo.
I'm sorry I was the only one who didn't understand.
MR. PRELL.
I hesitate at times to use this because I know
it's a more obscure measure, but I thought that under the
circumstances-MR. BLACK.
I was just curious.
I was trying to figure out
what it could be and I couldn't come up with anything.

budget

MR. MULLINS.
It's a way to characterize a $300 billion
[deficit] as fiscal restraint.

MR. PRELL. Clearly, there was a package of cuts in
expenditures and hikes in revenues enacted last year and that's the
basic process that's going on here.
CHAIRMAN GREENSPAN.

Lee Hoskins.

MR. HOSKINS.
I, too, want to compliment the staff on its
professionalism and objectivity in presenting this very interesting
report.
I have one question with respect to the longer-term averages
that you present here. A naive and uninitiated person--nobody at this
table, of course--could read this as saying that with the baseline
[policy] we will average 2-1/4 percent [real growth] for 5 years and
if we have an easier monetary policy, a pro-inflation policy, we will
average 2.6 percent.
So, over long periods of time it looks like if
we have a pro-inflation policy or rapid money growth, we'll have
higher rates of real growth. And that simply doesn't seem to [happen]
over the longer periods of time.
I presume your answer is that 5
years isn't [a long] enough time period.
MR. PRELL. A different way to look at it is that there's an
aggregate supply function out there and an aggregate demand function.
If monetary policy keeps pushing the growth of aggregate demand out
there faster than aggregate supply will support, we're going to end up
with accelerating inflation. And that's the message that this is
intended to convey. There will be a lot of dynamics over a period of
time if we are right and you kept pressing against that.
But that's,

I think, the interpretation of this data. Obviously, there are
significant uncertainties, and I think we underscored this in the
report. Larry's reason for presenting the band on it was to suggest

2/5-6/91

-20-

that on a statistical basis 2.6 percent is almost as good an estimate
as 2.3 percent.
Where the issue arises is if you take the more
optimistic view, say, of the Administration and you're talking about 3
percent plus [real growth].
That begins to press pretty hard against

our confidence intervals here; that's stretching it. But there are
lots of assumptions made about the future in this and this is just our
best guesstimate--as careful an analysis as we could do.
MR. HOSKINS.
If you were to run your model with expectations
of some degree of credibility or full credibility, would you expect to
get the same results?
MR. PRELL.
MR. KOHN.

I don't think credibility would be-Are you referencing the Bluebook?

MR. HOSKINS.

Yes, the one that has the five-year average.

MR. KOHN. Right. It's our view, which we expressed in the
Bluebook, that we could get either the [unintelligible].
However, if
[the Federal Reserve] had some credibility, we think the tighter
alternative would give you some combination of higher output and lower
inflation than presented here. These simulations embodied entirely
backward-looking expectations.
MR. HOSKINS.

Built on the 2.3 and 2.6 percent projections

for--

MR. KOHN. I think that's also noteworthy with respect to
your observation about real GNP over this time. In some sense it
helps that we've started above the assumed natural rate so that you
can push the economy for a little while. It's a bit like Mike's
alternative simulation. Inflation takes a while to begin picking up
because we don't drop below the natural rate for a time. So, in some
sense this was a favorable starting point for a more expansive policy.
But you'll note that when we get out to 1995 finally, we do have lower
growth in output; it's a little higher level of output and we do have
a soaring inflation. At some point, presumably, the Fed would have to
[rein that inflation] in.
MR. PRELL. And the same point is made simply in our
Greenbook forecast: in essence that over the next seven quarters
after this one the economy is growing at a rate clearly above our
estimate. But it's an environment of decelerating prices because
we're above the natural rate.
CHAIRMAN GREENSPAN. Any further questions? If not, why
don't we take a coffee break and come back and do the tour de table.
[Coffee break]
CHAIRMAN GREENSPAN.

Who would like to start the round table?

Bob.
MR. PARRY. Thank you, Mr. Chairman. The Twelfth District
economy continues to blend recessionary problems in California with
robust growth in the rest of the region. The California economy
continues to experience weakness similar to that of the rest of the

-21-

2/5-6/91

nation, although some data indicate that conditions may be improving.
Employment in January registered a 1.1 percent decline from a year
earlier, with weakness reported in durable goods manufacturing,
construction, and retail. Agriculture has suffered at least $1
billion in crop losses because of the freeze and it looks as though
there could be significantly greater damage if the water cuts actually
take effect as a result of the very serious drought. The remainder of
the District states continue to report relatively strong growth.
Outside California, employment in the past year has grown 3.3 percent.
Individual state growth rates range from a low of 2.3 percent in
Hawaii to 6 percent in Nevada. But Hawaii is a very interesting
They're not growing because they don't have a growing
situation.
labor force; they have an unemployment rate of only 2.8 percent.
Despite relatively sluggish retail sales, trade employment still has
grown 3.2 percent in the rest of the District. And employment in
services has grown a solid 5 percent.
I have two interesting vignettes about the effect of the war
who is a very large retailer with
on the economy,
stores predominantly in the West but also on the East Coast. He said
that they didn't have the best Christmas but that sales really started
to pick up right after Christmas and then just went down the tank on
I called him last Friday and he said that sales
the 16th of January.
have started to come back a bit, so apparently there must have been a
very quick reaction, probably because people were watching their
televisions.
VICE CHAIRMAN CORRIGAN.

The CNN effect!

MR. PARRY. The other vignette is from
He said that the Prime Minister of Japan made a speech about the
inappropriateness of people vacationing if they are draft age males;
it wouldn't look good to the rest of the world. And in the week after
the speech there were 2,000 cancellations [by Japanese tourists] of
reservations in Hawaii, each one of whom typically goes for 4 or 5
days and spends $500 per person as opposed to $125 spent by U.S.
I just thought those stories were rather interesting.
tourists.
If I can turn to the national outlook, we are expecting a
short recession and a moderately strong recovery, assuming that the
war in the Gulf is over by spring and oil prices remain low. Our
forecast, as it turns out, is very similar to that of the Greenbook.
And we do expect the inflation rate to come down to about 4 percent or
However, I'd like to add that
a little lower both this year and next.
to prevent a subsequent rise in inflation, it seems that we're going
to have to respond to the economic recovery by tightening policy in a
timely fashion, which of course is assumed in the Greenbook forecast,
just as we've recently eased policy to prevent a deep recession.
CHAIRMAN GREENSPAN.

President Keehn.

MR. KEEHN. Mr. Chairman, starting with a comment about the
Our forecast is considerably more modest than
national economy:
Mike's rosy scenario. But I am pleased that our forecast is
comfortably included within the central tendency. We have a couple of
First, and this really relates to the
particular differences:
Greenbook, we expect a pretty significant reduction in consumer
durables in the second quarter rather than a very large pickup. That

2/5-6/91

-22-

difference probably relates to the automotive sector, which seems to
us to be very much on the optimistic side in the staff forecast.
I'll
make a comment or two about the automotive sector in just a moment.
The second significant area of difference is on the export side.
Our
expectation for import growth is a bit more modest than the Board
staff's, but the difference is more particularly on the export side;
we just don't think that exports are likely to grow to quite the level
that the Board staff shows in their forecast.
And that really
accounts for the differences in their forecast and ours.
Turning now to the District:
As I have been reporting, the
District really is doing quite well compared to other parts of the
country but we are now catching up.
Clearly, a shift is taking place;
certainly, more and more within the recent couple of weeks, our region
is taking on the aspects of a fairly classic manufacturing recession.
So far it's mainly auto-related.
The Middle East events have resulted
in an almost total shift in attitudes with regard to the outlook in
that sector. At this point it's very hard for automakers to keep any
semblance of a normal production schedule. Normally, they set their
production schedules pretty far in advance.
But now they are meeting
frequently--about weekly--and the tendency is to reduce production
week-in and week-out. As a result of significantly reduced retail
sales, dealer inventory is building up in terms of the number of days
stock on hand.
And, therefore, the dealers' attitudes are just
terrible and dealer orders have been cut back substantially.
[Their
sales] are running at about 50 percent of last fall's levels, and last
fall was pretty weak to start with, particularly if you take out the
fleet aspect of that.
So, the dealer orders from the manufacturers
are very, very low. Employment levels and production schedules have
been reduced substantially and at least one company that I talked to
would expect that production this quarter will be down 11 percent from
last year, which was not in itself a strong period. They would
further expect that the risks are on the down side with respect to
incoming orders, and it's entirely possible that their production in
the first quarter will come in 24 percent below last year. As they
add their production and the production for the other manufacturers
together they would expect that this would have a negative impact on
the first quarter GNP by about 1 percentage point.
It's far too early
to tell what is going to happen to auto production in the second
quarter, but certainly it's going to be down compared to last year.
And as you would expect, [the impact of] autos is now moving into the
supplier community and the suppliers are seeing very, very sharp
curtailments of purchases.
That's the bad news.
There is some better news.
The steel
business--and I found this surprising--is quite good.
The orders are
continuing to come in at reasonably good levels and firms are
operating currently at a level of about 83 percent of capacity. The
current estimate for shipments this year is 81 million tons.
That's
down from 85 million tons last year but is still a pretty good year,
at least as they see it now. And I think, encouragingly, they are
exporting steel at pretty good levels even to Japan. I do think the
steel industry is one where the competitive aspects have improved very
substantially just in going through the last three or four years.
Machine tool orders are surprisingly strong; some of that goes into
the auto sector.
There will be substantial retooling in the auto
sector as they come up with some new models over the next year or two,
so that has been strong. Agricultural equipment certainly is going to

2/5-6/91

-23-

be down; they have cut production substantially in this quarter but
not nearly as much as the auto sector. The production plans for the
remainder of the year are expected to be down about 12 percent.
I end up with a comment--an anecdote really--on retail sales
not unlike Bob Parry's.
I talked with a guy who runs a specialty
chain store that has operations all over the country. They had a good
year last year and a good Christmas season. But as of January 15th
there was just a complete shutdown of retail sales, unlike anything he
had experienced in his life,.
He mentioned one story about a
conversation with one of their salesmen he had seen when he was in New
England. The salesman had just completed the sale of a large couch to
somebody. As they were completing the paperwork, the buyer was just
filled with apologies that she was buying the couch.
She made the
point that she thought it was a bad time; she was embarrassed to be
making a purchase at this particular time but the family desperately
He
needed a couch to sit on and that's why they were doing it.
suggested this is symptomatic of the attitudes that people have; they
are quite worked up about this [war in the Gulf].
And as a
consequence, his retail stores are really quite void of people.
He
doesn't think this will be a continuing effect, but for now it has had
a very significant impact on their sales.
CHAIRMAN GREENSPAN.

President Forrestal.

MR. FORRESTAL. Starting with the District, Mr. Chairman,
conditions in the Sixth District remain weak, although it does seem
that the earlier deterioration is ending. The unemployment rate is
averaging higher than in the rest of the country and we think it's
going to continue to be that way for some time. The export sector is
doing fairly well, although we've noticed that we've lost exports from
the Sixth District to the Soviet Union and the Persian Gulf in recent
months. That reflects some agricultural products, particularly rice.
And I was very surprised to find that we're losing the sale of carpets
to Saudi Arabia.
I didn't realize we were selling carpets there, but
apparently it has been a big factor.
MS. SEGER.

They put it on the desert to keep down the dust!

MR. FORRESTAL.
MR. BLACK.

Is that what it is?

They're not Persian carpets, are they?

MR. FORRESTAL. Obviously not. The energy sector seems to
have softened somewhat after it became pretty clear that increased
OPEC production and heavy inventories would keep prices down. And the
District's [energy] producers are still seeing quite a heavy shortage
of skilled workers, as we have talked about before. The rig count in
Louisiana was down 9 percent from a year earlier and the offshore
count was 7 percent lower.
Even though the data we have continue to
be uniformly negative, I would say, based on the contacts that I've
had personally and that our staff has had, that there seems to be a
little less pessimism about the situation, even with the war in the
Persian Gulf. People are convinced, I think, that the steady
deterioration has slowed up if not stopped. And bankers are seeing a
bit more light in terms of the demand for funds.
As a result of all
this, we are looking for a somewhat better situation in the District,

-24-

2/5-6/91

although in my view the recovery in the Southeast as well as in the
nation is still pretty fragile.
Looking at the national economy, our forecast is quite
similar to the Greenbook forecast but it is weaker. We show a
somewhat smaller decline in the present quarter but the rebound over
the rest of the year is not quite as robust. One of the differences
that we have--and this has been alluded to by someone else--is that we
don't see as much of a contribution coming from the export sector. It
seems to us that the improvements in net exports are not going to be
quite as strong [as in the staff forecast].
As a result of this lower
growth rate than the Greenbook, we obviously see a higher unemployment
rate toward the end of 1991. But our estimate of inflation is
somewhat better--in fact quite a bit better--than the Greenbook. We
are anticipating inflation, measured by the CPI, of about 3 percent;
looking at the chart, I think we're at the low end of the forecasts.
These forecasts, of course--both the Greenbook, I assume, as well as
ours--did not take into account the easing action of last Friday. So,
if you look at those forecasts in that light, perhaps they represent a
worst-case scenario. But I'm not convinced that that's the case. It
seems to me that the recession could last somewhat longer and be a bit
deeper than we're forecasting. Both our forecast and the Greenbook
forecast seem to me to be quite reasonable. But I think the
uncertainty surrounding the general economic situation and the
situation of the Persian Gulf threatens any potential rebound in
consumer confidence and consumer spending.
The deterioration of public confidence or the lack of
confidence in the banking system also is going to be a major factor.
The credit crunch perhaps is not getting any worse, but the
announcements that keep coming forth from the press and on the talk
shows about weak bank earnings and the potential FDIC losses and a
deficit in the FDIC are really quite adversely affecting sentiment and
raising considerable concern about the public costs of dealing with
these problems. And the rise of bankruptcies may be working in the
same direction. My point is that even though I believe the Greenbook
forecast is a reasonable one, although a bit rosy, I think the risk is
still very much on the down side.
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE. In the District, weakness is widespread. I
suspect we have several more months of downturn, with the beginning of
the recovery more a second-half phenomenon than a second-quarter one.
Attitudes are really very, very cautious both among business people
and individuals. And we see bank assets continuing to slide, with a
couple of banks close to the edge. Real estate is probably several
years away from recovery, especially on the commercial side.
In the nation, I think the staff forecast, while well thought
out, is on the rosy side. We can't be very sure of any forecast at
this point. I think we just need to keep an open mind and stay alert
to incoming information. I'd rather err on the side of too much
stimulus at this point rather than too little because I think the
costs of misjudging and having a prolonged and deep recession are very
[high].
Having said that, I think we have to be prepared to offset it
with some tightening at some point. But we simply can't afford to

2/5-6/91

-25-

have a prolonged, deep recession, given what is going on in the
financial system.
CHAIRMAN GREENSPAN.

President Syron.

MR. SYRON. Actually, Ed Boehne and others have said much of
In terms of the situation in New England,
what I wanted to say.
unfortunately, I don't think one can characterize it any other way
than as dismal, with pessimism on the edge of panic. At this point
there really is no source of strength with the possible exception of
Patriot missiles for which Raytheon is running three shifts a day,
seven days a week. When people turn on CNN there is almost a perverse
desire to see another one go up because it means more production!
MS. SEGER.

How many people do they employ?

MR. SYRON.

About 2,000 in that particular facility.

There is some export strength. As for employment, though we
started at a substantially lower unemployment rate and a higher per
capital income [unintelligible] the 1973-75 recession years, the
decline in employment we're seeing in New England now is at a
substantially faster rate than at any time in the postwar period.
That also holds true for the change in growth in personal income.
This is having the impact you'd expect. Retailing is extremely soft;
we're seeing very widespread discounting of all merchandise. When we
"Once this inventory is gone we are not
talk to retailers they say:
Actually, that
We're tired of doing this."
building any inventories.
may be somewhat favorable in the longer term. We're seeing a change
in the composition of the retail outlets, even in fairly affluent
Tonier places are closing
neighborhoods, more toward discount stores.
and there are more vacancies. And we are seeing price improvements
going along with this.
As you have all read, we have an extraordinary degree of
financial nervousness. It's to the extent that on the talk shows
every morning as you're driving in you can dial up and get the Tracy
Report and for $20, which you can charge to your Mastercharge, you
will be sent a list of safe Swiss banks where they say you should be
sure that you have some of your money. We've shipped out close to
$400 million in the last several weeks in emergency cash payments
People are calling in to question
[because of] runs in Rhode Island.
the safety of the FDIC.
There are some real concerns about our larger
and some other mutual
institutions.
funds and insurance companies are raising questions with us about how
they can be sure that they'll be protected if they have a fail in a
repo transaction during the day and it goes into overnight or if they
send in funds in anticipation of funds in an ACH transfer and an
institution is closed.
In fact they have come with proposals to have
that stuff essentially swept off the bank's books onto our books
overnight.
The surprising thing is that the banks are so panicked
about it that large institutions have come to us and asked if we can
I think the only way to look at the economy is that we have
do this.
a long way [to come] back. A friend of mine just did a real estate
forecast which is being hailed as greatly optimistic because he shows
Compared
the beginning of some bottoming out and a snapback in 1995.
to a lot of other people's forecasts, actually it is relatively
optimistic.
The recovery there is going to be quite slow.

2/5-6/91

-26-

As far as the national economy goes, it seems to me that an
awful lot has to do with what happens to confidence. Mike I think
pulled everyone's line and appropriately so by saying "rosy scenario."
I have been inclined, as have others, to accuse the forecast of being
somewhat rosy. But in particular I think the simulations that Mike
showed at the end are very useful in dealing with that.
So much
depends on confidence.
No one knows how long the war is going to
last.
My own naive view of this was that if we had a sort of Nintendo
war that was over in a week, there might be some great exuberance and
people would feel like they should go out and spend. But even if this
war goes on for several more weeks or a couple of months, I don't see
As far as
it leading to a great bounceback in consumer confidence.
the oil price impact on confidence, relatively recently we've seen
some improvement in oil prices. And I do have to admit that I bought
the credit crunch story late in New England and now have to eat crow
I think the
with a lot of people and admit that they were right.
chart you showed was very useful but we're not at the high point
nationally in terms of where we'd be [with respect to] a credit crunch
number. All those things weigh a little on the down side, so I'm
inclined to think that the forecast may be slightly or a little more
than slightly optimistic. But if that's the situation, as I say, I
think the simulations or the scenarios that were shown at the end [of
Because of my own, perhaps biased,
the chart show] are the way to go.
concerns about financial fragility, I'd be prepared to take out some
insurance now with the notion that we would, as Ed said, make a
commitment that we'd be willing to turn quickly if we're wrong and we
don't need it.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. Well, I was hoping I wouldn't follow Dick because
I don't have any colorful adjectives to use to describe the District
economy!
I guess I would have to say it's mixed. The rural areas,
because of the importance of agriculture, continue to do reasonably
well.
One exception is the areas where wood products are important.
It took a little longer to hit them than I might have thought, but
clearly because of the weakness in housing that sector has
deteriorated. On the other hand, in the Twin Cities there is a lot of
concern about many of the issues we've already touched on this
afternoon. And while the objective measures of economic activity are
still reasonably good, there are lots of signs of at least imminent
softness in the economy.
With regard to the war, I haven't been able to judge what it
has meant psychologically. There are a couple of objective things.
Some of the large corporations have either eliminated or severely
On the other
curtailed foreign travel as a consequence of the war.
hand, some of the firms that clearly have military business said their
orders have just taken off. There is no question about that. The
response has been large and very quick, and they, of course, are quite
positive.
With regard to the national economy,
guess I'm not as confident as the staff about
quite as quickly and quite as robustly as the
seems to me that even if this turns out to be
recession, it could well last into the spring
summer.
In that regard, I thought the latest

like many others, I
the recovery occurring
Greenbook suggests. It
a garden variety
and maybe even into the
employment report was

-27-

2/5-6/91

more or less consistent with that--suggesting that maybe this is a
garden variety recession but that it has a way to go.
I can't resist commenting a bit on the credit crunch and the
I think maybe we are exaggerating the effects
real estate situation.

of the credit crunch, at least in that area.

In a sense we do have an

inventory problem in the economy.
It's not in manufacturing; it's in
real estate. We simply have too many office buildings, too much
retail space and, in many parts of the country, too much residential

space. We know that prices are going to decline in that environment
and they have. I don't happen to think that additional credit
availability would help the situation at all. I can't think of any
responsible way of addressing this problem. We're really paying for
the excesses of the 1980s both in the real estate market and in
financial institutions. We have to work our way through those. We
have to let the market deal with this because the excess supply is
apparent. As I say, I don't see any responsible way out of that.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. After only a couple of days on the job, I don't
have a lot of firsthand knowledge of the economy in the Eleventh
District except for the residential real estate market. I find myself
buying into a rebounding market and selling into a market which is
declining fairly rapidly. The Eleventh District, as I'm sure you are
aware, ended 1990 out of sync with the rest of the country. It was
either somewhat stronger or less weak, depending on what measure one
looks at. Employment growth held up much better than it did in the
national economy. In the fourth quarter there was employment growth
not only in the government and private services sectors but even
slight employment growth in the manufacturing sector and fairly
substantial employment growth in nonresidential construction. Most of
the growth occurred in the first two months of the fourth quarter and
then the weakness started in December. Of the states in the Eleventh
District, the strongest was New Mexico with total employment growing
by 3.6 percent at an annual rate; in Texas and Louisiana growth was at
annual rates of about 2.5 and 0.6 percent, respectively. Part of this
had to do with the composition of the energy sector rather than
primary oil or primary gas. Gas has been very weak and employment has
been shrinking there. Oil drilling hasn't gone up very much in the
Texas and New Mexico areas, but employment in that industry has grown
somewhat as existing wells have been worked more intensively. Also,
the additional profits and incomes that are resulting from the higher
oil prices have added to the liquidity and spending power of the
sector and have helped that part of the country do a bit better than
the rest of the country.
As for the national economy, I believe I would be describing
the Dallas research staff's view accurately in saying that they really
have no quarrel with the pattern of the Greenbook forecast. They just
believe that the expected rebound is not likely to be as sharp as the
Greenbook has it.
CHAIRMAN GREENSPAN.

President Guffey.

MR. GUFFEY. Thank you, Mr. Chairman. The overall pace of
economic growth in the District appears to be slowing somewhat, due
mostly to weakness in manufacturing and construction. Automobile

2/5-6/91

-28-

manufacturing, for example, which we share with the St. Louis
District, has weakened further. But the District aircraft
manufacturers reported improvement in sales of business jet aircraft

and as a result are showing a good deal of strength.
activity in the District remains
projects, such as a large public
the weakness in both residential
I might also say in reference to

Construction

weak overall but public works
project in Kansas, continue to offset
and nonresidential building activity.
state and local spending that

throughout several of our metropolitan areas there appears to be on
the shelf--the bonds have been sold--infrastructure construction that
will be commencing in 1991 and will hold up that sector somewhat. The
oil price volatility and uncertainty about the outlook for oil prices
is slowing activity in the District's oil patch. And sluggish export
demand has led to weak prices in wheat, corn, and soybeans. On the
other hand, the livestock prices continue to bolster farm income, and
I would characterize the rural areas as being fairly optimistic.
There is one vignette I'll add to Bob's:
In talking with a
restauranteur who has stores across the United States in the mid to
upper range of restaurants, they also found that [their business]
virtually closed down on January 16th, 17th, and 18th. But by the
first of February they were back at a level that they found
encouraging. They attributed it largely to CNN and people sitting in
front of the TV to determine what was happening in the Gulf war.
As to the Greenbook forecast, we also believe it to be rosy.
That is, the pickup in the second quarter seems unlikely to us but we
believe there will be the start of a pickup in the second half-probably in the mid to late part of the third quarter. We have growth
about a percentage point below the growth projected in the Greenbook
for the year 1991 but a percentage point above that projected in the
Greenbook for 1992. So, averaging it out, the staff forecast does not
look unreasonable to us; it is simply the timing and the contour of
the recovery that we believe may be different than in the Greenbook.
I would say that if the war continues beyond midyear, then all bets
are off as far as we can tell. As I understand it, the best guess is
that it should be over by mid-April.
CHAIRMAN GREENSPAN.
MR. PRELL.

In the a.m!

CHAIRMAN GREENSPAN.
MR. GUFFEY.

The 18th!

Saudi Arabian time.

Thank you, Mr. Chairman.

CHAIRMAN GREENSPAN.

President Black.

MR. BLACK. Mr. Chairman, I think the staff has done a very
thorough job in putting together their economic forecast but, like so
many of the other speakers, I believe that it may be a bit on the
optimistic side and that the risk of error with respect to real GNP is
at least moderately tilted toward the down side. I think the staff is
probably about right on its guess that the war may end in the spring
but my fear is that it will be the late spring rather than the early
spring. In any event, while the war is going on there are going to be
a lot of continuing uncertainties and periodic setbacks and it's going
to damp both business and consumer confidence as well as sentiment in

-29-

2/5-6/91

the financial markets. Now, these negative impacts are going to be
the situation in the
amplified, I think, by three big problems:
Northeast; the perceived fragility in the banking system; and the
extreme weakness in commercial real estate in substantial parts of the
country. So, we think there's a significant chance that the economy
will recover later and probably less strongly than the staff is
projecting. Our guess would be that the recovery might begin in the
third quarter rather than in the second. And we expect only about 1
percent growth in real GNP on a fourth-quarter-to-fourth-quarter
basis, which does not put us comfortably within the central tendency,
as Si was, but labels us as an outlier in that the staff is predicting
about 2 percent growth over this period. We also are an outlier on
the inflation side because we're more optimistic about inflation under
the assumption that we can avoid a long and destructive war in the
In addition to the effects of the declining oil prices on the
Gulf.
CPI, we think that the underlying trend rate of inflation is going to
begin to respond in '91 to the considerable deceleration that we've
I
had in the growth of the aggregates over the last several years.
think it's quite possible that our core inflation rate for the CPI may
be down to around 3-1/2 percent or lower by the end of the year.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. On the national scene, we're very close to the
median; I'm not sure that has ever happened before but there's some
In the short
statistical probability of that and I guess it occurred.
run, not surprisingly, our staff would view the major risk as being
whether the assumption with respect to money growth, something in the
4 to 5 percent area, is realized. I guess I'm a little schizophrenic
about that because I'm worried that it may be realized and then some.
And in that context I think Mike's scenario 2 here is very instructive
We
because we could have some considerable challenges ahead of us.
have to get through the one we're in right now but, as we've discussed
in the past and as Bob Parry mentioned, I hope we will be ready to
respond in the other direction when we need to.

average.

CHAIRMAN GREENSPAN.
What is the peak?
SPEAKER(?).

That 8 percent funds

[Unintelligible]

rate is a quarterly

percent.

MR. MELZER. In terms of our District, I don't have a lot to
say. Our economy is stagnant, probably declining slightly. Perhaps
with what is going on in autos and cancellation of the A-12, we'll
have some further weakness showing up.
Essentially, what has been
going on is that manufacturing weakness, which is not as great as it
is nationally, is being offset by strength in services--health
services and business services, generally.
Just one last comment on the banking sector:
I would say
that when the year-end numbers come out, some weakness probably will
show up; but our banks are still in relatively good shape. I was at
our Memphis branch a couple of weeks ago and one of the bankers said
"This kills me to do this, but I've got to tell you that I don't think
additional stimulus from the Fed is really going to help. We're
swimming in reserves; we don't know what to do with them. And the
problem is that when we try to lay them off, eventually we get to the
New York money center banks and we don't necessarily want to sell very

-30-

2/5-6/91

much!"
Another banker--these were both large bankers in that area-said that they have cut their fed funds selling by 70 percent in the
last year.
I took that to mean in terms of approved names on the
list.
So, that's a pretty dramatic shift.
MR. PRELL. Mr. Chairman, if I might just inject a point that
perhaps we should have made in talking about that last simulation:
According to our model, the additional M2 in 1991 would be about 2-1/2
percent.
So, to give you some-MR. MELZER.
MR. PRELL.
MR. MELZER.
MR. KOHN.

That's the incremental amount, Mike?
Yes, incremental M2 growth in 1991.
To bring it up to a total of what, Mike?
Seven percent.

CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN CORRIGAN. On the anecdotal side, the only
thing I can say that is unambiguously good is that the weekend before
last in Tampa, Florida, there were actually no signs of a recession.
Quite to the contrary.
MR. KELLEY. Playing for the championship for the Second
Federal Reserve District!
VICE CHAIRMAN CORRIGAN. That's right.
But on a more serious
note, the impression that I get from talking to businessmen and women
and directors and others is that the statistics have basically caught
up with their expectations, which had been distinctly sour for some
time prior to the point when [the weakness] really showed through in
the statistics.
As I've said before, I do think that the real estate
situation, at least in the greater New York metropolitan area--while
not in the same category as it is in parts of New England--has not
bottomed out.
I think Gary's point is absolutely right:
The excess
inventory of real estate of all kinds is going to take a long time to
work itself out.
It's not just in the Northeast; I get the impression
that this is pretty much a nationwide problem. Also, as several
people have mentioned, one does get the impression that at least for a
while in mid-January the so-called CNN effect was quite real in terms
of retail operations and restaurants. They say it even showed through
in the theaters in New York City. I have no independent evidence of
that.
But notwithstanding all of that--and this is where we come to
the great dilemma--if you go through the exercise of looking at the
economy sector by sector, regardless of whether you rely on a formal
econometric model or rules of thumb that you may have acquired over
time, it's not that hard to see a short recession. Based on my own
purely subjective instincts, having spent a lot of time going through
that kind of analysis, if I had to make a guess I would probably say
that the chances of an outcome that is somewhere around the center of
the central tendency are probably 50/50.
Indeed, I would think
there's at least some chance that we could get as robust a recovery as
Mike has in his forecast. But, of course, if we do get that, then we

2/5-6/91

-31-

have an obvious problem of the second scenario on the last page of the
chart show.
On the other hand, I would say that the chances of an outcome
that is weaker than the central tendency--again this is not scientific
--are probably about 15 percent or 20 percent. But unfortunately, I
can't rule out the possibility of an outcome that is very
significantly weaker, either. Now, I don't think that's the likely
outcome but if you asked me whether we could have a long and really
deep recession I think I'd have to say there's at least a 10, 15, or
20 percent possibility of that.
Again, I don't think it's anywhere
near the likely case, but I don't think one can rule it out.
And the
reasons it can't be ruled out in part get to the things that Gary was
Some of
the overhangs of the excesses of the '80s.
talking about:
Mike's charts on corporate cash flow positions and debt positions and
things like that I don't think really capture how much of an overhang
those things are.
But on top of that I do think what we have is a
recession that in the first instance is being driven by expectational
factors, some of which are conditioned by those earlier excesses. But
whatever the precise anatomy of the recession, the character of it, as
I see it, is different enough that it is that much more difficult to
judge how things will work their way through it, even in terms of this
question of how much bang for the buck do we get from lower interest
rates.
I'm not sure.
And because of some of these behavioral and
expectational characteristics of current patterns of behavior it's
very, very difficult to make that judgment.
On the credit crunch issue, again, I essentially agree with
Gary's point. But I think there's also a little more to it than that.
One really does get the impression--it's more than an impression
because I have been told point blank even by the best banks in the
Second District, and at least one or two of them are among the best
banks in the country--that the banks simply are not doing things on
the credit extension side anything like the way they used to, even to
those who would have been considered good customers 8 or 9 or 10
months ago.
And the rate of foreclosures as opposed to restructurings
or stretchouts, especially in the real estate sector, is another
symptom of that phenomenon. So, while I think it's fair to say that
the credit crunch is exaggerated, especially in political circles, I
think it's entirely fair to say, as Gary did, that it tends to reflect
these excesses of the past.
I still think it is a very important
consideration in the current setting, especially as it bears on this
all important question of confidence and expectations.
That is one of
the many reasons why I find that I can be so ambivalent about what I
think is going to happen. I sit down with Dick Davis and his guys and
they convince me in two hours that Mike Prell is right, or more or
less right, and not to worry. Then I start thinking about it and I
say:
"I guess I am worried."
And that's about where I am, Mr.
Chairman.
CHAIRMAN GREENSPAN.

Lee Hoskins.

MR. HOSKINS.
The District's [economic] activity has softened
since October but is still generally stronger than the nation's.
The
unemployment rate in Ohio is up about 1/2 point but employment is
about the same; it hasn't changed much. In fact, if you look at
[initial unemployment] claims, the peak seems to be in the first week
of January at 44,000 and they declined gradually each week to around

2/5-6/91

-32-

24,000. The hardest hit, of course, are autos and auto-related
industries; that has impacted steel companies, which are operating at
about 70 percent. [Unintelligible] cited a recent survey by a bank of
its customers and 85 percent of respondents said that in terms of new
projects they have no trouble getting credit; in terms of operating
monies, 91 percent said they have no problem. As for straight-out
anecdotal information, the international airline with which I'm
familiar, since my wife works for it, has offered a month off without
pay to anyone who wants not to work. That's clearly associated with
the war and lack of travel.
And you're probably all waiting for my stainless steel strip
index, but I'm not going to give it to you because I've latched onto a
new one:
the Smuckers Index!
I had a chance to talk with Paul
Smucker, an elderly gentleman who has been through many business
cycles and he told me that apple butter sales remain relatively soft
and that's a good sign because during deep recessions apple butter
sales soar.
[Laughter]
So, I'll be reporting to you on apple butter.
a jam!

CHAIRMAN GREENSPAN.
[Laughter/hoots]

It sounds to me as though business is in

MR. HOSKINS. I'll make my comments on the national economy
really short after that! As I look at it, I agree with the staff's
view and also with what the Chairman has been saying. This is
principally a situation where the downturn occurred as a result of the
war and the consumer sentiment associated with that.
With respect to
problems in real estate, I think Gary Stern has it right: It's a longterm problem; there's no easy way out of it.
And I don't think
monetary policy can help either one of those situations.
Now, I'm
sitting here looking ahead at policy. There's a lag that we all know
about, and we have a forecast that says the economy will be rebounding
at about the time that the average lag says [current] policy is going
to have an impact.
So, I have some concerns about that, but I'll save
those for Don Kohn. What I think we, from the point of view of a
central bank, ought to be focusing on--[unintelligible] some of the
concerns that people around the table have particularly from the areas
that have been impacted hard--is what is happening to money. Perhaps
some of you are interested in credit, but I would tend to focus on
money.
If we're going to worry about anything, I think we ought to
worry about making sure that we don't permit a procyclical monetary
policy at this point.
CHAIRMAN GREENSPAN.

Governor Mullins.

MR. MULLINS. My view of the economy is that the fourth
quarter was not quite as bad as I expected; it looks like a
contraction that is accounted for mostly by inventories, with much of
it in the auto industry. The downturn still seems to be synchronized
in the sense that inventories are in line with no serious imbalances,
with the one exception of the commercial real estate inventories which
are out of balance.
But we have yet to see the imbalances.
More
recent data continue to have a sour cast to them, although the leading
indicators were up in December; durable goods were also up but, of
course, that [increase] was focused in certain areas.
It bothers me a
little that the purchasing managers index is still dropping and
consumer confidence has yet to bottom out.
Indeed, I agree with Jerry
that the hard data are kind of catching up with the attitudes, and I

2/5-6/91

-33-

I noticed this
wish the attitudes would stop moving for a while.
afternoon during the break that the 10-day auto sales reported this
afternoon were at a 5.2 million annual rate whereas people were
expecting a 6.3 million rate or something of that nature. When I look
at corporate finance, it doesn't lead me to forecast a vigorous
I think the Greenbook mentions that 1990 was a year
rebound either.
of record defaults; that's really probably just the overhang of the
junk bond market. But 1990 was also a year of record downgradings in
bond ratings and almost a record in dividend cuts--probably the
greatest number of dividend cuts and eliminations since the late
1950s.
And that just suggests that corporations, like banks and
consumers, may be in for a period of retrenchment--a period in which
they will rebuild their capital structures and bond ratings before
they're ready for aggressive growth again. Against this doom and
gloom of recession and financial fragility, the stock market continues
to charge ahead and [the DOW] will approach 3,000 if it continues
another few weeks at the current pace. Why is this happening?
Perhaps the most common indices we look at are more weighted toward
multinational companies and reflect the prospects in some of the-CHAIRMAN GREENSPAN. But the stock prices of smaller
companies have gone up even faster.
[Yes], the difficulty is the smaller companies
MR. MULLINS.
It is an interesting scenario when our
have gone up even faster.
staff says we will have downgradings this year. I assume from
watching the screen that the downgradings are continuing at a pretty
rapid pace, yet their stock prices are going up. Now, of course, that
can happen in a period of uncertainty; when you're a highly leveraged
company your bond prices can go down but your stock prices can go up.
Still, I think it's hard to escape the conclusion that the stock
markets see better times ahead. And while it is true that a lot of
publicly traded companies do have access to the public debt markets
and commercial paper markets, when you get down to the broad equity
markets this is not true and that includes some of the growth
So, I would say that the long bond rate, which is now
companies.
approaching 8 percent, confirms that the recession is here and
inflation is under control; but the stock market tends to suggest that
I don't know how much
there's a light at the end of the tunnel.
confidence one would want to put in the stock market as a forecaster,
but the stock market has a rosy forecast. So, overall I see the
There's real uncertainty
economy still contracting at a slow pace.
What
about the war. What will happen when the ground war starts?
I tend to
will really happen to consumer confidence in that case?
I also
agree that the prospects are good for a rebound this summer.
that it's not
tend to agree with what a lot of people have said:
I think this-likely to be quite as robust as [the staff] forecast.
People
the war, the recession--has been a pretty sobering experience.
haven't experienced a recession in a long time. And with all the bad
news about the financial system, it may take consumers and businesses
a while to rebuild confidence.
As for the banking system, the credit crunch has been
I think some progress has been made
discussed pretty thoroughly here.
in the [banking] industry. They made it through the end-of-year
financing pressures and now not only has the fed funds rate come down
but the other money rates--the CD rates and commercial paper rates-have come down pretty substantially, by [125] and 175 basis points.

2/5-6/91

-34-

This has really helped to open up the margins it seems to me; even
bank stock prices have rebounded a little. And it has opened up a
spread that might accelerate the process of financial healing in some
of those institutions. We also have gotten through the fourth quarter
and the results of another round of commercial real estate problems.
The industry has absorbed another round of publicity about the bank
insurance fund being broke; and also the public impact of the failure
That was the most visible weak
of Bank of New England is behind us.
Looking ahead, we may have
institution overhanging the market.
another quarter or so of bad results to get through. And I'm afraid
we will have a lot more publicity on the bank insurance fund that
we'll have to put up with as well as a lot of publicity about the
banking reform legislation, which will be accompanied by comments
I'm also concerned about the
that the banking system is in trouble.
weak elements in the banking system and the need to get some of those
weak components cleaned up rather than just waiting for them to fail
I don't know exactly how to do that,
into the bank insurance fund.
but I think they could be a drag on the economy and on the psyche for
So, overall on the
a long time unless we can think of how to do that.
banking system, I think we've had some progress, primarily in that the
lower rates have helped the banking system; but there is a way to go
I noticed noncompetitive bids in the
in working through the bad news.
three-year note auction were only $769 million, which is far below the
$2 billion that people were expecting and the $2-1/2 billion that was
the record.
And what bothers me about the financial system is not
only the direct impact on lending but also that the bad news about
banks feeds directly into consumer confidence it seems to me. And
then there's also the low probability but serious outcome of a crack
in the financial system.
As others have mentioned, I think we have a good dose of
the reduction in the dollar--even as we
stimulus in the pipeline:
speak, probably. Oil prices have come down without a real rebound in
consumer confidence yet, as Dick noted, which would suggest that it's
the war that is affecting confidence and not just the oil prices. And
the fed funds target has come down 200 basis points since the summer;
[rates on] long bonds are down probably about 100 basis points. Most
I know there is a
of this has taken place without disrupting markets.
lot of uncertainty left relating to the war, and I still have concerns
about the financial system; a lot of these concerns are captured in
the money and credit data and I continue to think we should focus on
money and credit, which are ultimately and appropriately our
responsibility.
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE. Mr. Chairman, there are three things that puzzle
me about the staff outlook for the economy as reflected in the
First, the projection is based on far from firm and
Greenbook.
certain assumptions that there will be a quick and decisive end to the
Gulf War and no substantial damage to Saudi productive capacity that
would interrupt supplies. These assumptions underlie the further
assumptions that oil prices will stabilize in the low $20s and
consumer confidence will rebound promptly and decisively at war's end.
No "what if" alternative, or worst case scenario is offered against
which to make judgments pertinent to the proper course for monetary
policy.
Second, the degree of fragility in the economy is not really
There is no quick end in sight for commercial real estate
addressed.

-35-

2/5-6/91

problems, and certain large segments of the banking industry are
continuing to downsize and restrain loan growth. The current timidity
of bank lenders is being compounded by depositor anxieties and deposit
erosion to the perceived safer haven of government securities or money
market funds. Third, it is not clear in my mind what role the banks
are expected to play in the projected recovery. If fund flows are not
to depository institutions but rather to Treasuries and to the money
market funds, they won't be reflected in lending activity. In my view
the economy is [experiencing] a paralysis of confidence which may not
respond to the classic monetary policy moves to increase reserves and
lower rates. Anxious consumers are loathe to spend or borrow.
Businessmen are looking for clearer signs to invest, whether in
inventories or plant. Governments plagued at the federal, state, and
local level by unmanageable deficits are in a weak position to offer
stimulus. And bankers, paranoid about overdiligent examiners, worried
about capital levels, uncertain about the economy, and finding
prospective borrowers weakened by recent economic trends, are refusing
to lend. This spells out to me a recipe for economic stagnation. And
I'm at a loss to understand how monetary policy can deal with it
beyond sending signals that we hope the lookouts will see and
interpret properly.
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. Mr. Chairman, I would accept the staff's
forecast or something close to it--maybe a bit less robust--as
probably the most likely outcome. And, certainly, it's positive and
desirable. But the concerns I have turn out to be ones that have run
through this discussion over and over again. That is, I am struck in
a way that I've never been struck since I've been here that the risk
of war analysis is very, very heavily skewed on the side of caution.
If we get a recession that is mild and ends soon and the rebound that
follows it, that is going to present questions for monetary policy,
without any doubt. But they will be happy kinds of questions, if you
will, and they are going to be in a positive context. Again, that's
probably the most likely scenario.
But I think the positive consequences that would flow from
that result are not nearly as significant as their mirror image on the
down side--the negative consequences that could flow if we get the
opposite scenario. If the situation turns out to be much more severe,
along the lines that Jerry described a few minutes ago, that could
have some very nasty consequences that are much larger in scope than
their positive counterparts on the other side. They're broader in
scope as far as their impact on our society goes, and I think they are
far longer-lasting in the effect they could bring. That has some
likelihood, whatever it is, and it's certainly greater than zero-perhaps 15 percent. I don't know [the precise number], but there is
certainly the statistical probability that we could get a much more
severe result. If we do, and if we wind up with the seriously
crippled banking system that John LaWare fears, for instance, it would
be very difficult for that kind of a banking system to make it to the
time when the economy was coming back around. I'm not sure where the
financial contribution and support would come from if the banks have
been crippled before that outcome started to take effect.
Obviously, the process of watching the banking system become
crippled, if that should evolve, would have a severe impact on

-36-

2/5-6/91

consumer and business confidence and would exacerbate the situation.
We could have a very, very large deficit built up, which would have a
a much larger debt
very long tail as far as its consequences go:
burden; the further fragility that would result from leveraging up the
economy; and all those kinds of things that would follow from the
I think it would
leveraging up that we're all familiar with.
foreclose--or at least for a very long time severely impinge upon--a
variety of social and political options that we need to have available
to us in this country as far as rebuilding our infrastructure goes,
It would have a
[ranging] from education needs to rebuilding bridges.
very severe impact on business investment down the line and on various
elements of our international position. And I would think that it
would have to have severe inflation implications that really aren't
Another point that I don't think
necessary for us to have to undergo.
is inconsiderable in the long-term scheme of things is that it would
have a very severe impact on the possibility of constructive banking
reform in the near future. We think that the time may have come for
an effective reform movement. And if we got into a very severe
recession right now, that would certainly doom the possibilities of
the passage of a good package in the near term. So, we have a severe
skewing that I haven't been conscious of in my thinking before, and I
think it necessitates our looking at some things that sometimes we
don't have to spend a lot of time on--a broader array of
considerations and potential downside concerns as well as some very
long-lived potential downside results that we would all hate to see
ensue. All of which leaves me intrigued with the thought of
investigating and considering further scenario 2 on the last exhibit.
CHAIRMAN GREENSPAN.

Governor Angell.

MR. ANGELL. This event clearly is an event that doesn't
happen very often. We really haven't seen [in a long time] such a
switch in preference from wanting to be leveraged to wanting to have
liquidity. We haven't seen such a period in which the creditors are
not anxious to lend. This is a very significant event and it's an
This economy has
event that I don't think we've seen since the 1930s.
a lot of factors that make for a very significant departure from the
way we went through the events in the 1930s and the way we're going
I agree with the staff's estimate in regard to
through them today.
There are considerable
the areas in which there are strengths.
strengths. And I tend to believe that of the factors on the export
side particularly. It seems to me that this $20 billion per year
payment from abroad--I don't care how you classify it--is really like
If you put that together with the
an export of a military service.
other factors, our balance of payments certainly swings rather
dramatically. But that swing in the balance of payments does mean
that a saving rate move is going to go with it, and certainly the
government sector is not going to be the source of that savings. And
So,
I doubt that the corporate sector is apt to add to that savings.
I tend to think that there is somewhat less robust final demand in the
Frankly, if it occurs in the
consumer sector than I would expect.
second quarter and it becomes evident that there are no more interest
rate declines, then I would expect the foreign exchange value of the
I would expect the
dollar to make a very significant turnaround.
foreign exchange value of the dollar to head back to the highs of 1989
That, of course, may then mean that later on we would
in rapid order.
There is a significant downside
get a slowdown on the export side.
risk that if monetary policy focuses on what I call a fairly weak

-37-

2/5-6/91

economic scenario, monetary policy will not be neutral but in fact
could be quite damaging to the spot [dollar] prospects.
That is the

most dangerous event that we're looking at here:

to have the foreign

exchange value of the dollar move into a decided destabilized
position, which I think could cause the bond markets and the stock

markets to reverse rather rapidly.
So, I'm looking at a scenario that I think is somewhat like
[what was described by] some of the rest of you, but I tend to believe
that monetary policy, if we're not careful, will make it worse rather
than better. From June of 1989 we've decreased the fed funds rate by
365 basis points; that's a rather significant move. But it focuses

upon the wrong rate in regard to what ails us. The right rate is the
rate that the real estate market is facing, which is the long bond
rate. And now for the first time in a long time we actually have long
bond rates lower than they were a year [earlier].
And it seems to me
that we are in a rather precarious [position] if we believe--and I
guess I take this from Gary Stern and many others--that these
corrections don't have to take place. If we believe that, I think we
are mistaken. I think the correction with regard to household savings
is underway and is going to take place and I think the use of monetary
policy to deal with that has to be very, very carefully done so as not
to make it worse rather than better. If we do not destabilize the
situation, it seems to me that the rebound is going to occur. There
are many factors [signaling] that. But if the dollar becomes
progressively weaker, I don't think that will help us a bit on exports
because in the mood of a war economy, with many countries in
recession, that kind of environment could foster protectionist
sentiment that could be very, very explosive.
So, even though I'm not quite as optimistic on the real side
as the staff, I do agree with the staff's [assessment of the] sources
of strength; I think they are there. And I'm comfortable with that,
if we do not harm this situation. I would admit that I am rather
bullish in that if the Federal Reserve policy doesn't destabilize the
situation--and I'm going to sound a little silly perhaps when I say
this--I would not be surprised if my forecast of the CPI at 3.2
percent [is wrong] for 1992. The reason my CPI is so high is because
of what the foreign exchange value of the dollar put us through; and
once the dollar begins to rebound I can see CPI inflation doing very,
very well. And then [we could] get the correction that we need, which
is mortgage rates in the 7 percent range in order to bring this about
where we need it. You see, real interest rates cannot be homogenized
at this point; there are real interest rates in every market. And the
real interest rate for houses right now is pretty darn high. In a
falling real estate market--when one does not expect house prices to
rise, and even expects them to fall--real interest rates even after
taxes may be extremely high. So, I think the key is getting long-term
bond rates down; and that's a lot harder than getting short-term rates
down.
CHAIRMAN GREENSPAN.

Governor Seger.

MS. SEGER. I think most of my points have been made--12
times--but I will start off just by explaining an experience I had
when I dug into my files to see what I had sent in this time last year
for a forecast because I try to key off that when I do the next goaround. Last year I was the source of the low end of the range, in

-38-

2/5-6/91

case any of you have forgotten.
I had 1 percent real growth fourth
quarter-to-fourth quarter, which was off the bottom of the chart. And
what is making me nervous is that that turned out to be too high; as
you know, it came in at about .3 percent.
Anyway, having said that, I
love Mike's forecast and I hope it is realized. Even though I'm
leaving, I certainly hope that this is what materializes. But I must
say that I'm a little skeptical that it will.
I'll just mention a couple of things. One relates to the
assumed bottoming out of housing or the investment in residential
structures.
I realize I'm biased because I just met with a couple
hundred homebuilders last month, but I really think there is a problem
there.
I think the credit crunch is still present in that industry,
particularly on the side of builder financing.
The United States is a
big country and housing markets are local; there are zillions of them.
They are not all like Boston or Denver or Dallas. There really is a
housing shortage, especially in low and moderate income housing. We
So, I hate to dismiss this as something
can use some more structures.
that we don't need to be concerned about. And I don't believe that
we've seen the bottom yet on this; I don't think it's going to bottom
out in the second quarter because of this credit situation. Also, on
the consumer side:
I would love to see the consumer come roaring back
into the stores.
It used to be VE day or VJ day--I'm aging myself; I
don't know what this would be--[VS] or something.
MR. SYRON.

VI.

MS. SEGER. VI or VIQ. Anyhow, I would love to assume that
[that will happen].
I have no idea when the war will end but,
whenever it does, I just don't think that in and of itself is going to
cure all the consumer confidence problems because I think part of the
confidence problem involves the war but another big part involves this
continuing flow of bad news about the financial system. It's like
having cold water run down your back continually and a lot of people
are reacting that way. That's part of it, but also consumers are
still very overloaded with accumulated debts.
I saw in one of the
presentations the quality of consumer debt deteriorating, mortgage
defaults growing, and that sort of thing. So, I just don't think
consumers are in shape to run right out and go on a spending spree if
they feel like it.
Finally, on the assumption that exports are really going to
carry a big part of the load:
again, I would like to assume that.
I'm impressed with how we have gotten our exports turned around.
But
as I hear about the conditions in other countries, such as Canada,
that are our major trading partners and I think about their problems,
I just wonder how strong those markets are going to be and, therefore,
whether our exporters--no matter how good they are and how good their
products are--in fact can achieve these kinds of results. Anyway,
this certainly would be my preferred outcome; there's no doubt about
it.
But I just have a feeling that the timing is somewhat too
optimistic and that whenever the bottom does occur the rebound from
that low point will be more gradual and less sharp.
CHAIRMAN GREENSPAN. Okay.
Why don't we recess until
tomorrow morning at 9:00 a.m. You may leave your papers here.
[Meeting recessed]

-39-

2/5-6/91

February 6, 1991--Morning Session
CHAIRMAN GREENSPAN.
MR. KOHN.
Appendix.]

Mr. Kohn.

Thank you, Mr. Chairman.

[Statement--See

We're open for discussion on
CHAIRMAN GREENSPAN. Thanks.
Any questions?
Dick Syron.
this issue. Let's do questions first.
MR. SYRON. Don, I find myself in great sympathy with what
you said.
I have a technical question having to do with this issue of
V2 and the credit crunch--not the New England credit crunch, but the
national credit crunch. The chart we saw yesterday in the chart show
indicated that, in terms of this particular measure of the credit
crunch, we are not in a much different place than we usually are at
this stage in the cycle. But part of your velocity forecast assigns
some weight to the credit crunch, doesn't it?
It may be consistent
with the earlier data; that's what I'm trying to get a hint on.
MR. KOHN. My interpretation of the charts--and I think Mike
had the same interpretation--was that something unusual did seem to be
happening in the depository sector. It was hard to see it reflected-in his charts, anyhow--in total credit or total borrowing really. The
flow of credit relative to GNP didn't look all that different from
past recessions--although it was consistent with a recession, which we
weren't anticipating at the beginning of the year.
MR. SYRON.
mostly from banks.

But the smaller business borrowing would be

MR. KOHN. Right.
The banking depository credit was
extraordinarily weak, and we think that's what is being reflected in
M2.
Now, part of the reason we have a velocity shift is because some
part of that weakness in depository credit doesn't matter. As Mike
pointed out, to the extent that it just reflects easily securitized
consumer credit or mortgage credit that flows through different
channels, the final borrowers--for example, households in this case-It doesn't matter to
don't even know who is holding their credit.
them whether it's a bank or someone else.
But when it seems to cut a
little further into small businesses, where information is important
and where the cost of rechanneling the credit may be rather high, then
[it does].
So, to the extent that it's easily rechanneled, we could
get an increase in velocity because the banks wouldn't need to issue
time deposits. GNP would be whatever it was anyhow and M2 would be
weak relative to GNP.
But to the extent that it cut into not so
easily rechanneled credit, it would have an effect both on M2 and on
GNP. That's why I say I think some of the weakness we saw in M2 was
reflected in GNP over the year and some of it was this velocity shift.
But the velocity shift persists.
To the extent that it does persist,
we don't need to worry about that amount of shortfall in M2 relative
to GNP.
And I think that is the part that's easily rechanneled in our
depository institutions.
MR. KOHN.

Further questions for Don?

Governor Angell.

MR. ANGELL. Don, I really have a two-part question. I want
to precede the question, though, by the comment that I thought this

-40-

2/5-6/91

section in the Bluebook on page 8 and the following pages on long-run
strategy was most helpful.
I thought you put it in the context that
is just right for decisionmaking. And I'm not trying to set you up
for the question. You mention on page 10 in that paragraph about in
the middle of the page--this is about strategy II--that "nominal
interest rates, while higher than in the baseline in the first two
years, thereafter move below those in the baseline as inflation comes
down more."
I didn't see those interest rates in the chart.
Did I
miss that somewhere?
MR. KOHN. That's because in the past we haven't shown those
interest rates in here.
In the baseline forecast, for example, we
would have interest rates averaging about 5-3/4 percent by the end of
1995--just to give the end point.
MR. ANGELL.

Okay.

MR. KOHN. We have a 5-3/4 percent funds rate in the baseline
and about 5-1/8 percent in the slower M2 [growth scenario].
MR. ANGELL.

Okay.

Could you give me those numbers for 1993

also?
In the fourth quarter of '93 it's 6-1/2
MR. KOHN. Sure.
percent, rounded, in the baseline and it's about the same actually [in
the slower M2 growth scenario].
The fourth quarter of '93 is about
where the crossover occurs.
MR. ANGELL.

I presume these rates are short-term interest

rates?
MR. KOHN.

That is the funds rate.

MR. ANGELL. Now, Don, the tough question, which I've set you
Could you tell me about the pattern of long rates with those
up for:
And to make it really tough, I'd like to know the
two scenarios?
pattern of long rates without credibility and the pattern with, you
might say, enough extra effort to bring on credibility.
MR. KOHN. Governor Angell, I can give you the deviation from
I don't have the charts showing the actual rates in the
the baseline.
baseline, but I can tell you for the corporate bond rate that by the
end of 1995 it is lower in the tighter alternative than in the
baseline by about 15 basis points.
MR. ANGELL. Yes, but what I really want to know about is the
Would the long bond rate be higher or lower if
second half of '91.
you add credibility?
MR. KOHN.

Certainly, without credibility it would be higher.

The way this works is that in the slower growth scenario--in order to
damp money growth even more than the staff forecast, given the
momentum of GNP--you have to raise interest rates. You have higher
nominal and real interest rates that damp spending gradually. That
then feeds through to inflation. How fast it feeds through might
depend on credibility effects; in the model there aren't any
credibility effects. And then the [lower] inflation will bring down
nominal rates, although you'd still have higher real rates, at least

2/5-6/91

-41-

with a backward-looking expectations [model], and a higher
unemployment rate at the end of this period under the tighter
alternative, as you see from the table.
MR. ANGELL.
So, in other words, you're saying that the first
part of any tightening would give [rise to] expectations of
further
tightening, which alters the opportunity cost of holding bonds, and
thereby bond prices would be somewhat lower than they otherwise would
be until the improved inflation effect overcomes it?
MR. KOHN.
MR. ANGELL.
important?

Right.
And that's where credibility would be so

MR. KOHN. Right.
If there were credibility effects,
obviously, that would feed through faster and bond [prices] would
probably rise; but [the markets] have to believe us.
In my mind, the
credibility comes mostly from our actions rather than from our words.
So, it would take a while for that credibility to build. But once it
did, then I believe that bond yields certainly would come down faster
than we've captured in here.
MR. ANGELL.

Thank you.

CHAIRMAN GREENSPAN. Other questions for Don?
If not, let me
start off with general comments on this issue.
I have been puzzled,
as I think everyone has been, by the extent to which our equations
forecasting M2 and the various interest rate assumptions became
progressively worse through the fourth quarter and kept a fairly large
gap in the first quarter. That's suggestive, obviously, of two
possibilities:
that there has been a shift in the function and that
we're now on a different slope, or that it's going to snap back. And
if it snaps back, that implies a dramatically different outcome than
if the existing divergence continues. My impression of the difference
In short, at this stage we
is that it is really quite substantial.
really do not have a feel for how this is going to come out--not in a
way that would make us feel rather comfortable about it, I would
suspect.
I conclude from this that we have very little basis on which
I would say we pretty much
to move from our preliminary position.
order to move one way or the
in
judgment
strong
fairly
a
have to make
other from alternative I, because I am fearful that if we choose
either of the other two alternatives we probably would be setting
ourselves up for things to go in the wrong direction. I think there
is just as much of a probability that we soon will be engendering
double-digit M2 as zero; if we could somehow hedge that until we get a
much better fix on what is going on in the numbers, I must say I would
So, I prefer to stay basically with the preliminary ranges
do that.
of alternative I. Dick Syron.
I think we're
MR. SYRON. I fully support what you suggest.
course of
the
is uncertain,
in a time when the course of the economy

world events is uncertain, and the course of the behavior of the
aggregates vis-a-vis the economy is uncertain. And in the context of
all of this, we are also in a period when everyone is watching what we
do extraordinarily closely. It seems to me that it makes all the

2/5-6/91
-42sense in the world to be
would presume that
fairly

-442/5-6/91

output,
rate and reduced
of the unemployment
And we're
throws of the agonies run
the
side.
other
the
on]
[over
to
the
potential
have
we
6 percent
a
to come back. And I think
going to need the excuse
back and raise interest rates
to come
excuse
the
us
ceiling.
gives
ceiling than the 6-1/2 percent
quicker
CHAIRMAN GREENSPAN. Vice Chairman.
ranges that you
I would maintain the
CORRIGAN.
CHAIRMAN
VICE
recommended.
CHAIRMAN GREENSPAN. Governor Seger.
that stability is good
MS. SEGER. I agree with the argument just looking at
But I was
but I
and that there is great uncertainty.
this is ancient history
realize
Appendix B [in the Bluebook]--I
we set-and the targets
do pay attention to the monetary aggregates
back: In
looking
growth,
M2
about
you
remind
the
and I just thought I'd
in 1989 we missed
on the low side;
the
on
midpoint
midpoint
the
the
missed
we
we missed
1988
on the low side; and last year
midpoint
an
be
to
ought
there
anyway,
point
some
at
me,
to
And
low side.
is
about at least a modest catching up. I guess that
think
to
effort
reason, along with the desire for some stability, that I
main
the
year
the targets that we had for last
would prefer to carry forward ranges that were set last July for this
the tentative
use we've
been assuming our targets were half-way
rather
I think
year.than
a
appropriatebut we've been low-balling it right along. I remember
pass
some
made
he
CEA,
the
at
when Beryl Sprinkel was
Anyhow,
ago,
years
few
Reports to the President.
Economic
the
of
one
in
idea
at that
of each
at the end
drawing a line related
to December 31.
I just feel more comfortable notJanuary
isn't
1
if
as
III for M2 and
calendar year and acting
using alternative
mix,
a
with
last year's ranges
go
carry
just
I would I for M3. That would
So,
alternative
alternative.
forward, which is a nonexistent
LaWare.
CHAIRMAN GREENSPAN. Governor
about the
my skepticism
Well, I want to repeat
MR. LAWARE.
at least temporarily
economy,
the
policy to affect
power of monetary
stated yesterday
game and the preference I
the
at this stage of
center
dead
off
thing
the
jiggle
giving signals that might
worry about
believe it is stuck. On the other hand, I
associated ourselves
have
that we
signal. In spite of the fact
of
effect
worry
I
,
aggregates
the
about
concern

a possible
as not
particularly
in the aggregates
growth interest
in
moves
had
we M2have
when
point
a
rates at
lower
circumstances
therecent
after
downunder
settle
to
going
is
dollar
the
where
see
that
And
rate.
funds
the
and
rate
discount
the
it may
about
although
action
of
course
safest
concern
I is thewhether our
I think alternative
raise some questions about
aggregates is genuine.
g o t t e n back into the
still has not
M2
GREENSPAN.
CHAIRMAN
alternative I range yet.
that
LAWARE. Well, I know and understand
GOVERNOR

-45-

2/5-6/91

MR. KELLEY. Mr. Chairman, I support alternative I, as you
suggest. I think we've been talking about two sets of effects that
the ranges have: the signal effect and the guidance for actual
policy. Looking back at Appendix B, I note that over a period of
years actual experience does track along with our intent in the sense
that both the ranges and actual growth have been coming down
gradually--since 1983 in the case of M2. But in any one year [growth]
varies substantially inside the range. So, actually, any of these
three ranges would give us ample room to conduct policy as we might
need to in order to accommodate the events over the course of the
year. But in the case of the signal effect, I think we're rather
locked in to alternative I. If we were to raise the ranges, it would
send a bad sign to the market relative to our inflation [credibility];
if, on the other hand, we were to lower them, it would send a bad sign
to the economy relative to our desire to help check this recession.
Therefore, I feel comfortable with the actual policy guidance effect
of any of the three, but the signal effect leads me to alternative I.
CHAIRMAN GREENSPAN.

President Guffey.

MR. GUFFEY. Thank you, Mr. Chairman. I think Wayne Angell
has probably made my comments--rather well, as a matter of fact. It
seems to me that there are only two real and important aspects to the
range for M2--and that's the only aggregate I'd be concerned about.
One is the midpoint, which gives us ample opportunity to achieve the
staff's forecast for the year, and the other is the top of the range.
The real test if we do get the bounceback [in the economy], which
implies vigorous growth of M2, is going to be whether or not we have
the courage to do what I think we should do fairly quickly. The
second part of that is that we only have 5 months, or 6 months maybe,
before we take a look at these ranges again. I think the message that
would be received well by the markets is that we are indeed still
concerned about inflation. All the rhetoric about the short recession
I think plays well with the longer-term view that inflation is our
major target.
CHAIRMAN GREENSPAN.

Governor Mullins.

MR. MULLINS. I support your proposal, Mr. Chairman, and your
rationale. We have seen an extended period of low money growth rates,
[with growth for 1990] the lowest shown in Appendix B [for any year
since at least 1979], and also falling growth rates in recent years.
I'm comfortable with the existing ranges. In the last 10 months M2
growth has been at the low end of its range; I don't think it's a good
idea in the current environment to reduce the range. I think we would
appear to be lowering the target so we'd have a greater chance of
hitting it.
I also think it's not a good idea to raise the range;
we're unlikely to achieve it and it's not a good idea to reverse the
trend of reducing the range gradually through time. And even the 21/2 percent low end of the current range is roughly consistent with
the long-term real growth potential of the economy. I think this is
an important decision, given the heightened public perception that
we're interested in M2 and the aggregates in general. I think any
decision other than alternative I risks confusion. We should focus on
achieving actual money and credit growth within the ranges and leave
the ranges pretty much alone.
CHAIRMAN GREENSPAN.

President Melzer.

-46-

2/5-6/91

MR. MELZER. Let me just comment first on the strategies that
Don laid out.
I strongly favor strategy II.
Given our role as a

central bank, I can't see associating myself with any other strategy.
The only thing we can affect in the long run is inflation; that's the
only one that really shows any progress.
That does not lead me,
however, to alternative II in terms of the ranges; I would support
alternative I. As Bob Parry already acknowledged, there's already a
reduction in the ranges implicit in the tentative ones, so in my mind

that's consistent with strategy II. My own view is that a further
reduction in the ranges, given the environment we're in right now,
really wouldn't be seen as particularly credible. I don't think we
would buy any credibility by ratcheting them down any further. What
is credible and what we need to do in this environment is to make sure
that we acknowledge that the one thing we affect in the long run is
prices and that we're still committed to price stability. [I mean
that] not in a saber rattling short-term context, but we have made so
much progress over the last four years in bringing down the growth
rate in money that, as I've said before, I think we have a tremendous
opportunity here to make a permanent impact on inflation. And I want
to make sure we don't lose sight of that. I'm sure we won't as a
Committee, but in terms of what we're conveying to the public we need
to convey that we have some short-term problems to work through now
but we still have our eye on the right ball.
CHAIRMAN GREENSPAN. I think not moving the ranges up in the
It's cyclically adjusted!
face of this recession gives that signal.
MR. MELZER. What I'm suggesting is that we can't rely on
that alone to convey the message.
CHAIRMAN GREENSPAN.

President Hoskins.

MR. HOSKINS. Well, I'm pretty much in the same mode as Wayne
and Roger and Tom. Our job is to reduce inflation over time. I think
all of these ranges allow us to do that, as Mike Kelley pointed out.
Midpoints are important and I would hate to have us think that if we
do come out for your suggestion, we have to hit the midpoint because
that's above where growth has been averaging. I think that was
Wayne's point. So, I'm for strategy II, a tighter [M2], because
that's the one that makes inflation disappear on this piece of paper
I'm not sure it will, in fact. But I'm not troubled
in front of us.
by marching the ranges down slowly over time because there's a
consistency in that that does lend itself to credibility. And we are
moving down a notch. So, while I would prefer to be more aggressive,
I can understand your arguments and would support them.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. I support your proposal, Mr. Chairman, and I
agree with Tom Melzer that we have an opportunity here really to make
some progress on the core rate of inflation if we conduct our affairs
[unintelligible].
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. I would associate myself pretty much with Tom
Melzer's statement. I could buy the economic case for alternative II,
but I don't think I'd want to put you in a position of having to

2/5-6/91

-47-

announce a reduction in the targets in the middle of a recession.
I would support alternative I.
CHAIRMAN GREENSPAN.

So,

President Boehne.

MR. BOEHNE. We're sending a rather powerful signal these
days with our short-run policy movements, and I think it's important
that we not confuse that signal.
I think staying where we are with
alternative I is least likely to do that. We already have lowered the
ranges one notch and by not going back [up] we send a signal that we
haven't given up on inflation. To go to alternative II in the current
environment of bringing interest rates down would send some mixed
messages, which I don't think we want to send.
In terms of operating
room, I think all of these ranges give us operating room. And if we
get a shift in the function, these ranges aren't going to be terribly
relevant.
So, I come down for alternative I on both counts:
the
signal effect and the operating room.
CHAIRMAN GREENSPAN. With the exception of Governor Seger, I
assume that when the preferences for alternatives were being cited it
was across the board, with no differentiation being made with respect
If that's the case, it appears
to the ranges for M2, M3, and debt.
that we have a-MS. SEGER.

Oh, I can go with alternative I.

CHAIRMAN GREENSPAN. No, I was just trying to get [that
clarified].
What I'm saying is that alternative I generally seems to
capture the center of this particular group, and I would ask the
Secretary to take the role on that motion.
MR. KOHN.

Do you want to read that portion, Norm?

CHAIRMAN GREENSPAN.

Yes, you better read it.

MR. BERNARD. I'm reading from page 23 in the Bluebook or
line 43 in the other handout, starting near the bottom of page 2:
"The Federal Open Market Committee seeks monetary and financial
conditions that will foster price stability, promote a resumption of
sustainable growth in output, and contribute to an improved pattern of
international transactions.
In furtherance of these objectives, the
Committee at this meeting established ranges for growth of M2 and M3
of 2-1/2 to 6-1/2 percent and 1 to 5 percent, respectively, for the
period from the fourth quarter of 1990 to the fourth quarter of 1991.
The monitoring range for growth of total domestic nonfinancial debt
was set at 4-1/2 to 6-1/2 percent for the year"-MR. KOHN. 8-1/2.
4-1/2 to 8-1/2 percent.

Let's not swallow it back too much; it's

MR. BERNARD.
--"4-1/2 to 8-1/2 for the year. With regard to
M3, the Committee anticipated that the ongoing restructuring of thrift
depository institutions would continue to depress its growth relative
to spending and total credit. The behavior of the monetary aggregates
will continue to be evaluated in the light of progress toward price
level stability, movements in their velocities, and developments in
the economy and financial markets."

-48-

2/5-6/91

CHAIRMAN GREENSPAN.

Call the roll.

MR. BERNARD.
Chairman Greenspan
Vice Chairman Corrigan
Governor Angell
President Black
President Forrestal
President Keehn
Governor Kelley
Governor LaWare
Governor Mullins
President Parry
Governor Seger
policy.

CHAIRMAN GREENSPAN.
Don Kohn.

MR. KOHN.
Appendix.]

Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes

We'll now move on to current monetary

Thank you, Mr. Chairman.

CHAIRMAN GREENSPAN.

[Statement--see

Questions for Don?

MR. HOSKINS.
Don, what does your model tell you for M2 for
the first half, given the [policy] moves that have been made?
MR. KOHN.
If we build in the error that seems to be in train
for the first quarter--that is, if we put in the 4 percent and the 5
percent that we had for February and March--that would give us 2-1/2
percent for the first quarter. Now, the model has something like 6
percent for the second quarter but we wouldn't expect anything like
that.
We'd be looking probably at something more in the 4 to 5
We're looking at a 1-3/4
percent area as a judgmental forecast.
percent approximate shortfall from the model for the year; we have a
substantial part of that in the first quarter but not entirely. I
don't have a projection for the first half that really goes with
alternative B, but I would guess off the top of my head that it
implies something like 5 percent, which would be about a 1-point
shortfall from the model; the latter was saying 6 percent.
MR. HOSKINS.
MR. KOHN.

But our confidence in the model has fallen?

It never was very high.

If not, let me
CHAIRMAN GREENSPAN. Other questions for Don?
start off with my appraisal. First of all, to me the most fascinating
aspect of the last several weeks is the stock market, which I think
essentially is clueing in to the fact that the war will be either
significantly contained or short. Now, I'm not sure it makes all that
If, for example, we cauterize the major [enemy]
much difference.
forces around Kuwait and wait for their supply of food and water to
run down, which could take months, and it appears as though their
offensive capabilities in the area--scuds, aircraft, and so forth--are
pretty much eliminated, I'm not sure it matters whether the war is
over at that point or not.
But I think the market essentially reads
it that way. What is really important about the stock market is not
so much whether it is forecasting correctly or not but that the very
mood of the market itself has economic implications in the context of

2/5-6/91

-49-

what I would call an add-factor economy in which most of our equations
don't work and what really moves the forecast is how one fiddles with
the add-factors.
In that sort of environment, confidence is the
problem, essentially. I would think at this particular stage that the
news is possibly better than we feared, if I may put it that way. And
while we've all taken pot shots at the Greenbook forecast, it is not a
zero probability forecast by any means.
[Laughter]
MR. PRELL.

[Damning with]

CHAIRMAN GREENSPAN.
MR. PRELL.

faint praise!

I'm willing to go at least 15 percent!

Can I get you to 60?

CHAIRMAN GREENSPAN. With all seriousness, I'm a little
concerned that we may be looking at the January data with a longerterm view of what it all means than it may in fact mean, especially if
one realizes that it [reflects] the climate going into the war or the
uncertainty it raised. One thing I found fascinating yesterday was
how many people around here are getting feedback around the country on
the CNN effect.
Usually we only hear it anecdotally in one place; we
heard it virtually all around this table.
I hope it doesn't get out;
it's terrific for CNN business!
In any event, I do think that in the context of our success
in bringing down money supply growth, we're beginning to see the
benefits on the inflation side. That's one area where I actually
don't quite agree with the Greenbook because I think the inflation
forecast is too high. From what I can sense, looking at the internal
price structure of a lot of companies and talking to a lot of people
about market resistance [to higher prices], it may turn out to be
doing better than we know. I think it's showing up very specifically
in the obviously crucial wage area.
I think this has given us room to
lower the interest rate structure, which we have done, without
engendering inflationary effects. And I think the way in which it has
been done to date, with a rather slight lag probably, has been very
helpful in preventing inflationary pressures from moving up over the
longer run.
Ideally, I would suspect that we would like to have the
rate structure, to the extent that it is relevant, come down and just
stabilize as we go into the expansion phase. But trying to ease into
the equilibrium in that manner strikes me as really quite unrealistic.
I have come to the conclusion that we may have to move it down further
as insurance but be prepared to back right up when and if that becomes
necessary. Unless we seriously believe that we have the capability of
bringing rates down to a point, including where we are now, and then
flattening them out at that point, we have to be [operating] under the
presumption that we are going to move them down and then we are going
to move them up.
I think we have to be prepared to do both, but
hopefully in a less volatile manner than has been the case for
monetary policy in the past.
I would say certainly that in recent
years we've been able to do that and I hope we can continue.
What this leads me to, granted all of what we were discussing
yesterday, is that it seems extremely unlikely that this economy will
start to move up, or more importantly that the money supply will start
to move up, at a pace that would induce us to be moving in a direction
of tightening rather than easing prior to our next meeting. I can
conceive of our easing further--not immediately, but certainly in

-50-

2/5-6/91

I would conclude, therefore, that the
response to additional events.
appropriate policy at this stage would be "B" asymmetrical toward
ease. Governor Angell.
MR. ANGELL. Mr. Chairman, I'm in agreement with everything
you have said.
I think you put it exactly right, so I'm not going to
repeat any of that because I think you hit it right on the mark. I'd
also like to say, Mr. Chairman, that I could detect in Don Kohn's
statement not just a pure analysis, but I thought he also was leaning
in exactly the same direction that you have indicated.
CHAIRMAN GREENSPAN.

Are you suggesting that I influenced Don

Kohn?
In going
MR. ANGELL. Yes, I am; he's easily influenceable!
with your outline, I would like to mention that the one thing I
disagree with you on is that I think the probability of this scenario
is more like 45 percent rather than 15 percent.
CHAIRMAN GREENSPAN.

I said "at least"!

I'm going to go to 45
MR. ANGELL. Oh, at least 15 percent!
percent even though I tend to think the recession is going to be a
little longer and the recovery a little shallower. But the fact of
the matter is that I think we do have ahead of us some more
disheartening news on the first quarter. Not only do we have the CNN
effect, which I think really is there--people have been watching TV
I have been
more than shopping--but there's also the travel factor.
at the airport in Zurich and at Heathrow and JFK, and there just isn't
There is a real impact. Harrod's runs a beautiful
anybody there.
store at Heathrow and they had about 30 sales people and I think 2
customers.
So, it does seem to me that travel is going to be down
sharply; that along with the CNN effect means that the first quarter
will be down sharply. So, I think we do have some bad news ahead of
us and we need to steel ourselves for that.
Now, if the staff is correct regarding the bounceback, one
thing I do believe is that once the capital markets recognize that the
U.S. economy is in a recovery phase, there'll be no more cuts--and
And I do believe
possibly increases--in short-term interest rates.
the dollar could have a very sharp bounceback effect once we get past
a period of stability.
So, I did a little calculation. We have what
--about $56 billion of deutschemarks?
Is that close?
MR. CROSS.

That's close.

MR. ANGELL.
I was thinking that we may have a window of,
If we want to get rid of
say, 90 days to get rid of 2/3rds of that.
2/3rds of the deutschemarks we hold--I'm not counting the interest
because so far this year the $50 million we've done is only 1/5th of
I
the interest we've earned--we're going to have to sell quite a bit.
calculate $620 million per working day over the 90-day period.
CHAIRMAN GREENSPAN.

That will get their attention!

It really is a very substantial item, and I
MR. ANGELL.
would suggest that the budget deficit for 1991 does not need to have a
huge foreign currency exposure because we've marked the gains up in

2/5-6/91

-51-

1990 on a mark-to-market basis for our payments to the Treasury. So,
Mr. Chairman, I appreciate very much that you have gotten done the $50
million and just would suggest that you carry on with more enthusiasm!
MR. SIEGMAN.
in recent values.
MR. MELZER.
MR. SIEGMAN.
MR. ANGELL.

Governor Angell, we have $33.9 billion in DM,

He wants to go short!
We did sell-Oh, I was looking at the totals.

CHAIRMAN GREENSPAN.

Including Treasury holdings.

MR. ANGELL.
I was including the Treasury too, but I thought
the Treasury probably would want to do the same as we would.
MR. CROSS.
MR. SIEGMAN.

Are you

[using] DM or dollars?

No, this is dollar values.

CHAIRMAN GREENSPAN.

Bob Black.

MR. BLACK. Mr. Chairman, I would agree that alternative B is
the best. We have just taken a fairly significant, strong, and
dramatic policy action and any further move now would appear to me to
be sending the signal that we had pushed the panic button. The staff
may be right in saying that we won't have to ease further in this
cycle: I certainly hope that that's true because it's in that area and
the failure to tighten up promptly that we've usually made our
mistakes.
But in my own forecast I see it somewhat weaker than the
staff does.
So, I think it's possible that we may have to do a bit
more [easing] before we start upward, though I hope not. But because
of that possibility, I would go with your asymmetric directive tilted
toward ease.
Lest anyone think that a hawk has become a dove, I think
I will be among those who will argue the strongest quite early for an
increase in the federal funds rate, if the economy does turn around.
CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Mr. Chairman, I support your recommendation of
alternative B since it appears that the economy will be recovering at
a satisfactory rate 6 to 9 months from now, especially in light of the
policy moves that were taken recently. However, I do have a strong
preference for a policy directive that is symmetrical.
If new
developments in the next several weeks suggest greater weakness, I
believe there should be a full discussion of the implications of those
developments for the outlook 6 to 9 months from now before policy is
changed.
It seems to me that that kind of discussion runs the
greatest chance of avoiding the error of going too far in the
direction of ease in response to weakness in the statistics that are
conveying information about the performance of the economy in the
recent past.
CHAIRMAN GREENSPAN.

President Forrestal.

-52-

2/5-6/91

MR. FORRESTAL. Mr. Chairman, we have done a lot over the
past several months and the most recent action is just behind us; for
that reason I would support your prescription. I do think, as I said
yesterday, that the risk continues to be on the down side and that we
may get some bad economic news over the next several weeks. And for
that reason I would support also your prescription for an asymmetric
directive.
I'm glad you said what you did about our moving on the up
side when that becomes necessary because I think it's important for us
to remember that we're not on automatic pilot with monetary policy and
I might say, going back to the
that we have to adjust to conditions.
asymmetric directive, that we have a long interval between this
meeting and the next one and I think it's important to be able to move
promptly if the information is negative.
On the CNN effect, I might
just say too that Jane Fonda is very happy with that!
CHAIRMAN GREENSPAN.

Si Keehn.

MR. KEEHN. Mr. Chairman, I support your recommendation. It
seems to me that we've done quite a bit and we ought to sit back and
pause here. Having said that, I think the chances are that we are
more likely to ease than to tighten before the next meeting and,
therefore, I think the asymmetric language would be appropriate.
CHAIRMAN GREENSPAN.

President Hoskins.

I
Mr. Chairman, I support your recommendation.
MR. HOSKINS.
was particularly encouraged--and you have said it all the way along,
so it should be no surprise--[by your] preparing this group for having
to tighten if things start to grow. However, on the asymmetric
language, I'm comfortable for different reasons.
I hope we will be
emphasizing slowness in money growth as the reason for moving rather
than weakness in the economy. The errors in our ability to predict
the economy one quarter out by anybody's forecast evaluation are
really quite large.
I think our best chance of getting to where we
want to be in the long term is to continue progress on relatively
So, I would hope that the asymmetric
steady money growth over time.
language would be exercised if we get bad news--that is, slower growth
in money than we anticipate.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN CORRIGAN.
I certainly would support the
suggestion you put on the table, but I would just elaborate a little
on one or two aspects of policy beyond that. Everybody has put his or
her own probabilities on outcomes of various forecasts and, as I said
yesterday, my own sense of it is that there's at least a 50 percent
chance that we'll get something along the lines of the central
And
tendency of the Federal Open Market Committee members' forecasts.
we certainly can't rule out the kind of [outcome] that Mike talked
about.
But if we're going to get either of those--a modest recovery
beginning sometime around midyear or even a fairly bouncy one as in
Mike's forecast--it seems to me that either outcome is already baked
There is enough there, if policy is
in the cake in policy terms.
working, to produce that result.
On the other hand, there is a 10, 15 percent chance--again,
Now, especially if it
pick your number--of it being a lot weaker.
turns out to be a lot weaker, then we're looking at a very deep

2/5-6/91

-53-

recession with all of the [attendant] financial problems.
That, by
the way, I think would blow the stock market right out of the water.
Then we really would have a terrible situation not only in terms of
what it implies for the economy and unemployment and all the rest, but
in those circumstances I think policy would be judged universally as
the culprit. Moreover, the risk of the whipsaw effect sometime out in
the future, which is embodied in Mike's second scenario on the last
page of yesterday's handout--even in the case of a steep recession-gets much greater under any scenario like that.
Now, I think the problem for policy and the appearances of
policy is a bit further complicated by this credit crunch issue.
There are two schools of thought about the credit crunch. One school
of thought is that it's very real and that the Fed in particular isn't
doing much about it.
I don't happen to agree with that school of
thought. Gary's analysis yesterday comes much closer to the mark as
far as I'm concerned. But there is that other school of thought:
that the Fed itself is overstating the credit crunch because that
rather suits its purpose. And the argument that grows out of that
essentially says that the weakness in money is really due to policy,
not a credit crunch--that the credit crunch is a smokescreen and the
Indeed, that argument goes one
Fed is hiding behind that smokescreen.
step further and says that the Fed is targeting the funds rate, that
reserves are strictly demand determined, and that it's the policy
process itself that is producing the weak growth in money supply
and/or the credit crunch, or even worse for the Machiavellian types
that the Fed is hiding behind the credit crunch. The reason I bring
that up is again in the context of what happens--regardless of whether
you think the risks are 10 percent or 20 percent--if it turns out that
the economy goes down the tank. That leaves me in this quandary of
desperately searching for what I like to think of as a low-cost
To me, a low-cost insurance policy is something
insurance policy.
that either in substance or in form tries to defuse some of those
arguments without bringing with it the necessary result that we go too
far in underlying policy terms and set ourselves up in the kind of
conundrum that Mike so graphically described yesterday. So, I ask:
Is there a low-cost insurance policy?
That is somewhat of a
contradiction in terms, of course; there really cannot be.
While I don't think it's germane to the Committee's
discussion this morning, I have this rather crazy idea that runs
around in my head that might deserve consideration as a low-cost
insurance policy.
Essentially, what is running through my mind is
going a good deal further than we have been thinking to date about
trying to bring the discount window to bear in this process.
The
concept that rolls around in my head--and I understand it can be shot
to pieces, but maybe Don and Mike and the staff could think about it a
little anyway--is a 6-month period, for example, within which we would
have a highly advertised program of more liberal discount window
accommodation, including term discount window loans.
The program
would be structured to say that its purpose is to ensure liquidity to
individual institutions to meet the needs of creditworthy borrowers.
We might have more liberal collateral requirements, but we'd haircut
the devil out of them so there would be no risk to the Federal
Reserve. But the thought would be that people could have easier
access and more generous collateral requirements--in terms of what is
put up [as collateral], not in terms of how it is haircutted.
It
would have a market rate of some kind or other.
The way I think about

2/5-6/91

-54-

it is that if it's used, I don't see that it has to have any material
impact on the broad thrust of policy, at least if one thinks of policy
in terms of interest rates or exchange rates.
I think we could
engineer those effects out through Mr. Sternlight's operations.
So,
if it's used, fine; I don't think it has to compromise the basic
thrust of policy. And there would be no risk to the Federal Reserve.
On the other hand, if it's not used, I'm not sure that that's the end
of the world either.
Indeed, if it's not used, it seems to me that it
goes at least a little in the direction of helping us to defuse the
argument that our unwillingness to provide liquidity either through
open market operations or otherwise is the cause of the credit crunch
and all these other things that go with it.
Now, as I said, there really is at the end of the day, of
course, no such thing as a low-cost insurance policy. This has smoke
and mirrors to it.
But I am worried about the danger that is inherent
in an outcome in which [the economy] really goes south on us.
I ask
myself what other alternatives there are that do not involve the risk
of compromising the basic thrust of monetary policy, and I look with
Bill Taylor and others at some of the things they are talking about on
the supervisory side.
Now, the problem there is that the ones that
might do something by their very nature are going to raise the specter
of forbearance on the thrift situation and all the rest, and I think
in a global setting relaxing capital standards or something like that
would be crazy. On the other hand, the kinds of accounting things
that are being talked about I don't think are going to do anything.
As a matter of fact, I think they will be viewed transparently as not
doing much at all.
Again, maybe we don't need a low-cost insurance
policy; but that, I think, is your judgment.
CHAIRMAN GREENSPAN. Well, no.
On the contrary, that is not
my judgment.
I think we may need it; I'm not saying that we don't; we
may and I think we should consider it.
But it might be useful to
continue on and get some comments on that issue at the luncheon, okay?
VICE CHAIRMAN CORRIGAN.
CHAIRMAN GREENSPAN.

Right.

President Syron.

MR. SYRON. Mr. Chairman, I support your recommendation with
asymmetry. Many of the reasons have been given before; one is that
there's a long interval before the next meeting.
I think we may have
to do something before the next meeting, and [it makes] sense to take
out insurance on the fundamental policy side.
I do agree very
strongly with the comments that Wayne made--and it's reassuring that
everyone has made them--on the importance of recognizing the scenarios
that were shown.
[I'm pleased] that we're willing to pay the premiums
involved in this insurance policy if we do have to [ease] in the
intermediate period rather than being tighter and I think we all
should realize that there may be a difficult period coming out of this
one.
The only comment I would make is--and again this may be more
appropriate for the [non-FOMC] lunch discussion--that we may well have
to do something more on the discount rate before doing more on the
funds rate because with a 6-1/4 percent funds rate and a 6 percent
discount rate, given people's aversion to borrowing, effectively, we
have a penalty discount rate right now. I think it's equally likely
that the next move may well be a cut in the discount rate without a
further change in the funds rate.

2/5-6/91

-55-

CHAIRMAN GREENSPAN. Without the funds rate showing through
and with the spread opening up again?
MR. SYRON.

That's right.

CHAIRMAN GREENSPAN.
MR. LAWARE.
asymmetry.

Governor LaWare.

I support your recommendation with the

CHAIRMAN GREENSPAN.

Governor Mullins.

I also support the proposal. I do think that
MR. MULLINS.
we will have to get through another bout of unsettledness when we
confront the possibility of a ground war, which could give us another
CNN effect for a week or two--although it may be less popular because
it may look less like a video game. I agree that there are risks on
the down side and I think that's understandable, given the 6 to 9
months of very slow growth in money and credit we have had.
I would
think that we'd be facing a pretty tough period, although looking
beyond that we have a good dose of stimulus in the pipeline already.
But I still think, given the uncertainties, that it's wise to be
asymmetric toward ease and watch events.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. Mr. Chairman, when I read the Bluebook, I wrote
in the margins "I like the interest rate implications of alternative A
but that alternative puts us on too steep a growth path for money in
the out years."
So, I would recommend alternative B.
And the
asymmetric language toward ease sounds good to me, although I like Lee
Hoskins caveat about that being focused largely on the growth of the
aggregates.
I can just confirm the CNN effect.
In anticipation of
moving, we had our cable disconnected last week and I've been
suffering withdrawal but I haven't gone to the mall yet!
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE.
I agree with your recommendation and your
comments surrounding it.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. I certainly support alternative B. With regard
to the question of the language:
Looking to the future, if all we
want to consider is asymmetric language toward ease, that certainly
makes sense because I find it very hard to believe that between now
and March we will get enough coincidence of events to suggest that we
would want to raise the borrowings target and the funds rate.
However, we have moved a lot recently, and I think we do have to
consider the lags in all this.
In light of that, I would have a
preference for symmetric language just because I think we run the risk
of not allowing the actions that we've taken to date to have an effect
on both the aggregates and ultimately on the economy.
CHAIRMAN GREENSPAN.

President Melzer.

-56-

2/5-6/91

Let me just pick
MR. MELZER. I support alternative B also.
I was writing some notes here and when
up on some things Jerry said.
he started talking I thought he was going to say the same thing I am.
But when you hear what I have to say, you'll realize that that was
virtually impossible. Basically I agree with this focus on slow money
I think that's what we ought to
versus weak current economic numbers.
focus on; that's what we have influence on. But I'm also sympathetic
to the uncertainties with respect to the short-term behavior of money,
Don has talked about it--the
particularly the broader aggregates.
restructuring that's going on in depository institutions and so forth.
And I guess we also know that the base is distorted by currency flows
overseas.
So, if it were up to me, I would pay some attention to
reserves. That's what we affect directly. And over the last year
Now, I'm not being
there has been virtually no growth in reserves.
critical here, because I think we've tried to respond to that to some
extent by bringing rates down; and we have recognized in this
Committee the perils of funds rate targeting and we've been trying to
respond to that. But we shouldn't sit around and be surprised that
we're not getting any money growth if we're not providing any
reserves.
Supposing reserve balances
CHAIRMAN GREENSPAN. But we are.
stretched across not only transaction balances but across the whole
spectrum of various depository obligations. Required reserves under
those conditions obviously would have been going up a great deal more.
How would money in that environment have moved differently from the
way it has?
I'm not sure.
My only point is that I don't
MR. MELZER.
think we can expect money to grow if we don't provide the basic fuel
that's necessary; we're demand driven.
CHAIRMAN GREENSPAN. What I'm trying to get at is that it is
really an excess required reserves problem and we've locked our
required reserves into an instrument that has become increasingly
I think you may raise the question on excess or free
obsolete.
reserves or something like that, but I'm uncomfortable with total
reserves as an issue.
MR. MELZER. Well, I'm not proposing a specific approach
I'm just saying that I would pay some attention to what is
here.
going on there. We have some uncertainty about how the aggregates are
behaving; that's what we can influence. And I think we should pay
some attention to it.

reserves.

CHAIRMAN GREENSPAN. That would be influencing by increasing
I don't know any other way of doing it.
MR. MELZER.

Yes.

Is
CHAIRMAN GREENSPAN. What I'm trying to get at is this:
there additional information here other than the money supply data
themselves that you feel we ought to be targeting?
MR. MELZER.
I guess what I'm suggesting, picking up on
Jerry's point that we're vulnerable, is that where we're vulnerable is
that somebody may look at it and say basically that by targeting the
funds rate we haven't provided any reserves to permit an expansion in

-57-

2/5-6/91

the aggregates. And my answer to that is not smoke and mirrors; our
best defense against somebody taking a shot at us is trying to do the
right thing. And I think we have been-MR. ANGELL.
But Tom, if we focused on reserves, don't you
think that we could end up with a 2 percent fed funds rate rather
easily?
Are you willing to pay that price?
MR. MELZER. I'm not suggesting that we target reserves.
I'm
just saying that in this uncertain environment it could be helpful
because if we're sitting here pegging the funds rate at the wrong
level and we're shrinking the supply of reserves, we are not going to
see the money growth that we are going to need.
I think that could
I think you all know what I've
just be helpful to us in this process.
advocated over time; I'm not one who would be inclined to go nuts on
the easing side, but I think this could be helpful in the other
direction as well. My main point is that our best insurance policy is
just to assure ourselves that we are doing the right thing. And
that's going to be the best defense. We are going to be vulnerable if
the record shows on a continuing basis that we're still not providing
adequate reserves. And I'd be the first one to say on the other side
that it's a problem, too, if those [monetary growth] rates shoot up to
double-digit rates over a sustained period of time, as they very
likely could with what has already been done. Anyhow, I support the
Chairman's proposal.
CHAIRMAN GREENSPAN.

Bob Black, do you have a comment?

MR. BLACK. Yes.
I was just going to say that I have a lot
of sympathy for what Tom said.
I think that reserve measures can be
refined, though. There are several things that are reservable that
are not part of M2.
The whole [reserve structure] is set up with the
idea of controlling M1 but we know ahead of time, because requirements
against interbank deposits and government deposits are lagged, what
volume of reserves we need for that. And we could put those in at the
beginning of the period. Those against the M2 portion are not lagged
quite as much. So anything we put out over and above that, which
would be something of a refined measure of total reserves, would be
available for supporting M2 and nothing else.
I think we could get to
something like that. Another thing I'd like to see us do is to try to
make some estimates of the amount of currency that is going abroad
because that [outflow means the] currency component is badly distorted
and if we think that's part of our domestic money supply, we're being
badly mislead. But I really think the rate of growth in the
aggregates is demand-determined now, and I think as Tom does that it
ought to be supply-determined to some degree and that's not easy
because of the reserve structure we have. Also, I think financial
innovation would create a number of instruments that would not be
reservable; indeed, a lot of them in M2 are not reservable now. But I
think we can get something better by moving in general in that
direction. And I would support-MR. MELZER.
I forgot one other point I was going to make,
which is that I think we can best defend ourselves by sticking to
promising things we can control and we can affect. We cannot solve an
intermediation problem in the economy, and I think that creates false
expectations.
But what we can do is make sure that we're providing

-58-

2/5-6/91

adequate reserves to the System so that the financial intermediaries
can do with those what they will.
VICE CHAIRMAN CORRIGAN. But no matter how you measure
reserves or anything else, in the kind of situation we're in right now
the only way that we can deal with this conundrum would be to run a
policy, in effect deliberately, that is prepared to accept the risks
of very large amounts of free reserves or excess reserves in the
System. And by definition if there is something real to this socalled credit crunch, that approach to policy--no matter how you
define the base or how you define reserves--carries with it the risks
of a 2 percent federal funds rate.
MR. MELZER.

Which, of course, we haven't seen.

VICE CHAIRMAN CORRIGAN. We haven't seen it because [of how]
we're conducting policy. But the only fail-safe experiment--and
that's what it would be--that would resolve that issue, no matter how
you define the base and no matter how you measure reserves, would be
the willingness of this Committee to run a policy that carries with it
the risks of a 2 percent federal funds rate.
MR. MELZER.
operating target.

I'm not suggesting that we use it as an

VICE CHAIRMAN CORRIGAN.

I know you're not.

MR. MELZER. I'm just saying that if it were up to me, in
this environment where we're worried about getting the money growth
path, I'd hate to be sitting here three months from now with a slope
on that line of total reserves that was still totally flat as it has
been over the last year.
VICE CHAIRMAN CORRIGAN. That's part of the reason why I made
the suggestion about trying to get some reserves out through the
discount window in a way in which Peter could do a pretty good job of
protecting against-SPEAKER(?).

Sterilizing!

VICE CHAIRMAN CORRIGAN.
sterilizing them!
CHAIRMAN GREENSPAN.

Protecting against--well,

Governor Kelley.

MR. KELLEY. Mr. Chairman, I support your recommendation for
all the reasons that have been articulated here. I would like at an
appropriate time, now or later, to suggest a change in the order of
the priorities of our considerations in the operational paragraph. I
don't know whether you'd like to pursue that now or do it as a
separate item.
CHAIRMAN GREENSPAN.

Let's do it separately.

Governor Seger.

MS. SEGER. I support your view, Mr. Chairman, but I would
say that the risk is definitely on the low side if for no other reason
than the auto industry situation. As you know, it's responsible for
the biggest chunk of the decline in the fourth quarter. Both auto

2/5-6/91

-59-

sales and production in my judgment are going to be a disaster in this
quarter and right now I can't think what is going to bring them off
the floor in the next quarter.
That is simply one reason.
In
addition, there is the confidence factor.
I think that is partially
related to CNN and the Gulf War but I think there's another big chunk
coming just from this nervousness over the financial system.
I wish
that weren't the case but I think it is.
Certainly, a lot of easing
has been done. But in order to compensate for the credit crunch,
which in my judgment is definitely out there, there will be a need to
do still more to offset that.
I think it would be good to look at
Jerry's idea, too; it strikes me as sort of extraordinary to
accommodate a special challenge of this nature, which I haven't seen
since the 1930s.
So, I would go with [alternative B], asymmetric
toward ease.
CHAIRMAN GREENSPAN.

President Guffey.

MR. GUFFEY. Alternative B.
I would prefer a symmetric
directive, given the background of the easing that already has taken
place and the closeness of the easing just last Friday. A symmetric
directive does not imply that you do not have the flexibility to take
a cut at easing between now and the next meeting on your own. And
that is the insurance that I would feel comfortable with rather than
the asymmetric directive.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. At the risk of getting in over my head
prematurely, I want to raise a point in connection with Tom's concern
about reserves and in connection with the comment about excess
reserves and free reserves.
I wonder if we might have some parallel
now to the situation in the late 1930s when the Federal Reserve
perceived [the existence of] a lot of excess reserves in the System
and took action to raise reserve requirements to mop them up only to
find later that the bankers didn't necessarily regard them as excess.
They were excess in the legal sense, but not necessarily excess in
their own minds in view of the uncertainties in the economy.
I wonder
if we might have a situation now where there's a difference between
what bankers themselves perceive to be excess reserves and what are
excess in a legal sense. If that's the case, then I think there may
be some room to be concerned about the flatness of the reserve
aggregates.
CHAIRMAN GREENSPAN. Well, that's the reason I raised that;
because Peter has that problem every day as to what the demand for
excess is and it doesn't mean it's going [unintelligible].
We're going to move now to the directive and vote on
alternative B, with asymmetric language toward ease. But prior to
doing that. Governor Kelley has the floor--with a proposal I would
presume?
MR. KELLEY. Yes sir, if I may. As it appears in lines 72
and 73 of the operational paragraph we have stated for some time that
our order of priority was "price stability" followed by "trends in
economic activity."
My suggestion is that, to the extent we'd like to
be forthcoming in this document, it might be an appropriate time to
reverse the order of those first two priorities.
That would be

-60-

2/5-6/91

consistent with the reasons for our recent actions and I think it
would be consistent with the Committee discussion that I've heard here
yesterday and today. We have an awful lot at stake in this economy
But I don't think that a
and that is what we've been discussing.
reversal of that magnitude would in any way indicate a downgrading of
our consideration of inflation. It's certainly going to continue to

be vitally important to this Committee, and it shouldn't and won't be
forgotten. But at this time I think, for the record, it would be a
more accurate reflection of the reality of the Committee's concerns to
reverse the order of those first two priorities.
MS. SEGER.
then, Mike?
MR. KELLEY.

Shouldn't we also move up monetary aggregates
Well, I don't know where--

MS. SEGER. As I've sat and listened here today, that has
received a lot of discussion.
MR. KELLEY. Somehow I'd like to have everything be first,
but that's difficult. My suggestion would be simply to reverse the
first two.
You'd like to comment?

CHAIRMAN GREENSPAN.

MR. ANGELL. Mr. Chairman, I'm only going to talk about a
I feel so strongly
question of the way that we conduct our business.
about this issue that, if we're going to do it, I'd really want to
have a recorded vote on this.
On this?

CHAIRMAN GREENSPAN.
MR. ANGELL.

On this.

CHAIRMAN GREENSPAN.
MR. ANGELL.

Okay.

CHAIRMAN GREENSPAN.
MR. ANGELL.
amendment?

Okay.

CHAIRMAN GREENSPAN.
MR. PARRY.

Indeed, that we will.

This is an important issue.
In other words, a recorded vote on the
Yes.

So, what is your view?

MR. ANGELL. My view is that price stability needs to be
there first and that it really does help the long bond market to get
long rates down to have price stability as the first priority.
MR. LAWARE. I don't often argue with my colleague on my
left, [Mr. Kelley], but it seems to me that price stability and the
progress toward price stability is the thing that has enabled us to
make the recent moves toward ease, or one of the things that has
supported that. I wouldn't want to lose sight of that as a primary
target. I'd be more comfortable leaving it where it is.

2/5-6/91

-61-

MR. PARRY.
I would agree with Governors Angell and LaWare;
in fact, I'm a little concerned that recent trends in economic
activity may be a bad basis for current policy.
CHAIRMAN GREENSPAN.

Bob Black.

MR. BLACK. I agree with what Governor Angell suggested.
I'd
also like to move monetary aggregates up [in the list].
I'd rather
have them before trends in economic activity, but that's raising an
issue I don't think you want to get into.
MR. BOEHNE.
I think there are times when you don't want to
kick sleeping dogs and this is probably one.
I know that Governor
Angell feels very strongly about this issue but, frankly, I would hope
that we could resolve this informally one way or the other. We have a
great deal of unanimity in the Committee now, and I think that's
important given all the problems out there in the economy.
I think to
have a separate vote on word ordering is not in the best interests of
I would urge that we-the big issues that we face.
CHAIRMAN GREENSPAN.

We may not need it.

MR. BOEHNE.

Well, I would hope so.

MR. KELLEY.

It doesn't look like we do.

MR. HOSKINS.

I probably don't need to comment.

MR. MULLINS. My preference also would be not to change the
order and not to appear to be responding to the current economic
conditions, but rather to respond with policy actions. And I would
agree with [unintelligible].
MR. KEEHN. I agree with Mike's thought; but having said
that, changing the order at this point I think would imply more than
we want to.
So, I'd be inclined to leave it as it is.
MR. FORRESTAL.

I would feel the same way.

CHAIRMAN GREENSPAN. Mike, you probably want to withdraw it
at this stage and resurrect it at a later time.
MR. KELLEY.

Consider it withdrawn for lack of a second!

MR. BERNARD.
"In the implementation of policy for the
immediate future, the Committee seeks to maintain the existing degree
of pressure on reserve positions. Depending upon progress toward
price stability, trends in economic activity, the behavior of the
monetary aggregates, and developments in foreign exchange and domestic
financial markets, slightly greater reserve restraint might or
somewhat lesser reserve restraint would be acceptable in the
intermeeting period. The contemplated reserve conditions are expected
to be consistent with growth of M2 and M3 over the period from
December through March at annual rates of about 3-1/2--"
MR. KOHN. Can we say 3 to 4 percent, using round numbers,
rather than 3-3/4 and 3-1/2 percent?

2/5-6/91

-62-

So it would be "growth of both M2 and M3 over
MR. BERNARD.
the period from December through March at annual rates of about 3 to 4
percent."
CHAIRMAN GREENSPAN.

We're changing the 3-3/4 percent?

that it?
MR. BERNARD.

We seldom use quarters.

CHAIRMAN GREENSPAN. I'm thinking of 3-1/2 to 4 percent as
more capturing what the Committee discussed because we're not going to
get up to our range if we don't stipulate that kind of range.
MR. ANGELL. The reason is that the current lags keep us from
getting up there within this period, but it does get us to the range
later.
MR. KOHN.

We have it projected up there by March.

CHAIRMAN GREENSPAN.
projecting?
MR. KOHN.

But is 3-3/4 percent what you're

3-3/4 percent for M3 and 3-1/2 percent for M2.

CHAIRMAN GREENSPAN. Let's make it 3-1/2 to 4 percent;
think that may capture the point.

Has there ever been
MS. SEGER.
May I just ask one question?
In other words, do we
a directive put out that just went one way?
really think that in the next six weeks or so greater reserve
restraint might be pursued?
CHAIRMAN GREENSPAN.
MS. SEGER.

Yes.

I'm just asking if that is true;

that's all I'm

saying.
CHAIRMAN GREENSPAN.
President Boehne's remarks.

It's conceivable, in the spirit of

This isn't a criticism.

MS. SEGER.
has ever been done.

CHAIRMAN GREENSPAN.

I'm just asking if that

No, I know that.

MR. BERNARD. Governor Seger, this is ancient history, but
going back to the late 1960s the directive was quite different in form
but in essence at times it was one way.
MS. SEGER.
MR. KOHN.

Thank you.
We're going to write 3-1/2 to 4 percent in there?

MR. BERNARD.

For both M2 and M3, 3-1/2 to 4 percent.

CHAIRMAN GREENSPAN.

Call the roll.

-63-

2/5-6/91

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

CHAIRMAN GREENSPAN.
If anyone would like to change their
[Humphrey-Hawkins] projections, I think Mike would like to have the
changes by close of business Monday.
MR. PRELL.
MR. BOEHNE.

Monday is fine.
Your testimony is when?

CHAIRMAN GREENSPAN.
[February]
The next meeting is March 26th.

20th and 21st, I believe.

END OF MEETING

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, February 5-6, 1991 : Transcript

FRASER