Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 31-February 1, 1995 : Transcript

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Meeting of the Federal Open Market
January 31-February 1,

Committee

1995

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.,

starting on Tuesday, January 31,

and continuing on Wednesday, February
PRESENT:

1995,

at 1:30 p.m.

1, 1995 at 9:00 a.m.

Mr. Greenspan, Chairman
Mr. McDonough, Vice Chairman
Mr. Blinder
Mr. Hoenig
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. Melzer
Ms. Minehan
Mr. Moskow
Ms. Phillips
Ms. Yellen
Messrs. Boehne, Jordan, McTeer, and Stern,
Alternate Members of the Federal Open Market
Committee
Messrs. Broaddus, Forrestal, and Parry, Presidents
of the Federal Reserve Banks of Richmond,
Atlanta, and San Francisco, respectively
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Kohn, Secretary and Economist
Bernard, Deputy Secretary
Coyne, Assistant Secretary
Gillum, Assistant Secretary
Mattingly, General Counsel
Patrikis, Deputy General Counsel
Prell, Economist
Truman, Economist

Messrs. Davis, Dewald, Lindsey, Mishkin, Promisel,
Siegman, Slifman, and Stockton, Associate
Economists
Mr. Fisher, Manager, System Open Market Account

Mr. Ettin, Deputy Director, Division of Research
and Statistics, Board of Governors
Mr. Madigan, Associate Director, Division of
Monetary Affairs, Board of Governors
Mr. Simpson, Associate Director, Division of
Research and Statistics, Board of Governors
Mr. Winn, 1/ Assistant to the Board, Office of
Board Members, Board of Governors
Messrs. Hooper and Reinhart, Assistant Directors,
Divisions of International Finance and
Monetary Affairs, respectively, Board of
Governors
Mr. Rosine, 1/ Senior Economist, Division of
Research and Statistics, Board of Governors
Mr. English, 1/ Economist, Division of Monetary
Affairs, Board of Governors
Mr. Freeman, 1/ Section Chief, Division of
International Finance, Board of Governors
Ms. O'Day, 1/ Associate General Counsel, Legal
Division, Board of Governors
Mr. Baer, 1/ and Ms. Misback, 1/ Managing Senior
Counsels, Legal Division, Board of Governors
Mr. Ely, 1/ Senior Attorney, Legal Division,
Board of Governors
Ms. Low, Open Market Secretariat Assistant,
Division of Monetary Affairs, Board of
Governors
Messrs. Barron and Rasdall, First Vice Presidents,
Federal Reserve Banks of San Francisco and
Kansas City, respectively
Messrs. Beebe, Goodfriend, Lang, Rosenblum,
Sniderman, and Ms. Tschinkel, Senior Vice
Presidents, Federal Reserve Banks of
San Francisco, Richmond, Philadelphia.
Dallas, Cleveland, and Atlanta, respectively
Messrs. McNees and Miller, Vice Presidents,
Federal Reserve Banks of Boston and
Minneapolis, respectively
Mr. Evans and Ms. Krieger, Assistant Vice
Presidents, Federal Reserve Bank of Chicago
and New York, respectively
1.

Attended portions of the meeting.

Transcript of Federal Open Market Committee Meeting
January 31-February 1, 1995
January 31--Afternoon Session
CHAIRMAN GREENSPAN. Good afternoon, everyone. The first
item on the agenda is the election of officers and I turn the chair
over to Governor Blinder.
MR. BLINDER. For parliamentary reasons known not to me but
to some people, I have the distinct honor and high privilege of
I understand that I am not allowed
opening the floor to nominations.
to nominate anybody.
CHAIRMAN GREENSPAN.

You are the Chairman.

MR. BLINDER. The floor is open for nominations for Chairman
of the Federal Open Market Committee for 1995. Do we have any
nominations?
[Laughter]
CHAIRMAN GREENSPAN.

This silence reminds me of last year!

MR. BLINDER.

Nobody nominated!

MR. LINDSEY.

I nominate Alan Greenspan as chair.

MR. BLINDER.

Do we have a second?

MS. MINEHAN.

Second.

MR. BLINDER.

All in favor?

SEVERAL.

Aye.

MR. BLINDER. Opposed?
[Laughter]
I now have the honor to
open the floor to nominations for Vice Chairman of the Federal Open
Market Committee for 1995.
MR. KELLEY.

I nominate President McDonough.

MR. BLINDER.

Is there a second?

MS. MINEHAN.

Second.

MR. BLINDER.

All in favor.

SEVERAL.

Aye.

MR. BLINDER.
completed now.

Opposed?

It is done.

I believe my duties are

CHAIRMAN GREENSPAN. You did that with exemplary efficiency.
I call upon our esteemed colleague to read the list of officers
tentatively put before you for nomination and action.
MR. BERNARD. The list is as follows:
Secretary and Economist, Donald Kohn;
Deputy Secretary, Normand Bernard;

1/31-2/1/95

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,
Lawrence Slifman, and
David Stockton;
Associate Economists from the Federal Reserve Banks:
Lynn Browne, proposed by President Minehan;
Thomas Davis, proposed by President Hoenig;
William Dewald, proposed by President Melzer;
Frederic Mishkin, proposed by President McDonough; and
Carl Vander Wilt, proposed by President Moskow.
CHAIRMAN GREENSPAN.
SPEAKER(?).

Would somebody like to move the slate?

So move.

CHAIRMAN GREENSPAN.
MS. MINEHAN.

Is there a second?

Second.

CHAIRMAN GREENSPAN. Without objection. We now move on to
the selection of a Federal Reserve Bank to execute transactions for
the System Open Market Account. Is there a nomination?
MR. BLINDER.

I will nominate the Federal Reserve Bank of New

York.
CHAIRMAN GREENSPAN.
SPEAKER(?).

Without objection.

This is getting

You almost lost that one, Bill!

VICE CHAIRMAN MCDONOUGH.
MR. LINDSEY.

[Pause]

Second.

CHAIRMAN GREENSPAN.
trickier and trickier.
MR. BLINDER.

Second?

I was worried about that pause.

This should have been staged better!

CHAIRMAN GREENSPAN. Are there any objections to the
selection of Peter Fisher as Manager of the System Open Market
Account?
If not, I will assume he is appropriately appointed.
The next item is our traditional approval of the minutes,
which I knew we would get to, of the December 20 meeting. Would
somebody like to move their approval?
VICE CHAIRMAN MCDONOUGH.

So move.

CHAIRMAN GREENSPAN. Without objection. The consideration of
FOMC disclosure policy is now on the table, and I call upon the
chairman of our subcommittee to handle that, Governor Blinder.

1/31-2/1/95

MR. BLINDER. Thank you, Mr. Chairman. The staff has
circulated, or actually recirculated, to each of you a memo from the
subcommittee that was prepared in August; it was accompanied by a
lengthy and more recent memo from Virgil Mattingly on certain legal
aspects. I am not going to summarize those memos; I just want to say
a few words. What is before you today are proposals from the
subcommittee calling essentially for the ratification, with some
exceptions--I am going to come to the exceptions--of what has become
the de facto status quo but has never actually been adopted as a
policy of this Committee. The de facto status quo has evolved since
the existence of the taping system was revealed in the fall of 1993
and the prompt announcements of policy actions were started in
February 1994. It is true, however, that when we go from a de facto
policy to a formally adopted policy, and we formalize and enunciate
things, that is a time for clarifying and tying up the loose ends and
in some sense committing to staying with such a policy--not forever
but for some period of time. In that sense, our policy merits some
discussion. There is only one thing that I think is an important new
wrinkle in this document. That is the matter of concurring statements
to the minutes, which I will say a few words about in due course.
The overall philosophy of this proposal is that the central
bank's independence carries with it a corollary of accountability.
Perhaps--I will put in the "perhaps" to make sure everybody agrees-the Federal Reserve has not quite acquitted itself of this
responsibility of accountability, at least not as well as it might.
In particular, the public has a right to know more about what the
Federal Reserve is doing and why it is doing it.
There are three principal things in the proposal. The first
has to do with announcements. This issue must be relatively
noncontroversial because we have been doing it since February 1994.
As. far as I know, everybody seems to be relatively happy with the
practice of announcing our decisions promptly. Furthermore, it is
hard to imagine how we could avoid doing so as long as interest rates
are the target. That seems to lead ineluctably to the conclusion that
we should continue making prompt announcements of policy changes.
There is an issue here that has to do with the statements
that we make about the policy being adopted rather than just saying
what the policy is. I think there are two questions: How often will
we make statements explaining ourselves, and how detailed will these
statements be? Very briefly on the "how often:"
The subcommittee
reached a majority opinion on the recommendation that we ought to make
a statement when we change policy--in this case that means changes in
short-term interest rates--and not make a statement when we do not
change policy. I must confess that I was more favorably inclined to
making statements, period, but the majority of the subcommittee, three
out of four of us, clearly favored statements only on interest rate
changes. That is the committee's recommendation--the subcommittee's,
excuse me. I may occasionally lapse into calling the subcommittee a
committee.
A slightly more interesting question, perhaps, that merits
some short discussion here but that cannot literally be resolved is
how detailed these statements ought to be. The statement that
accompanied our May action, and included a change in the discount
rate, had what I would call one substantive sentence. I am not

1/31-2/1/95

-4-

counting the usual boilerplate--the Federal Reserve Board acted on
recommendations of such and such Reserve Banks and the explanation of
what a discount rate is. There was one sentence of substance that
said something about the reasons for the actions. In the August
announcement, there were three sentences of substance. If I remember
--I hope Don will correct me if I am wrong--the November statement had
none. It announced the decision; it had only the boilerplate. I am
pretty sure that is right. Those are the last three announcements we
made without enunciating any formal policy on announcements. The
subcommittee discussed this issue to some extent. Not surprisingly,
we could not reach a consensus for many reasons, including the fact
that it is hard to define what a consensus is. I think the only
useful thing would probably be for the Chairman, who will be the
drafter of such statements, to hear the views of the members--to what
extent do we want to say something and to what extent do we not want
to say anything. I don't believe it will be possible to enunciate a
clear and crisply defined policy on this issue.
The second issue has to do with tapes and transcripts. While
I think many people believe that, in the abstract, it would be better
if the taping system did not exist, it was the unanimous view of the
subcommittee that we have the taping system now and we ought not to be
turning it off. The issue here is whether there should be an "off the
tape" portion of FOMC meetings. This would afford the opportunity to
discuss nonmonetary policy matters with the tape turned off. There
was a feeling that there probably was a case for that. A slight
nuance mentioned in the report is whether we want to construe this as
"the tape is almost always on and occasionally turned off" or "the
tape is off except when monetary policy is being discussed." There
is, of course, a third alternative and that is not to turn the tape
off at all, which is in fact the status quo under which we are
operating right now.
On transcripts, the subcommittee again recommended ratifying
the status quo, which is to release them after five years, edited more
or less exactly as they are now--no change from current policy. The
one new wrinkle that bears mentioning is dealt with in some detail in
the Mattingly/Baer memo that is in front of you. It has to do with
the potential danger of a premature, let me call it, release of the
tapes or the transcripts in response to a subpoena from a certain
number of members of the Government Operations Committees in the House
and the Senate. At the time the memo was written, the number was
seven members in the House and five in the Senate; but it may be
different now. The issue is that it is a finite number, not
necessarily the majority, of the members of those committees. The
conclusion of Virgil's memo was that in fact there was such a danger.
The conclusion of the subcommittee was that that did not change our
decision that we should maintain the taping system essentially as it
is now, much as we would regret a successful subpoena that would
actually get hold of these tapes prematurely.
The third issue is the minutes. We basically recommend
continuing the minutes essentially as they are now. The operational
content of that recommended action is that they would continue to be
written without attribution of particular thoughts to particular
people. We would add the option of concurring statements by
individual members. I want to stress that it is an option; nobody is
going to be asked to put in a concurring statement just to make the

1/31-2/1/95

minutes longer or because it seems like a nice thing to do. So, our
recommendation is to leave concurring statements as an option for
those members of the Committee who wish to avail themselves of it on
an ad hoc, meeting-by-meeting, person-by-person basis. The virtues of
this seem to me, and indeed to the subcommittee, to be three. The
first is an increase in Federal Reserve accountability as it relates
to the quantum of information about the Federal Reserve's policies
that is received by the public. The second advantage is that these
statements can potentially serve as a halfway house between agreement
and dissent. That is, there may be times when a member of the
Committee is basically willing to go along with the decision, but that
member may not be entirely happy, for example, with the presumably
very brief statement that the FOMC issues at the time--if indeed there
is a statement--and may wish to put some sort of nuance on the
assenting vote. A concurring statement makes it possible for a member
to say something without dissenting, if that member wishes to. The
third advantage, I think, is an operational advantage. Having these
assenting statements will, I believe, make it much easier in practice
to leave the drafting pencil for the Committee's official statement in
the hands of the Chairman without having to worry about 19 people
around the table deciding whether the verbs and adjectives suit them.
The proposal is to let the Chairman write that statement exactly as he
sees fit, and a person or persons who want to put a somewhat different
light on their decision would have that as their option.
Those are the three things in the proposal. I should add one
more that is not in the document. I have discussed this with the
Chairman, though not recently. So this will come as a bit of a
surprise; I thought of this again last night. It is the issue of the
blackout period. We now have a symmetric blackout period of one week
before and one week after a meeting. This made a certain amount of
sense under the old policies. Most people think it makes very little
sense under a policy of announcing the interest rate change
immediately. The suggestion is for an asymmetric blackout period,
including a more limited or no blackout period after a meeting; but we
may not want to go that far. Certainly an asymmetric blackout period
of some sort seems in order. Mr. Chairman, I think you suggested a
one- or two-day blackout after each meeting when we talked about this.
CHAIRMAN GREENSPAN. No. Actually I am agnostic on the whole
issue because I really have not given it enough attention. I would be
very curious to hear what the members have to say.
MR. BLINDER. So, I would also like to put that on the table.
There is no proposal from the subcommittee on that issue. I think I

have now put everything out on the table.
CHAIRMAN GREENSPAN.

Do you want to go piece by piece and see

whether we have a consensus?
MR. BLINDER. Okay.
CHAIRMAN GREENSPAN.

It will be useful, I think, if we just

have individuals raise specific questions relevant to each of the
issues that you outlined. Then, at the end of the discussion, we can
see whether there are significant qualifications or dissents from the
subcommittee majority.

1/31-2/1/95

MR. BLINDER. Do you want to go issue by issue or around the
table person by person?
CHAIRMAN GREENSPAN.

I think issue by issue.

MR. BLINDER. Okay. Why don't we take the question of
announcements first. I reported our proposals in the inverse order of
how much discussion I thought the Committee would want to give them.
The first is the issue of announcements, where the proposal is to make
prompt announcements of each interest rate change and not to make an
announcement when the change in interest rates is zero. Then, as a
subquestion, it would be helpful to get some guidance or some feeling
from the Committee regarding how detailed these announcements ought to
be. This piece of paper says that Bob Parry is first.
MR. PARRY. With regard to announcements, I think it is clear
that we ought to continue the present procedure. What I would be a
little concerned about would be too much detail in the explanation. I
think we have been pretty well served by the practice of explaining
the reasoning but keeping it quite short. I don't see much advantage
in providing a detailed statement. There would be the issue of
whether we would get a consensus on it as well.
MR. BLINDER.

President Broaddus.

MR. BROADDUS. On the announcements, I certainly agree that
we should continue to announce policy actions immediately. With
respect to the statements that accompany these announcements, I have
mixed feelings about the subcommittee's recommendations. Frankly, I
have some reservations--not about announcing our actions--but about
making accompanying statements because it is so easy for people to
misinterpret them no matter how carefully we write them. As Tom
Melzer points out in his letter that we all received, the rationale
supporting an action is going to be released in a fairly short period
of time anyway. If we do decide to continue to make such statements,
I think we ought to think a little about how they get prepared. We
know from experience with discount rate announcements that the
statements or explanations that accompany these actions have a
material effect on market reactions, mainly because they clarify what
the action may signal with respect to what we are going to do in the
future, whether it is the first of several actions or the last action
of a series or whatever. The record on this is pretty clear. We have
done a good bit of research on discount rate announcements at our
Bank, and some other research has been done elsewhere. So, I think
that point is well documented.
Consequently, and I certainly mean no disrespect to the
Chairman, but given this market impact, I think the full Committee
should be involved in preparing these statements. I am well aware of
the problem of having 12 or 19 people around this table trying to
write these statements in detail, but we might be able to cut through
this by asking the staff, perhaps in the Bluebook, to include in its
discussion of alternative policy actions perhaps a couple of
alternative statements that might go along with each alternative that
involves a policy change. The format that might be followed is that
the alternative statements could give some sense of what the
Committee's stance is going to be after the action is taken, whether

1/31-2/1/95

it is symmetrical or tilted in one direction or another.
I think we ought to give that some consideration.
MR. BLINDER.

In any case,

President Melzer.

MR. MELZER. First of all, I favor making statements only
when there is a change in policy, not when there is no change.
Secondly, I am comfortable leaving it up to the Chairman's discretion.
I could imagine, for example, a change in policy where the Chairman
decides not to say much at all, and I can imagine other changes where
more would be appropriate. But I think ultimately it has to be at his
discretion. From time to time he may want to consult with the
Committee, but I would not make the consultation obligatory.
The one concern I have about statements relates to the
possibility that they may take some flexibility away from the
Committee in the future. We have to be very careful about that.
Otherwise, the language becomes subject to negotiation because it is
predisposing what we may or may not be able to do in the future. The
statements have to be very carefully drafted in my view so as not to
take that flexibility away. I do not think that the opportunity for
assenting statements really offsets that because once that public
statement is made, an expectation has been set in motion in the
marketplace. Assenting statements coming out six weeks later are not
going to make any difference in altering those expectations or really
give any solace to an FOMC member who feels that the Committee's
flexibility has been compromised by the statement.
CHAIRMAN GREENSPAN.

Tom, may I just ask you a quick

question?
MR. MELZER.

Yes.

CHAIRMAN GREENSPAN. You are raising a tricky problem. Al
Broaddus is saying that their research, and I suspect most other
research, indicates that there is content with respect to future
actions embodied in the statements. If you want to leave full
flexibility for the Committee for the future, then by definition the
announcement cannot have that content. The question essentially gets
to the issue of whether you want the statement to have forwardprojecting content. If you have that, then Al's point about the
Committee having a voice in its drafting clearly is a matter of
material importance. If it has no content or it leaves full
discretion to the Committee, which I would guess is what you are
suggesting and what a normal statement is supposed to do, it really
should be backward-looking; it should not be forward-looking unless
there is a specific policy that the Committee wants to convey. If
there is no forward content to the statement, then it is a matter of
indifference whether I write it or not. But I do think that this
decision really comes down to the question of what the Committee wants
in that statement, not who does it. Do we want any forward-looking
content or do we want a retrospective statement that effectively
captures the reasons that led up to the particular decision?
MR. MELZER. What I would want would be the latter, what you
just described--a description of our rationale for taking the action.

1/31-2/1/95

CHAIRMAN GREENSPAN. If we are successful, the correlations
in Al's studies should go to zero--theoretically.
MR. BLINDER. I doubt that we could do that. It would be
hard. These things are read and parsed very carefully, and whatever
we say to explain what we did by reference to the past, even if we
don't mean it to, will be interpreted as having some implications for
the future. If we now make an interest rate move and say not a single
word, a thousand people around the world will start saying what that
means for the future just from the size of the move, how it was
related to previous moves, and a whole variety of other things. I
think the reference to the future is always implicit. To what extent
we make it explicit is a kind of art form.
CHAIRMAN GREENSPAN. It has been our usual practice to read
the draft statement to the Committee. The purpose of that statement
is to capture the essence of the Committee's reasoning. I think it is
crucial to avoid the optional differences in phraseology that we all
have, which I think is impossible to do with 19 people or 12 people.
Unless somebody objects, I think the current practice seems to be
working reasonably well. What I try to do when I write the statement
is to anticipate who is going to object when I read it to all of you.
In general, I have been forecasting reasonably well. What does have
to happen, however, is that the statement that is made has to be
vetted to the Committee before it becomes public so that if there are
objections, it is important for them to be on the table and get
addressed. But I would strongly recommend that the Committee as a
whole not try to write the statement because the meeting will go on
and on. It is like writing a communique at an international meeting
where the communique can take four-fifths of the time of the meeting.
MR. BLINDER. I think what you just said is exactly what the
subcommittee had in mind.
CHAIRMAN GREENSPAN.
procedure?

Would anybody object to this as a

MR. BROADDUS. It would be helpful if we had a chance to look
at the statement in draft form and make whatever comment we deem
important. Just very briefly, in the research on the discount rate
announcements--it is not exactly analogous--some researchers have
tried to distinguish between alignment announcements, which really do
not have any policy content and talk about moving the discount rate
back into alignment with the funds rate, and announcements that are
clearly a policy signal. The latter announcements almost always
have, because of the way they are worded--and people have studied this
very carefully--some impact on policy. As I believe you said,
Governor Blinder, it is hard to avoid some kind of impact. By putting
the draft out on the table, somebody here might spot some problem that
might escape the drafter.
MR. BLINDER.
Chairman McDonough.

I have three more people on the list.

Vice

VICE CHAIRMAN MCDONOUGH. I am very strongly persuaded that
we should announce policy decisions. As I have mentioned before, our
previous practice would make it possible in today's very sophisticated
financial markets, had we continued that procedure, to give an

-9-

1/31-2/1/95

advantage for only 10 seconds or half a minute to the more
sophisticated market participants. We do, in fact, say when there is
no policy action that the Committee has met and there is no further
announcement. That is an announcement of sorts. Therefore, I think
whether we do that or whether we say the Committee has met and there
was no change in policy is-CHAIRMAN GREENSPAN.

There is a big difference.

VICE CHAIRMAN MCDONOUGH.

It is the symmetric directive

issue.
CHAIRMAN GREENSPAN. No. Somebody has argued--I have
forgotten who it was; it may have been Don Kohn--that there is an
important difference. Suppose we purposely delayed an interest rate
change for 48 hours pending somebody's speech or some statistical
release, and we said there was no change, and then 48 hours later we
made a change; it would look awkward.
VICE CHAIRMAN MCDONOUGH.

That is right; I had not heard that

argument.
CHAIRMAN GREENSPAN. If we say the Committee has made no
decision or something like that, we still have full flexibility to
make a change later.
VICE CHAIRMAN MCDONOUGH. The point I want to emphasize is
that we should continue to have Joe Coyne announce that the Committee
meeting is over and that there is no further announcement.
CHAIRMAN GREENSPAN.

Yes, I think that works.

VICE CHAIRMAN MCDONOUGH. I think the content of what we have
had to say in our announcements of policy changes has been quite good.
Personally, looking back to August 16, I wish that we had not said
that these actions are expected to be sufficient at least for a time
to meet the objective of sustained noninflationary growth. Since I
was very supportive of the decision, I understand why we did it. I
think, henceforth, we might want to be even more careful about making
such a statement.
MR. KOHN. Mr. Chairman, I would like to put another point on
the table. That is, the Committee made several policy changes last
spring that involved only open market operations and not discount
rates. In those cases, except for that first change, you simply
announced the fact that the rate had changed without a full
explanation at that time. Explanations came later when the
Committee's actions were taken in conjunction with changes in the
discount rate. This is really a question for the Committee. Does the
Committee wish to put out discount rate type announcements when
discount rates are not changed or would it prefer to try to maintain
this tiny distinction between what Governor LaWare used to call
"ringing the gong" with the discount rate and a less open policy
change involving only the federal funds rate?
MR. BLINDER. The subcommittee's proposal was the former.
statement with an interest rate change was the subcommittee's

A

-10-

1/31-2/1/95

recommendation. The full Committee can reject it if there is no
discount rate change.
MR. KOHN. So there would be no announcement unless the
discount rate is changed?
MR. BLINDER.
MR. KELLEY.
MS. MINEHAN.

No.

Either.

Either.
Either or.

MR. BLINDER. An announcement would accompany an interest
rate change, whichever kind of interest rate it was.
MR. KOHN. A statement would say more than just "we changed
the interest rate" but would give at least some boilerplate
explanation as to why we changed.
VICE CHAIRMAN MCDONOUGH.
MR. BLINDER.

A very brief explanation.

President Hoenig.

MR. HOENIG. First of all, I agree on immediate
announcements, and I like the way we have done it.
That is, when we
take no action, we say there is no announcement. Regarding the
statement, I think it should give no reason or be extremely brief. We
started making announcements to make sure there is no advantage to
anyone. Our procedure takes care of a lot of that and is one of the
reasons I am pleased with it. Now, if we take it a step further-especially when we have a change only in the fed funds rate, and start
explaining--we open ourselves up even more to misinterpretation, I
think. Every word is taken a different way, and that causes more
confusion than it settles.
Except in very rare instances, and there
are always instances one can think of, we should minimize any
comments.
MR. BLINDER.

President Minehan.

MS. MINEHAN. I also am in agreement with the announcement
policy, but I would like to argue for a bit of flexibility on whether
we do or do not announce "no change."
There are instances where no
change is not a change in policy. There are instances where the
reverse is true. For example, if we decided not to do anything at
this meeting, I think that would suggest something different in the
way we now see things than is indicated in the minutes of previous
meetings.
I would think that where we have a situation where no
change is in fact a change in policy, something ought to be said, but
we should not hold our feet to the fire every time we have a meeting
and do not make a change. We should keep our options open, but where
there is something to be communicated, we should communicate it.
CHAIRMAN.GREENSPAN.

I think that is a good thought.

MS. MINEHAN. I would leave the statement wording to you,
Mr. Chairman, because I don't think there is any way we can draft it
as a Committee. I would like to hear the statement before it is
released, but I would give you the flexibility. I also feel that

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President Broaddus' suggestion of having a staff draft to work from
has some interest, but I would really hope that the statement would be
very short and crafted to reflect the discussion that went on in the
meeting, which can't always be anticipated before the meeting. I
would go with the subcommittee on the suggestion that you draft the
statement, Mr. Chairman, and if you want to tell us about it, fine.
CHAIRMAN GREENSPAN. The point at issue is that if it is more
than boilerplate, Governor Blinder is absolutely right. There is no
way to make any value-neutral statement in the English language.
There is always some value element involved. We have always had time
to have a statement written in advance, and I would suggest that short
of an extraordinary situation or a surprising situation, that really
ought to be part of the process. What that statement says, leaving
the particular language aside, does have content that affects the
market, and the Committee as a whole should have control over at least
the basic substance. I can conceive that in an emergency we might
have to bypass that, but I would say it would not be wise policy under
normal circumstances.
MS. MINEHAN. Are we talking about the directive or the
actual statement itself?
CHAIRMAN GREENSPAN.
MS. MINEHAN.
advance, have we?

Just the statement.

We have not been writing the statement in

CHAIRMAN GREENSPAN. Yes. When we were doing the discount
rate announcements, we always had a draft if there was a possibility
of a change in the rate. We would have a tentative statement to be
read in the event that the votes were there.
MR. BLINDER.

Two-handed intervention!

VICE CHAIRMAN MCDONOUGH. I would like to raise a minor, or
maybe not so minor, objection to that. Don Kohn, I believe, has been
the drafter of the statement, but the fact that he has had it in
pectore rather than on the table means that the debate is not
inhibited by people looking at the statement and seeing what the party
line may be.
CHAIRMAN GREENSPAN.
discussed after the vote.

No, the statement has always been

VICE CHAIRMAN MCDONOUGH. I thought you were suggesting that
you were going to have it available for people while they were voting.
CHAIRMAN GREENSPAN.
MR. BLINDER.

No, we vote and then decide what it is--

What we voted on!

CHAIRMAN GREENSPAN. What we have been doing recently is to
vote and then discuss what type of statement would be issued should
the Board approve a discount rate change that would be part of the
decision. That was never done to my recollection until after the FOMC
had voted.

-12-

1/31-2/1/95

VICE CHAIRMAN MCDONOUGH.

I understand how it has worked.

I,

at least, got confused by what you said just now.
MS. MINEHAN.

Yes.

CHAIRMAN GREENSPAN. I am sorry. I would say that if we are
going through a process involving an FOMC vote, and it is going to be
either preceded or followed by a discount rate change, the statement
that is to be used in the discount rate announcement should be
indicated to the FOMC, at least in approximate form, after the FOMC
vote. If there is a challenge as to whether or not the statement
captures the substance of what the Committee decided, we have a chance
to change it.
MR. BLINDER.

President Boehne.

MR. BOEHNE. Just a couple of comments: I might state
somewhat differently than did the Vice Chairman the rationale for why
we are doing what we are doing. We are trying to make the best
possible monetary policy decisions and that depends very crucially on
the quality of the deliberative process. At the same time, we also
want to be as open as possible. That balance of having a quality
deliberative process and a degree of openness, I think, ought to be
reexamined from time to time. What was the right balance in one
period may be different in another period. I agree with the immediate
change. I think that there are some rather strong reasons for only
announcing changes and not getting into the habit of announcing "no
change" decisions, even though I can conceive of situations where that
might be best. In addition to the examples you gave, Mr. Chairman,
where there may be a reason to delay the implementation for a couple
of days and it therefore would be very awkward to issue a no-change
statement, there is also the complication that we sometimes have
conference calls between meetings. In my view we would not want to
get into the habit of stating that policy was not changed at a meeting
even though we might have considered the possibility of a change at an
unscheduled meeting during the intermeeting period. Another
complication is the delegation that the Committee makes to the
Chairman. The Chairman has the flexibility to change policy between
meetings. While it may be splitting hairs, conceivably the Chairman
could think about making a change and decide against it.
If we have a
stated policy that we are going to announce both change and no change,
it could get more complicated. It is much cleaner to do it the way
that we have been doing it.
On the issuance of a statement, I think we ought to have a
statement when we do make a change. It ought to be short. To me, the
main reason is that somebody is going to explain our action, and I
would rather our words be the basis for that explanation than somebody
else's interpretation. So, I think it is worth a sentence or two, but
I feel rather strongly that it has to be up to the Chairman. The
Chairman can get all the advice he wants from the Committee, but it is
his responsibility, and I think we ought to make that clear.
MR. BLINDER.

President Jordan.

MR. JORDAN. I agree with announcing as we have done over the
past year, including the indication as appropriate that the meeting
has adjourned and there is no further announcement. As far as the

-13-

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substance is concerned, though, I think your characterization, Mr.
Chairman, of the message about the future is the important criterion.
That depends critically on the regime that we are in. If we were in
an era when people had absolutely no doubt about the ultimate
objectives of the Committee--if we already had a totally credible
commitment to future price level stability, or had announced something
along the lines suggested in the Dave Lindsey memo regarding future
objectives--and the only message was a matter of tactics in order to
achieve those objectives, that is one thing. In that case, I would be
willing to be more forthcoming about how our action is intended to
achieve the objectives. However, the regime that we are in, as I
perceive it, is one where there is some uncertainty about our
objectives. The message could get confused in the minds of the public
as to what it is we are trying to achieve versus how we are trying to
achieve it.
In that case, I would prefer the briefest possible
statement to minimize that misinterpretation.
MR. BLINDER.

Governor Phillips.

MS. PHILLIPS. I agree that it is appropriate to make
announcements of policy changes, and when there are no changes to
continue to indicate that meetings have ended. With respect to the
statements, I think that, as a general matter, making them as short as
possible is probably the best rule of thumb. We always have to leave
open the ability to communicate what needs to be communicated, and I
think that should be left to the Chairman's discretion. If he has a
draft statement that he feels matches the gist of the discussion, I
think it would be useful for that to be read. But I would hate to see
that built in as a requirement because I do think that the Chairman
needs to have some discretion in terms of wording the final statement.
MR. BLINDER. That is the end of the list. I would just like
to add my own views. I would like to align myself very strongly with
Cathy Minehan's views on the "no change." We would not want to be
committed to making a statement every time we did nothing.
MS. MINEHAN.

Right.

MR. BLINDER. Many of those times we have nothing to say.
There have been times in history when not changing the interest rate
was the news or changing the interest rate was the non-news. I would
certainly like to see us have the flexibility to make an announcement
and explain why we decided not to change interest rates, where that
seems sensible. My personal preference would be for a policy that
calls for a statement at every interest rate change and the option of
a statement on a no-change, but by no means a requirement of a
statement on a no-change. I would also like to go out on a limb--I am
not hesitant to go out on limbs as you know--against what is obviously
the tide toward briefer and terser. I believe, for the reasons Ed
Boehne and others mentioned, that we now have a situation where the
people that speak the least about the Fed's decisions are those at the
Fed, and we are interpreted voluminously. There is nothing wrong with
that. We will still be interpreted voluminously even if we say
things. But our statement is a chance for us to say what we are up to
and why. I don't have a specific number in mind, but a number of
central banks around the world say a lot more about their policy than
we do. We could expand from our current empirical norm of zero to

1/31-2/1/95

-14-

three sentences. Going up from that would still leave us with a
fairly short statement. I am not talking about writing a book.
On the issue of the pen in the Chairman's hand, it seems to
me that we have coalesced around a policy where the Chairman has a
draft, he reads it, he listens to what people say, and then he has
unilateral authority to do with that as he wishes. It sounds like
almost everybody is there on that one.
President Moskow wants to
speak also.
MR. MOSKOW. I generally agree with the thrust of what has
been said. Let me just preface it by saying, as a newcomer, that I
think the announcement policy of the past year has been working quite
well. Essentially, what we are doing is ratifying the current
practice. Certainly, we should continue announcing our policy changes
after each meeting. The announcements should be brief. I think the
Chairman's suggestion that they continue to be read to the Committee
for any comments is good and useful. Maybe this is just a nuance on
the Minehan/Blinder suggestion, but I would phrase it a little
differently though I think I am in complete agreement with what you
are saying. As I understand the current practice, after the meeting
Joe Coyne announces that the meeting is over and that there is no
announcement. That is the announcement; there is essentially no
announcement. Now it seems to me that we as a Committee can make an
announcement at any time if we want to without changing interest
rates. We always have the option of making a statement if we want to.
We could do it after the meeting if we so desired. I just would not
put it in the context of a "we are going to announce no-change."
I
think I would say that if we have an announcement to make when there
is no change, we will make an announcement.
CHAIRMAN GREENSPAN. One way to resolve this issue of whether
to make an announcement when there is no change in policy is to view
it as a policy question that should be part of our debate.
In other
words, if we are in a situation where part of the response that we
expect to get stems from our doing nothing, that is a major policy
issue, not a disclosure question; so that is part of our discussion.
On rare occasions--I think probably quite rare--it might be that what
we want to do is to put aside our standard procedure, which we always
have the option of doing anyway, and as part of a policy decision we
could say that policy has not changed and make a statement. Or we
could just say that we did not change our policy and make no
statement. Both of those are policy-oriented matters. I gather the
thrust or consensus here is that we should leave our announcement
policy as it is. That is, if policy is not changed, Joe Coyne will
say that we have ceased functioning, which may have more implications
than--[Laughter]
MS. MINEHAN.

He won't say that!

CHAIRMAN GREENSPAN. There would be no announcement unless
there is something positive to be gained as a result of making one, in
which case that would be part of what we would discuss and we would
instruct Joe accordingly. I would guess that that may happen once a
year, maybe less.
I do think that leaving the issue open in the
abstract and maybe as a practical matter does have some merit.

-15-

1/31-2/1/95

MR. MOSKOW.

That is exactly what I had in mind, Mr.

Chairman.
MR. BLINDER.
sounds like one.

I think we may have reached a consensus.

CHAIRMAN GREENSPAN.

It

Why don't you try to define it?

MR. BLINDER. I have been assigned to define the consensus.
The consensus is that on interest rate changes, be they federal funds
rate changes only or discount rate changes only or both, there will
normally be a statement. I think there was a strong consensus that
those statements should be terse. A draft of them should normally be
read to the Committee by the Chairman who will ask for comments and
then will have the authority to do with those comments as he wishes.
In cases of no change in policy, there is an option of making a
statement, if we see something to be gained. But there is no
presumption that there will be a statement.
CHAIRMAN GREENSPAN.

Tom.

MR. HOENIG. If I may, it seems to me that the last part of
that should be stated the other way. There is a presumption that if
there is no policy change, the meeting would end with no announcement.
An exception would be made if there is a policy consideration to be
served, which we would discuss at the meeting. Is that what I heard?
MR. BLINDER.

Yes, I think so.

MS. MINEHAN.

That is what it is.

CHAIRMAN GREENSPAN. Yes. An announcement when there is no
policy change is an exception and must be agreed to during the
discussion in the FOMC meeting.
MR. HOENIG.

Thank you.

CHAIRMAN GREENSPAN.
thought was scholarly?
MR. BLINDER.
Thank you.

Any objection to that summary, which I

A much higher grade than I would have given it.

CHAIRMAN GREENSPAN.
[Laughter]

I am emotionally involved with CRA!

MR. BLINDER. The second issue relates to the tapes and
transcripts. The subcommittee is basically recommending the status
quo except for the issue of an occasional off-the-tape discussion that
is not about monetary policy. It may be, for example, about some
confidential personnel matter. Other people may have other examples,
but monetary policy would not be included. I guess the floor is open.
Governor Lindsey.
MR. LINDSEY. Unfortunately I am going to be dissenting on
this. I realize I am in the minority. The discussion in your memo
says there is a strong consensus that we would all be better off if
the practice of taping FOMC meetings had never begun. That is true.

1/31-2/1/95

-16-

It is also true that this Committee never authorized the maintenance
of tapes. As the memo points out later on, most of us were taken by
surprise when we found out that the transcripts were maintained. So.
I think that there is an issue of justice here and that we are
ratifying an injustice by approving the recommendation, practical
though it may be.
The second concern I have is a hypothetical one. At the
moment we live in a very benign political environment in which the
chances that the tapes will be used against the Committee are very
slim. That is not necessarily the environment we should presume in
considering whether or not it is wise to tape these proceedings. In
fact, an abundance of caution would suggest that we should imagine a
very non-benign situation. One might think of it as a witch hunt in
which we are turning over to the prosecutors evidence that is really
none of their business. It is possible for us to prevent taping under
those circumstances by turning off the tape now. It will not be
possible in that less benign political environment for us to turn off
the tape when we feel we need to. So, I think we should show at least
a little caution about the vagaries of the political process and
protect not ourselves but some future Committee that may be in a more
hostile political time than that in which we find ourselves and I'd
turn off the tape now while we can do it.
MR. BLINDER.

President Melzer.

MR. MELZER. A couple of comments: First, on this issue of
turning the tape off for certain periods of time, I have had a concern
that in doing that, even though it might be desirable in some
respects, we could incur a fairly heavy political cost with respect to
how the Federal Reserve is perceived. Apparently, the public
perception is that the Fed is not as forthcoming as it ought to be,
and turning off the tape for parts of our meetings would be perceived
as a step in the direction of becoming more secretive. So, as I
mentioned in the letter that I sent to Alan Blinder earlier, while it
might be desirable in some sense, I think if I were going to incur
that cost, I would be inclined to shut the tape off entirely.
Second, in thinking about these issues, I come at it the same
way that Ed Boehne described before. We really have to think in terms
of this tradeoff between the deliberative process and providing
disclosure to the public. Our primary responsibility ought to be to
make sure that we have an effective deliberative process and then
provide as much information to the public as possible. In thinking
about the issue of continuing to run the tapes, I feel much the same
way as Governor Lindsey has stated here. In my view it is just a
matter of time, given the various avenues through which we could be
served a Congressional subpoena, that those tapes will be listened to
on virtually a real time basis and could be used as a means of
isolating members and basically killing the deliberative process. The
only way to preserve that process at that point in time would be to
say, now that the damage is apparent, we are going to turn the tape
off. But that would be in the very sort of climate that that action
would be considered as a major affront. Frankly, I have seen us back
away from much less threatening situations because of the concern
about the potential for legislation. In this particular issue with
respect to the tapes, we have had a couple of opportunities along the
way, in my opinion anyway, where we might have had an opening to

1/31-2/1/95

-17-

correct this. The first instance occurred when the Justice Department
announced its new policies with respect to defending agencies on FOIA
requests. We may have had another opportunity more recently this
fall. In any event, I think that we could be leaving a future FOMC in
a very difficult position. In effect, in approving what is
recommended here, we have to be saying to ourselves, I am approving
this recognizing that an important condition would be that, in the
event of that sort of request, we would be prepared to take the action
and turn the tape off to try to preserve the deliberative process and
fight whatever battle needs to be fought at that time. But again,
that is going to be one difficult battle. The real question is
whether there will be a better opportunity in some other environment
to straighten out our record-keeping practices. I think all of this
is better stated in my letter that you all have than I have just
stated it.
MR. PARRY. As a point of clarification, what did the
subcommittee conclude with regard to this point?
MR. BLINDER. When the subcommittee met and drafted its
report, we viewed the subpoena option as considerably less likely than
we did subsequently--after Virgil's memo pointed to the route through
the Government Operations Committee. But a subpoena was already a
possibility. I believe our view was that we should resist a subpoena
if and when it came.
MR. MELZER. There is a reference to that in our report at
the bottom of page 2 and the top of page 3. It is an explicit
statement of the conditions under which we would approve turning off
the tape.
CHAIRMAN GREENSPAN.

Where?

MR. BLINDER. It is the very last sentence on page 2 carrying
over to page 3 in the subcommittee's report. President Forrestal.
MR. FORRESTAL. I must say that when it was revealed that we
were taping these sessions, I wished that we had never started this
practice. But having thought about this over the past year or so, I
have begun to think that having the tape may not really be all that
bad. It does provide evidence of the accountability of the Federal
Reserve. I don't think that it has in any way interfered with the
deliberative process. I did sense at the very beginning that some
interference might have happened, but I now feel that the deliberative
process has been preserved. We agreed to a five-year period before
release of the transcripts, and I think that in itself helps to
safeguard the deliberative process. I see the danger of a subpoena as
fairly minimal. I don't believe it is going to happen, although it
could, and if it does I think we have ways of resisting it. In the
interests of accountability and openness about what happens in the
central bank, keeping the tape on is the way to go, even leaving aside
the political difficulty of turning it off at this point. It is a
good idea to have the tape on as a matter of principle.
Having said that, I would agree that a very good argument can
be made for turning the tape off on those occasions when we have to
discuss very sensitive personnel matters or perhaps matters dealing
with other central banks--the situation we are in at the moment--or

-18-

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issues involving foreign governments. I think we can draw an analogy
from the Freedom of Information Act. It is a statute that calls for
accountability and openness in government, but there are exceptions
and exemptions that are brought to bear. Those include personnel
matters, deliberations pertaining to foreign central banks, and so on.
Such exemptions can give us the justification for turning off the
tape. I believe the way our policy should be stated is that the tape
is on as a general rule but that it is turned off in those exceptional
cases. To conclude, we would be in a very difficult position if we
were to turn the tape off completely, and as I said, I don't think it
is costing us very much to keep it going anyway.
MR. BLINDER.

President Minehan.

MS. MINEHAN. I would like to align myself with most of what
President Forrestal had to say. I do see the need for such a record
for reasons of accountability, but I have a question. We have tapes
and we have lightly edited transcripts. Do we have to keep both of
these? Are both the full record, or do we get rid of the tapes upon
the development of the lightly edited transcripts? Would a potential
subpoena, assuming it did not cover a recently completed meeting for
which we have a tape but not yet a lightly edited transcript, cover
only the lightly edited transcript? Or do we have to keep the tapes,
too?
MR. MATTINGLY. No. Once the edited transcript is approved
by the participants, the tape can be dispensed with.
MR. KOHN. And so can the draft, lightly edited, that is sent
to the members for review.
MS. MINEHAN.

Okay.

MR. MATTINGLY.
transcripts.

The approved record would be the edited

MS. MINEHAN. So the lightly edited transcript is what we are
talking about in terms of what might be subpoenaed. In this
connection I would like to note that there has been some delay in
terms of our getting the word-for-word transcript. I have not seen
one in a little while; maybe I am just behind in my work. To the
extent that that is pretty much up to speed-CHAIRMAN GREENSPAN. The transcript for the December 20
meeting came out several days ago.
MS. MINEHAN.

The lightly edited version?

MR. BERNARD.

That transcript was sent out about the 12th of

MS. MINEHAN.

Really?

January.

MR. KOHN.

The draft version for you to correct.

MS. MINEHAN. I saw the minutes for the December meeting.
have not seen that transcript. I don't know why.

I

-19-

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MR. KOHN. One point of clarification, President Minehan:
For earlier meetings before the Committee started to review the
transcripts--that is, those before January of last year--we are not
permitted to throw away the raw transcripts.
MS. MINEHAN.

Right.

MR. KOHN. But for all the transcripts that the participants
in the meeting have reviewed and made corrections to their statements
where necessary, we can throw away both the tapes and the draft
transcripts. That would cover everything from the start of 1994 on.
MS. MINEHAN. So, have you thrown away the tapes but still
have the draft transcripts, or have you kept both?
MR. KOHN.
everything.

So far, pending this discussion, we have kept

MS. MINEHAN.

Going forward then, we would--

MR. KOHN. Going forward, once the lightly edited transcript
is finished, we would throw away the other transcript and the tape.
MS. MINEHAN. So within the ambit of the next meeting, you
would have a lightly edited transcript and no draft transcript or
tape?
MR. KOHN. I don't know what the timeframe will be. It might
take a couple of months before we get all the corrections and are able
to incorporate them into the lightly edited transcript. By the time
we send the draft transcripts to you, you send them directly back to
us, and we incorporate corrections, there may be a meeting that goes
by.
MS. MINEHAN. Okay. I think it is important that most of
what anybody would get with a subpoena would be the transcripts that
we have reviewed for accuracy--the lightly edited transcripts with the
confidential information redacted.
MR. KOHN.

Yes.

MS. MINEHAN. Then I think that normally keeping the tape on
is the right way to go. The tape is normally on, and it is explicitly
turned off only for certain discussions of confidential matters other
than monetary policy. I am convinced that we have less risk with this
policy, given what Don has said about the lightly edited transcript.
MR. BLINDER.
up this conversation.

The Chairman has just requested that we speed
With that, I call on President Parry.

MR. PARRY. I basically agree with what President Forrestal
said. I would stress, though, that if we do have the tapes subpoenaed
we fully intend to stop taping at that point.
MR. BLINDER.

President Jordan.

MR. JORDAN. Thank you. If we did not already have the
tapes, I am not sure that I would support initiating such a procedure,

-20-

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but I don't see the possibility of terminating it at this time. We
have transcripts for 1994. They will be released five years from now,
or sooner if somebody makes us. That leaves us basically with two
choices if we were even to contemplate turning the recorder off.
Either we announce now that we are stopping, take the storm now, or
wait until the year 2000 and then say that we turned the recorder off
five years ago. Neither alternative is realistic. That to me is just
not something we can consider. I would oppose turning the tape off
even for non-monetary-policy parts of our meetings. The principle
that we have established of taping entire meetings, as we have done in
the past year, is really the one we have to support. One of the
defenses we have against earlier release, whether we end up with four
years or three years or one year or whatever, is that we do discuss
sensitive matters. We do discuss foreign governments and foreign
central banks and individuals. And leaving that sort of information
on the tape is the reason that we can give as to why we have to have a
five-year delay.
CHAIRMAN GREENSPAN.
MR. BLINDER.

That is a very good point.

President Hoenig.

MR. HOENIG. I would say the current situation is such that
as much as I would like to turn the tape off, I don't think we can.
Having said that, I must tell you that I think Governor Lindsey is
right. First of all, I believe the tape has had some chilling effect
on our discussions. I see a lot more people reading their statements.
I think it is harder to be as candid as some of us might otherwise be.
But more importantly, I think if we do start seeing the threat of a
subpoena or inquiries, that will have a clear chilling effect, and it
could happen at the most critical of times for monetary policymaking.
We are in a sense confined to this outcome of leaving the tape on for
now. I hate to see this enunciated as a formal policy. I would like
to see our options preserved for the time when we can seize the
opportunity to turn the tape off.
MR. BLINDER.

Governor LaWare.

MR. LAWARE. I must say that I have never seen any reason why
we should not keep the tape on. I agree with some of the
representations made here that might serve us well in protecting the
tape. The lightly edited transcript, I think, is very useful from a
historic point of view. If we can delete or remove or edit the
confidential material, I don't see the problem. What puzzles me here
is why we feel it necessary to enunciate this policy change. Why do
we have to tell anybody what we are doing? Do we have to make it
public? This does not involve any change in monetary policy. I was
baffled when I came across the issue of how we should enunciate this
on our agenda. Is somebody out there waiting for us to enunciate a
policy?
CHAIRMAN GREENSPAN.

Yes.

MR. LAWARE. Let them wait then. [Laughter]
They will
forget about it after a while. I just don't see the need to do that.
It will just reopen the whole issue and stoke the fire under it.

-21-

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CHAIRMAN GREENSPAN. Let me respond to that because it is a
quite legitimate question. It is my impression that House Banking
Committee Chairman Leach has been holding off on any legislative
initiatives in this area on the grounds that we are going to do it
ourselves. The impression I have--I don't know how firmly based it
is--is that if we don't set our own policy, there will be real
interest in that committee in trying to do something. Whether or not
the issue would go to the full House is a question, but my suspicion
is that there is more support for FOMC openness, on both sides of the
aisle, than I think we have realized up to now. Larry Lindsey is
obviously correct. The degree of Congressional friendliness is much
more evident when, say, Jim Leach is in the chair instead of Henry
Gonzalez. But I don't think that their views on the issue of the
openness of the Fed, on disclosure and that sort of thing, are
significantly different. Let me just ask Don Winn to make sure that I
am not misreading. Do you have an impression, Don, as to the answer
to that?
MR. WINN. I agree with your impression, Mr. Chairman. My
understanding from talking with the committee staff is that there was
interest on the part of the new chairman of the committee on including
something on this subject in legislation. Indeed, the bill that was
introduced on the first day of the session concerning the Reserve Bank
presidents probably would have included a provision dealing with
transcript-type issues--maintenance of the transcript, release of the
transcript, and the time period for the release. Such a provision was
left out because there was an understanding on their part that we
would be addressing this issue. So, the interest in the transcripts
subject cannot be thought of as simply a matter that the other side of
the aisle was focused on and interested in. It is a subject that
continues to be of interest in the Congress. It is also a subject in
which the new chairman of the committee through his staff has
expressed an interest to us. The expectation on their part is that we
would make some kind of policy decision.
CHAIRMAN GREENSPAN. Chairman Leach effectively is leaving it
to us to make the judgment, but he has made it very clear that he
wants us to make a judgment.
MR. LAWARE.
MR. BLINDER.
to say more?

Okay.
Are you finished, Mr. Chairman?

CHAIRMAN GREENSPAN.
MR. BLINDER.

Did you want

I don't want to say more.

President Moskow.

MR. MOSKOW. I am very concerned about making a long-term
decision on this today that is going to bind future Open Market
Committees for many years to come. Since I am very new to this, I am
begging indulgence if I ask some very basic questions. First of all,
you mentioned that Virgil Mattingly's memo came out after the
subcommittee had written its report. Did the subcommittee consider
that legal memo in later deliberations and still agree to go forward
with its recommendation?

-22-

1/31-2/1/95

MR. BLINDER. Yes. Subsequent to that memo we had a
conference call devoted-almost exclusively to the memo and we left the
recommendation intact.
MR. MOSKOW. I divide this into two questions. One is, would
we want to have these tapes today if we were voting today to set up a
system of taping and follow the procedure we are going to have? Would
we do that today? My sense just from reading this report and from the
comments here is that we would not initiate this.
CHAIRMAN GREENSPAN.

You could stipulate that.

[Laughter]

MR. MOSKOW. Okay. If that is the case, then the second
question I have is whether we have explored both within the Committee
and with those in the Congress who are so interested in this area
other ways that we could be more open. I agree that we should have a
policy of openness unless it is going to interfere with our
deliberative process. Have we explored other options?
CHAIRMAN GREENSPAN. Let me address that. I think the answer
to that is definitely yes. We have explored it on the Hill and tried
to get a sense of where everyone was. We obviously can't do this in
any detail, but I am not sure that any of the options we tried to
surface had any support. The only real option that exists for us now
is to turn off the tapes. That is an option for which I believe there
was some strong support within this Committee a year or so ago, mainly
on the grounds that we thought the taping inhibited the deliberative
process, not that we were concerned about the subpoena issue, which is
a somewhat different question. I think the conclusion, with perhaps a
qualification from Tom Hoenig, is that there is very little evidence
that the quality of our discussions has been reduced. Indeed, some of
our most fervent discussions have occurred in the period since we all
knew the tape was on. On that issue, I think the question has pretty
much become moot. What is an issue, and I think it is a real one, is
the subpoena question. It is an issue that could freeze our
discussions at some point. If we really wanted to get paranoid on
this whole thing, we basically could say that, if we had no
transcripts, we would all get subpoenaed to testify in some open
forum. My own judgment is that the chance of getting subpoenaed
clearly is very negligible in the short run, certainly the next two
years. If we get into an environment in which the subpoena issue
becomes a big question, my guess is that it will not be our most
important problem.
MR. BLINDER.
MR. MOSKOW.
MR. BLINDER.

Mike, were you finished?
Yes.
President Broaddus.

MR. BROADDUS. I want to support Jerry Jordan's point--if we
are going to leave the tape on most of the time, I think he made a
compelling argument for leaving it on all of the time.
CHAIRMAN GREENSPAN. Then the lightly edited transcript would
be released after five years in redacted form. We have redaction
capabilities. So, it is really a redaction issue.

-23-

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MR. BROADDUS. Yes, it would not preclude that. I think we
would still have the lightly edited transcript as the principal
written record, but I also think that there might be something to be
gained by keeping the draft transcripts somewhere in our archives so
that any questions that might come up about the integrity of the
editing process could be answered. I do not think we would lose
anything by that.
CHAIRMAN GREENSPAN. Isn't there a legal question on the
redacting? That is, within 30 years don't we have to send the
unredacted transcript to the National Archives? We can't redact the
transcript and throw the unredacted version away.
MR. BLINDER. I am confused. Could you clarify? I thought
we had to keep an unredacted transcript for archival purposes, but I
also thought I heard you say before that we do not have to do that and
that we can just destroy that transcript once we have done the
redactions.
MR. KOHN. What we would destroy is the draft transcript that
does not incorporate your edits. We would then have a complete
lightly edited transcript-CHAIRMAN GREENSPAN. Including the materials that would later
be redacted before publication.
MR. KOHN. Yes, before release to the public. The unredacted
transcript would be turned over to the National Archives after 30
years.
MR. BLINDER.

Okay.

Governor Lindsey.

MR. LINDSEY. I have a point of information that I think gets
to the heart of President Boehne's comment and our willingness to
redact certain materials. Mr. Chairman, is it your intention to turn
off the tape during the discussion of Mexico we are about to have
later this afternoon?
CHAIRMAN GREENSPAN. It is one of the questions that I was
going to raise with the Committee after we discussed the grounds for
redacting central bank issues. However, I must say my own inclination
would be to forget this issue of turning off the tape from time to
time on a discretionary basis because that leaves open the question of
how to do that. It may be more of a problem than it is worth.
MR. LINDSEY. No quarrel from me; I think it makes the point
that we were making earlier.
MR. KELLEY. On the last point that you made, Mr. Chairman,
about when to turn off the tape, there is a way to accomplish that and
that is by doing it in a negative way instead of in an affirmative
way. In other words, what is at issue here, I believe, is an
appropriate record, whatever that may be, of monetary policy
discussions. I would argue that it would be unfortunate if this
Committee left itself in a position where it was unable to talk freely
about whatever it might want to talk about other than monetary policy.
I do not know what those issues may turn out to be, but I certainly
would like to have available to us the opportunity to discuss off the

1/31-2/1/95

-24-

tape anything that we might want to discuss. Our monetary policy
discussions, properly defined, do have to be appropriately recorded
for posterity. Beyond that, if we want to go the route of maintaining
the ability to discuss whatever--Mexico, personnel matters, you name
it--off the tape, all we have to do is to adopt a policy that says we
will tape monetary policy discussions, period.
CHAIRMAN GREENSPAN. I forgot this issue. Some of the things
that I had in mind for turning off the tape were organizational
discussions and issues relating to how we as a Committee comport
ourselves. The reason I would raise that issue, and I retract what I
just said about leaving the tape on all the time, goes back to what I
thought was a frankly outrageous request for the tape of our
discussion in October a year ago. It covered a discussion of how we
would comport ourselves at a House Banking Committee hearing. That is
the sort of discussion that we should leave ourselves flexibility to
have with the tape off.
MR. KELLEY.

Precisely.

CHAIRMAN GREENSPAN. I would not turn the tape off on central
bank discussions on the grounds that they may involve important
issues. But I would think that personnel matters and discussions
about how we relate to the world at large and how we organize
ourselves as a Committee could be done without the tape running.
MR. MCTEER.
would not be taped?
MR. KELLEY.

For example, this conversation we are having now
Exactly.

CHAIRMAN GREENSPAN.

This conversation, yes.

MR. KELLEY. I take it your point is, of course, that what is
taped ought to be broadened to include perhaps central bank
considerations as opposed to somewhat more tightly defined monetary
policy considerations?
CHAIRMAN GREENSPAN.

Yes.

MR. BLINDER. Let me tell you what I think I heard as a
consensus, though I am not sure. Correct me if you think I am wrong.
It seems to me that we need a vote to determine this. I think I heard
a consensus, though not unanimity, that we should continue taping and
that we should enunciate a policy on this issue. It is possible not
to say anything. Is that correct? I think so. I am leaving aside
the issue of when the tape should be off where I did not hear any
consensus--maybe someone else heard a consensus. Maybe we should just
have a vote on whether there should be an "off the tape" portion. Do
you agree?
CHAIRMAN GREENSPAN. I agree. It is not clear where the
Committee is on that. I think we ought to take a vote of all 19 of us
because this is a policy in which we will all be involved, not just
the current members of the FOMC.

-25-

1/31-2/1/95

MR. MCTEER. I have some questions. First, what is the
definition of "enunciate?" Could enunciate be a private communication
to the chairman of the House Banking Committee?
MR. BLINDER.

Do you want to answer that, Mr. Chairman?

MR. MCTEER. Is it the same thing as an announcement to the
public or could it be different?
MR. BLINDER. I used the phrase enunciate a policy and the
question is does that mean-CHAIRMAN GREENSPAN.
that what you mean?

When the tape would be turned off, is

MR. MCTEER. No, the question is do we enunciate a policy on
taping, and I do not really know what enunciate means in this context.
SPEAKER(?).

You mean make public do you not?

CHAIRMAN GREENSPAN.
MR. BLINDER.
MR. KELLEY.

Oh, yes.

That is what I meant.
Make a public announcement.

CHAIRMAN GREENSPAN. The answer is "yes." We would make a
public announcement and mention our decision in the minutes. But the
announcement would not go into details.
It would just list the
various items; it would be a very short statement.
MR. MCTEER. You could not just have it in the minutes and
then convey that to the chairman of the House Banking Committee?
CHAIRMAN GREENSPAN.
MR. BLINDER.

If it is in the minutes, it is public.

The minutes will be published in about six

weeks.
MR. MCTEER.

Oh, you mean those minutes?

CHAIRMAN GREENSPAN.
MR. MCTEER.
MR. BLINDER.

Yes.

Okay.
I think we have a few more people who want to

speak.
MR. BOEHNE. I just have a question and this has to do with
whether we allow the tapes to go off for certain subjects. It is a
question to Virgil: What could we argue reasonably convincingly about
redaction? For example, if we keep the tape on all the time, what is
it that we could hold back for 30 years? What would be a legitimate
kind of argument? Would the example the Chairman uses about how we
comport ourselves with the rest of the world be a legitimate

redaction?

1/31-2/1/95

-26-

MR. MATTINGLY. That is legitimate. We could keep from the
public information that we get from another central bank or foreign
government on the grounds that if we disclosed it after five years, we
would no longer be able to get that information. That source of
information would dry up and that is legitimate grounds to redact the
material.
MR. BOEHNE.
rest of the world?

What about how we organize ourselves for the

MR. MATTINGLY. We would have to make that discussion public.
Our organization rules are public. Now, if the Committee is talking
about the appointment of a person to a particular position, the debate
about that could be redacted. There would be a possible invasion of
personal privacy.
MR. WINN. I would note with respect to dealings with foreign
central banks that Congress, back in the late 1970s and the early
1980s when they were considering legislation dealing with the
maintenance of transcripts, did contemplate an exemption dealing with
foreign central banks that would have allowed us to withhold that
information for 30 years.
MR. BOEHNE. Returning to your example, Mr. Chairman, I would
agree that it was outrageous to request the tape for that telephone
meeting we had in October 1993.
In hindsight, however, it probably
served us well that we had that tape because it was very useful in
showing that there was no conspiracy, that there was no evil activity
going on. I think it cleared the air rather nicely even though we
thought that it really was not a legitimate request.
CHAIRMAN GREENSPAN. I think it did clear the air, but the
issue is that if we had known our discussion was going to be
transcribed and made public, would we have been inhibited in that
discussion--as indeed I think we were in other discussions later.
There is a very special type of discussion that any committee,
independently of the individuals who happen to be members of it,
should be able to hold in private. That is the committee's internal
organization. An example is the content of that particular meeting-who would say what to whom, and how we would decide who followed whom,
and who would be responsible for indicating such and such. As it
turned out, as soon as we brought all those Congressional committee
staff members here to listen to the tape, the issue was gone. No one
uttered a new word. But the fact that the tape for that discussion
was available to be scrutinized is what I found inappropriate. We
will be accused of all sorts of conspiracies whether we have tapes,
whether we do not have tapes, or whether we publish them at any time
because there is always the question: what are we not telling them?
It is an unanswerable question. Maybe I was overly sensitive to that
particular episode, but I thought that it was a real violation of the
Committee's rights. For example, there are certain types of
conversations we can't have with each other about how we are going to
organize if we are subject to making those publicly available. There
can't be any informal discussions.
SPEAKER(?).

That's exactly right.

-27-

1/31-2/1/95

MR. WINN. Mr. Chairman, when we are dealing with monetary
policy, it is a lot easier to defend preserving the confidentiality of
a document. I think there really is a lot of respect for the
independence of the Fed in the Congress. When anyone is trying to get
information and we can say it relates to monetary policy, we are going
to be more successful in defending documents of that nature. Where it
is not monetary policy--and that was the kind of tape we were dealing
with--it is very hard to raise our best arguments in protecting our
information. I guess that argues for limiting what is taped to
monetary-policy types of information. It is hard to defend nonmonetary-policy types of information from a Congressional request or
demand.
MR. BLINDER.

Tom, did you want say something again?

MR. MELZER. Not on substance. I was just going to suggest
that it might be helpful for the Chairman to take a straw vote--a show
of hands--on that issue first, just to get a sense of where people are
without a formal vote.
CHAIRMAN GREENSPAN. I am not going to record these votes
because we do not have to. There is no legal requirement. But we do
have to find out where everyone stands.
MS. PHILLIPS. Before we do that, may I ask a question? A
lot of times we have briefings where one of us or a member of the
staff presents information and we ask questions. Is this the kind of
thing that you would contemplate not taping?
CHAIRMAN GREENSPAN.

No, the tape would be on for that.

MS. PHILLIPS.
I was thinking about legislative matters such
as what is happening on the Hill, those kinds of discussions?
MR. PARRY.
MR. KOHN.

That is not done during the meeting.
It is done when the meeting is over.

CHAIRMAN GREENSPAN. We usually do that at lunch because it
is not part of the FOMC deliberations.
MR. KOHN.

And the tape is not on.

MS. PHILLIPS.

Okay.

VICE CHAIRMAN MCDONOUGH. I think, Mr. Chairman, we could
distinguish between organizational matters that would not be taped and
monetary and central banking matters that would be taped.
CHAIRMAN GREENSPAN.

Yes.

MR. BLINDER. I would have suggested something like
"confidential matters not pertaining to monetary policy" as the rubric
for not taping. That is just a suggestion.
CHAIRMAN GREENSPAN. You know what the problem with that is?
It is the word "confidential."

-28-

1/31-2/1/95

MR. KELLEY.

Strike "confidential."

Just say "matters."

CHAIRMAN GREENSPAN. "Confidential" is precisely what we do
not want. It has to be based on the nature or the substance of the
discussion. I thought that the Vice Chairman's formulation seemed
reasonable. What I want to do is ask for that and also ask whether or
not it should be the choice of the chair to make the decision on when
the tape goes off.
MR. BOEHNE.

Could you repeat what Bill McDonough just said?

CHAIRMAN GREENSPAN.

Bill, why don't you repeat it.

VICE CHAIRMAN MCDONOUGH. I suggested that organizational
matters, which we discussed as examples, would not be taped. Other
matters would be taped and those would be monetary policy and central
banking matters. I do not know of anything else we talk about.
CHAIRMAN GREENSPAN. Let me give you a case in point--today's
meeting. We would not have taped the very beginning of the meeting
where we discussed the Committee's organization. We would publish,
obviously, the list of everyone who got elected; that is part of the
normal record. I suspect we would not be taping this particular
discussion.
MR. MCTEER.

That's right.

CHAIRMAN GREENSPAN.
MR. MCTEER.

What about Mexico?

CHAIRMAN GREENSPAN.
central bank matter.
MR. BOEHNE.

This is an organizational discussion.

Mexico I think we tape because that is a

And redact?

CHAIRMAN GREENSPAN.

Yes.

MR. BLINDER. This is one of the reasons that I have a
It
somewhat negative reaction to the phrase "central bank matters."
is not obvious that what we just discussed is not a "central bank
matter."
VICE CHAIRMAN MCDONOUGH. You could leave it as monetary
policy because to me, monetary policy is a very broad, broad church.
MR. BLINDER.

Yes.

VICE CHAIRMAN MCDONOUGH. It certainly would include a
discussion of anything we may do vis-a-vis Mexico.
MR. BLINDER.
monetary policy.

I think most people would say this is not about

CHAIRMAN GREENSPAN. Can we just say that organizational
issues will not be taped, all others will be?

-29-

1/31-2/1/95

MS. MINEHAN.
keeping the tape on.

That is the formulation I would favor for

CHAIRMAN GREENSPAN.

Can we add that?

VICE CHAIRMAN MCDONOUGH.

Yes.

CHAIRMAN GREENSPAN. Okay, the proposal is that all
organizational matters will not be taped but, as relevant, the
substance will be included in the minutes. All other issues will be
taped. A lightly edited transcript will be made available, redacted
as may be necessary. The unredacted versions go to the National
Archives after 30 years. Okay? All those in favor of that particular
proposition, please raise your hand. All those opposed. The "Ayes"
Shall we do the next item?
have it.
MR. BLINDER. Yes, since this one was so easy, let's go to
the novel aspect of the subcommittee proposal, which is to allow
individual members at their option to add concurring statements to the
minutes.
I would like to say in starting this off that there was a
Mullins subcommittee before this subcommittee, as a lot of you will
remember. I inherited this proposal from the Mullins subcommittee and
heartily endorse it, although it wasn't my idea by any means.
I
wanted to mention that. The floor is now open.
I think there is a lot to be said for
MR. FORRESTAL.
concurring statements and, Alan, you articulated the arguments very
well.
I would just like to throw in one reservation. If we have the
possibility of concurring statements, we are going to invite more than
we might like. If we start with one concurring or two concurring
statements, we are going to have five or six in the next set of
minutes. If that were to happen, the quality of the minutes would
diminish because the concurring statements would detract from the
essential elements of the minutes. Over the years, and maybe Virgil
could confirm this, I have read many Supreme Court and Court of
Appeals decisions that have concurring statements. My judgment has
always been that if there are more than a few concurring statements,
it really takes away from the essence of the decision of the court.
That is what I have in mind when I raise this possibility. I think
this will be an invitation for people to get their names in the
record. I'm saying that as delicately as I can.
[Laughter]
Perhaps
this discussion today is an example of that-CHAIRMAN GREENSPAN.

Bob, you were not very successful!

MR. FORRESTAL. There are advantages, but I think we need to
take that potential drawback into account. If we do agree that we are
going to allow concurring statements, I would urge the members of the
Committee to be very judicious in the use of those statements.
CHAIRMAN GREENSPAN. Let me ask a question relevant to that
because I think Bob Forrestal is raising a very crucial question. Did
the subcommittee consider any sort of halfway alternative where there
would be a significant-MR. BLINDER.

Could I interrupt you for one minute?

CHAIRMAN GREENSPAN.

Yes.

-30-

1/31-2/1/95

MR. BLINDER.

Governor Lindsey suggested that we just decided

MR. LINDSEY.

To turn off the tape;

to-let's turn it off.

MR. BLINDER. I am neither endorsing nor opposing this.
Governor Lindsey suggested we just agreed on a procedure for turning
the tape off.
CHAIRMAN GREENSPAN. I think that is a valid request but we
are almost through with this.
[Laughter]
MR. LINDSEY.
MR. KELLEY.

Pardon me!
You would make a good terrorist!

MR. LINDSEY.
MR. FORRESTAL.
MS. MINEHAN.

[Laughter]

What do you think they do on weekends?
That is on the tape!
Some may view him as a terrorist already.

CHAIRMAN GREENSPAN. Did the subcommittee discuss anything
similar to what Bob Forrestal just said, namely, that only under
extraordinary circumstances would it be appropriate to have assenting
statements rather than as a general rule? Did you discuss that
question at all?
MR. BLINDER. I do not believe we did. We discussed
restrictions. The whole subcommittee is here. I don't remember
discussing that.
MR. BOEHNE. I think, Alan, the general feeling of the
subcommittee was that the concurring statements ought to be an
available option, but there was a general feeling that such statements
would not be used often. Now, there is no real way to enforce that.
We count on the good judgment of every individual member of the
Committee, but we count on the good judgment of every member of the
Committee for a whole lot of things.
MR. BLINDER. I do not think we ever discussed this issue,
but I would guess, like Ed Boehne, that this option would not in fact
be heavily used.
CHAIRMAN GREENSPAN. Can we make the issue basically that
what is on the table is "assenting statements, to be used only with
great judiciousness" or something like that?
VICE CHAIRMAN MCDONOUGH. This is a different human nature
than I am familiar with. I think I am closer to Bob Forrestal's view
of it as a privilege rather than a right.
MR. BLINDER.

President Hoenig--I am going down the list.

MR. HOENIG. As the Chairman has defined the proposal now, I
could live with it. But as a concept, let me just say, number one, I
think that we are a consensus-building body and our success has been
very much built around that.
I also think that nuances and

-31-

1/31-2/1/95

differences are reported and defined in the minutes so that the
outside world can see them. I believe it would be a mistake to begin
having concurring statements unless they are extremely limited. I
would define that as almost never if not never. Otherwise, we invite
into the process, as Bob Forrestal said, a feeling of obligation to
state a view because one's view is not quite the same as the view
expressed by another member or a member wants to get his or her name
on the record. But more importantly, if there are differences, I
think concurring statements invite a proliferation of statements.
That then opens up even more the issue of releasing the minutes
sooner. This could take us down a very rocky road.
CHAIRMAN GREENSPAN. I must say I have considerable sympathy
for that analysis and the view that there is a problem here. Do you
mind if I ask Don Winn a question? Don, I know that there has been
very little discussion of this issue on the Hill. Have you heard of
any? Do you have any sense of where the committees might be on this?
MR. WINN. I really do not have the sense that this is a
point of great significance to the Hill people. I don't think we need
to base our determination in terms of input that we have gotten on
that. I just cannot report anything significant on either side of the
aisle.
CHAIRMAN GREENSPAN. We originally brought this notion
forward, as I recall, when we were looking for ways to be more open.
I am wondering whether in fact we have overreached.
MR. WINN. I think you recall correctly, Mr. Chairman, that
we came up with it as an alternative to some of the proposals that we
were getting from the Hill. It is not a Hill proposal.
CHAIRMAN GREENSPAN. Just to say my piece, I had been in
favor of this proposal, but I have been having second thoughts
recently. I am willing to go along with whatever the majority wants,
but I must say that my enthusiasm for this is fading. The type of
argument that Tom Hoenig and others have made is really difficult to
get around.
MR. BOEHNE. I think this came up originally when we were
thinking of ways to expand the minutes. But subsequent to that, I
believe, we discovered that the meetings were being recorded and we
decided to release the transcripts. Also, we made the decision to
release our actions promptly to the public.
CHAIRMAN GREENSPAN.
MS. MINEHAN.

You mean it may be moot at this point?

Yes.

MR. BOEHNE. Yes, it may be moot at this point. This had a
life that preceded our making those decisions. I think the arguments
that have just been made are very good, particularly in light of the
fact that we really are being rather forthcoming. When it was still
the Mullins subcommittee, I think I was in favor of this. But enough
has changed since then that it seems to me it is not really a terribly
important issue anymore.

1/31-2/1/95

-32-

MR. KELLEY. As a member of the subcommittee, I want to
associate myself with what Ed just said.
MR. BLINDER. I would like to disassociate myself. I felt
strongly that this was a way to provide more information to the
public. I feel even more strongly about it now, given the decision
that we just made to keep our press statements extremely terse, which
is the majority view. This is in some sense a substitute for that.
But having said that, I won't belabor it. President Jordan.
MR. JORDAN. I'm opposed to concurring statements because it
seems to me the only way they can be used is to express reservations
or reluctance to go along with the majority. I think that is
inappropriate for people to do. If they feel strongly enough about a
decision, they should dissent. Otherwise, they should go along and
keep quiet about it. It is very divisive to publicize, even with a
45-day lag or so, degrees to which people are or are not on board with
the majority. I think it plays into the hands of people on the Hill
and elsewhere in a very negative way. In principle I just think that
concurring statements are wrong.
MR. BLINDER.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. I think it is an unfortunate bit of
history that people who dissent make a statement explaining the
dissent. It is fine to dissent if one thinks he or she ought to, but
I think the dissenting vote is enough. So, it is very easy to
understand why I think that consenting opinions are truly a terrible
idea. I believe the function of this Committee is to make decisions
on monetary policy. That is best done when the Committee reaches its
decisions after an open and frank debate. The notion that, well, I
supported the majority but here is why I think my view is a little
different from what is stated in the minutes opens us up to
factionalism. I think Bob Forrestal is right. First there would be
one statement, and then there would be two, and then there would be
heaven knows how many. The press and the Street would have a field
day deciding who is in one camp and who is in the other camp. I think
it would be a terrible disservice to the great reputation and the
enormous responsibility of this Committee.
MR. BLINDER.

President Parry.

MR. PARRY. I used to be very supportive of such statements,
but in light of all the changes that we have made that are clearly in
the direction of openness, I do not see a necessity for it any longer.
MR. BLINDER.

Governor LaWare.

MR. LAWARE. I don't think the opportunity to make a
concurring statement is urgently needed by anybody around this table.
Secondly, I think a policy decision is significantly weakened if,
within that consensus, we have a half dozen nuances of opinion. I
would be strongly opposed to it.
MR. BLINDER.

President Minehan.

MS. MINEHAN. Initially, I came at this wondering whether it
was really possible for us to prevent anyone from writing a concurring

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statement if that member absolutely wanted to do so in the context of
our having dissenting statements. I am not sure what the answer is to
that question, but I am much more in the camp of those who think that
such statements are not a good idea and are divisive in terms of the
minutes of the meeting and the statement of the consensus as a whole.
Can the Committee administratively preclude someone from writing a
concurring statement?
MR. MATTINGLY.
MS. MINEHAN.

A person can write a concurring statement.
But we just would not include it?

MR. MATTINGLY.

It is not included in the official record of

the FOMC.
MS. MINEHAN. Okay.
right or anything like that?
MR. MATTINGLY.
MS. MINEHAN.

[Laughter]

There is no inalienable

No.
Okay.

MR. BLINDER. That is in fact the status quo--dissenting
opinions and no assenting opinions.
MS. MINEHAN.

Right, but I didn't know if that was by rule.

MR. BLINDER.

The question is, is it by rule?

MR. MATTINGLY.
MS. MINEHAN.

Dissenting statements?

No, assenting statements.

Is there a rule?

MR. MATTINGLY. My position would be that the Committee can
establish its own rules.
If the Committee votes not to allow a
concurring statement, it would seem to be within the Committee's
right.
MR. BLINDER.

President Melzer.

MR. MELZER. At the risk of jeopardizing the direction in
which this conversation is headed, which I favor, I will point out
that I was the minority view on the subcommittee against assenting
[Laughter]
statements.
CHAIRMAN GREENSPAN.

That is a dangerous position to take.

MR. BLINDER. I think you have moved into the majority!
There is a strong consensus on this. We do not require a vote.
CHAIRMAN GREENSPAN. I don't think so. Well, let me just be
sure.
Does anybody object to not moving toward assenting statements
but leaving the minutes essentially as they are, with only dissenting
statements allowed?
MR. LINDSEY. Just a point of information--I always thought
dissenting statements were required. They are not?

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CHAIRMAN GREENSPAN.

Required by whom?

MR. LINDSEY. I have always been asked for one whenever I
have dissented. I didn't want to bother writing one.
[Laughter]
If
you are going to tell me that in the future that I have less work to
do when I dissent, I will be delighted.
[Laughter]
So, I take it
that there is no requirement to issue a dissenting statement?
CHAIRMAN GREENSPAN.
MR. LINDSEY.

Thank you for the point of information.

CHAIRMAN GREENSPAN.
MR. LINDSEY.
[Laughter]

There is no requirement.

You have saved a few hours a year!

Yes, I hope not to dissent very much, but--

MR. BLINDER. The last issue is the currently symmetric
blackout period--moving from a symmetric blackout period around the
meeting date to an asymmetric period. There actually is no proposal
on the table. Would you like to make a proposal, Mr. Chairman?
CHAIRMAN GREENSPAN.
not have any strong views.

No, I have been agnostic on this.

I do

MR. BLINDER. I do not have firm views on this either. I was
thinking of a blackout period covering a week before and a day or two
after a meeting.
MR. PARRY.

Would you explain what the blackout period is?

MR. BLINDER. We now have a blackout period in which none of
us is supposed to talk publicly about monetary policy a week before
the FOMC meeting and a week after.
MR. PARRY.

Monetary policy?

MR. BLINDER. Monetary policy.
correct me if I am wrong.

I think that is right, but

CHAIRMAN GREENSPAN. It is rather unfortunate that it has
become such an elastic concept that I am not certain what that means.
People around here comment on data when they come out, and that is
very clearly related to one's position on monetary policy. I think it
would be useful if we had a definition of what this is all about.
MR. BLINDER.

President Melzer.

MR. MELZER. I do not see any reason to change any of our
rules with respect to how we communicate with the public.
I think the
blackout period is appropriate.
It is consistent with the discussion
we just had. Our monetary policy decision should come across as a
decision of the group. To the extent there is a statement issued,
that is the statement explaining our action. Frankly, I have taken
the view that I am not going to talk about any monetary policy
decision until the minutes of that meeting are out, and even then I
might not talk about it. The record of the meeting is then public but
I have not, for example, taken the view that after one week I am at

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liberty to talk about what the Committee decided and why.
that is a very important rule.

I think

CHAIRMAN GREENSPAN. As I remember what this issue was about,
there was a view in the old days that we should not discuss anything
related to monetary policy, which in fact includes virtually
everything that everyone around this table talks about when they speak
to the press. This so-called blackout is very difficult to define. I
am not sure what it is and I was wondering if Joe Coyne would just
take a second to give us a history of this.
MR. COYNE. This goes back, I would say, 15 years when there
was a lot of discussion in the press stemming from comments made by
various members of the Committee both before and after an FOMC
meeting. Some of the papers liked to do a summary story immediately
before the meeting. They would do a round-robin, calling all 19
people. They would compare answers and try to figure out what was
going to happen. We were asked to put together some informal
guidelines. These are not "rules" of the Committee. They are simply
guidelines that I have propagated to the Committee. The purpose was
to help the Committee deal with the press in sensitive periods. One
of the things we came up with, that the then-Chairman agreed with, was
this blackout period. People were not to talk to the press a week
before and a week after a Committee meeting. The purpose was to try
to prevent all the speculation in the press and subsequently in the
market about what the Committee would do. Now, we still get that
speculation, but we get it from commentators. We do not get it from
members of the Committee anymore. It has worked to an extent. It has
not worked 100 percent. But a lot of members of the Committee use the
blackout period to avoid talking to the press during these sensitive
periods.
MS. MINEHAN.

Yes.

CHAIRMAN GREENSPAN.
has been useful?

Joe, are you suggesting that it actually

MR. COYNE. It has been very useful in my view. If you are
going to make the blackout period asymmetrical, I would say make it
asymmetrical to the Friday following the meeting rather than for just
two days. If it is only two days, then everybody will jump on it
after 48 hours, and we are still going to get a lot of different
comments. One of the problems is, if someone comments one way, as Mr.
Forrestal just said, somebody else is going to try to jump the other
way. Then we are going to get more and more people commenting.
CHAIRMAN GREENSPAN. So, in a sense, the thrust of the
announced decision of the Committee then gets diluted in the same way
that consenting statements would do that.
MR. COYNE.

That is right.

MR. FORRESTAL. May I just raise a question?
compelling reason to change the blackout period?
policy.

Is there any

MR. COYNE. Someone asked whether it just covered monetary
It was supposed to cover monetary policy and the economy--

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1/31-2/1/95

things that the Committee discusses when it is formulating monetary
policy.
CHAIRMAN GREENSPAN. My impression is that if a reasonably
good reporter gets one of us to sit and discuss what is going on in
the economy, it is a farce for us to say, "I won't discuss monetary
policy but let me tell you what is going on in the economy."
It is a
farce because, while it may be that in the old days reporters were not
very knowledgeable, many of the current breed have MAs and PhDs in
economics.
MR. BLINDER. I was taught the blackout policy by Joe Coyne
when I arrived here, and it was that one does not talk about the
economy the week before and the week after.
MR. KELLEY.

Me, too.

MS. YELLEN.

Exactly.

MR. BLINDER. I think the answer to Bob Forrestal's question
is that a change is not compelling if the Committee does not think it
is compelling. The current blackout is a leftover from a time when we
did not announce the decision when we made it. There was still some
secrecy and there was a lot of speculation as to what the FOMC had
done. Now there isn't and the post meeting blackout now seems like an
anachronism. But there certainly is no urgency if nobody wants-MR. FORRESTAL. I would like to follow up my question by
expressing my belief that the blackout period as it now is constructed
serves a very useful purpose. I think the change to an immediate
announcement does not really affect that. I think we ought to keep it
the way it is.
CHAIRMAN GREENSPAN. For the same reason that the assenting
statements are not desirable?
MR. FORRESTAL.

Yes, exactly.

MR. BOEHNE. There is another reason and that is that these
FOMC meetings are now hyped-up more by the press--before and after-and I don't think we ought to contribute to that hype. Even though
our practice is not perfect and it is only a guideline, I personally
have found it to be very useful just to say, look, there are two weeks
that I am not going to talk to you people. If you want to talk about
some banking condition or something like that, that is a different
story. But as a general proposition, I just do not talk to the press
for the two weeks around the Committee meeting. As I said, I have
found it to be personally very useful, and I think it collectively
keeps us from this hyping up of Committee meetings.
CHAIRMAN GREENSPAN.

Any objections to what Ed is proposing?

MR. LINDSEY. I think, first of all, that the blackout was
defined so that we never, never, never talk about what goes on at an
FOMC meeting, period--whether that is one week before, two weeks
before, eight weeks before, or seventeen weeks after. It is not an
issue of talking about the FOMC because we never should. I have no
right to tell someone what any of you said; that is your business.

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1/31-2/1/95

CHAIRMAN GREENSPAN. To my knowledge, as long as I have been
here there has never been a breach of that confidence.
MR. LINDSEY. That is correct and I think that is important.
We should separate out the FOMC from the blackout issue. I think not
talking to the press about economics or monetary policy is very useful
the week before because of the issue of how we are going to vote. If
we do, reporters are going to write it all up in the Sunday
supplements. It probably was useful to have the blackout after the
meeting while there was some ambiguity about how we voted, but in
practice I think that, given the obligations we have to the public to
explain our views, allowing us to talk about the economy and give
economic speeches the week after is not unreasonable. Otherwise, we
are in a situation where we are in blackout literally one-third of the
time. I can respect the people who like that situation, but it is
very, very difficult. If we are going to have the kind of strict
blackout that Joe discussed where we do not talk about monetary policy
or the economy, then I suggest we limit it to one week per meeting.
MR. BLINDER.

President Melzer is on the list.

MR. MELZER.
I just wanted to clarify what you were saying,
Alan. I think you are right in terms of individuals never being
identified. We did have that very difficult period where the leaks to
The Wall Street Journal and others covered Committee deliberations and
positions. To make sure I understand it correctly, what I want to
confirm is that we really should never be talking about what went on
in an FOMC meeting in terms of who said what.
MR. KELLEY.

Ever.

CHAIRMAN GREENSPAN.
MR. MELZER.
MR. BLINDER.
SPEAKER(?).

I had forgotten about that incident.

Okay.
That is not what this proposal is about.
It is a good defense mechanism.

MR. BLINDER. This proposal is only about talking to the
press about things that under normal circumstances we can talk to the
press about. That excludes the FOMC discussion.
MR. PARRY.
February and July?
MR. BLINDER.

Isn't there another element to the blackout in
Because of Humphrey-Hawkins.

MR. PARRY. Yes, the blackout covers the period between the
meeting and the Humphrey-Hawkins testimony.
MR. BLINDER.

Yes, okay.

Mike.

MR. MOSKOW. First of all, I think any of us can set a
blackout period if we want to. We can just say, my policy is not to
speak to the press for a week before, a week after, or whatever the
time period is, and the press will respect that if we set it. Any of
us has that ability.
I can see a blackout the week before. I think

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1/31-2/1/95

it makes good sense that we not talk about the economy or monetary
policy before the meeting. After the meeting, I view us as having
made a consensus decision; we are going to go out and try to explain
it to people. I think that helps in the education of people and the
better understanding of monetary policy. I could see some limited
blackout time after a meeting--perhaps 48 hours or as Joe suggests
through Friday. I would go with a more limited period after meetings
than one week. I wouldn't tie everyone's hands for a full week
afterward because I think it can be a great benefit to the Committee
and to what we are trying to explain.
VICE CHAIRMAN MCDONOUGH. I have always looked at Joe's very
good guidelines as a reminder to all of us to be prudent. That can be
between the meeting and the Humphrey-Hawkins testimony because we do
not want to preempt what the Chairman is likely to say. That is easy
because usually we do not know! [Laughter] But now that we announce
the decision, we could all look rather foolish if somebody were to
say, "Well, you raised interest rates on such-and-such a date, didn't
you?" We don't want to say, "Sorry, I can't say anything about that."
So I think the blackout is a reminder to be prudent. I think it is
very, very important for us to be quiet during the week before the
meeting so that we do not provide the entertainment in the Sunday
supplement. After the meeting, it would seem to me that one has to be
careful not to reveal positions for just the reasons that we do not
want concurring opinions.
CHAIRMAN GREENSPAN. Maybe Joe's suggestion is a good
compromise on this. In other words, a blackout through the end of the
week rather than a full week probably captures most of what everyone
would be concerned about. Does anybody object to that as a solution
to this dilemma? If not, Joe, why don't we just change it to be
through--are we always meeting on a Tuesday?
MR. BLINDER.

No, tomorrow is a Wednesday.

VICE CHAIRMAN MCDONOUGH. This year we have one Wednesday
meeting in November because of the BIS conflict.
MR. KELLEY.

We can say the balance of the week of the

meeting.
CHAIRMAN GREENSPAN.
balance of the week? Okay?
MR. COYNE.
MR. BLINDER.
MR. KELLEY.
MS. MINEHAN.

Why don't we just leave it at the

Fine.
We have exhausted this issue.
We certainly have.
This issue and ourselves!

CHAIRMAN GREENSPAN. Now, let us get to the easy issue of
inflation targeting! It has been suggested, and I think it's a good
idea, that we have pro and con statements on inflation targeting. I
have asked President Broaddus and Governor Yellen to take the pro and
the con. Al, why don't you get started?

1/31-2/1/95

-39-

MR. BROADDUS. Thank you, Mr. Chairman. I appreciate the
opportunity to make a few comments about inflation targeting.
Actually, I am going to use the term "inflation objectives," if I may,
because I think that describes and reflects more accurately what I
have in mind. To my mind, this is an idea whose time has definitely
come. Let me cover just three things. I will try to do this as
briefly and compactly as I can and still get the main points across.
First, I will summarize as clearly as I can the analytical case for
some kind of explicit inflation objective. Then, I want to comment on
just one of the most frequently heard objections. Finally, I would
like to say a little about what specific kinds of objectives we might
want to introduce and how we might proceed if the Committee decides,
and I hope it will, that this is a good idea and wants to move in this
direction. In doing this, I will build on Dave Lindsey's memorandum
that I think did a very nice job of laying out the main issues and
considerations in a balanced way.
Very briefly, the basic argument, as I see it, for
implementing an operationally meaningful explicit inflation objective
is that it would allow us over time to foster a better economic
performance. This would occur, in brief, because we would be moving
away from the almost purely discretionary approach to policy we have
followed historically, with its focus on reacting to emerging shortterm economic developments, toward an approach where the central focus
would be on precommitment to a permanent low inflation objective that
would be clear and feasible. Of course, on the face of it, the
assertion I just made that changing our approach to policy in this way
is going to improve economic performance is just that; it is an
assertion. But I think it is fair to say that it is supported by
much, if not most, of the important research done in monetary
economics over the course of the last twenty years. Dave Lindsey
alludes to this when he refers to such issues as how the public and
the market form expectations about future inflation and how these
expectations and the way they are formed relate to monetary policy and
its effect upon the economy--the so-called time-inconsistency problem
and all of that. Beyond these theoretical considerations, however,
experience over the years under our current approach to policy, with
accelerations and then decelerations and then re-accelerations of
inflation, suggests that periodic inflation scares in the financial
markets and the damage inflation has done to the economy naturally
make a lot of people think there has got to be a better way.
Against that broad background, let me quickly list some of
the most important advantages that I see for a credible inflation
objective. Many of these are also noted by Dave in his memorandum.
First, by signalling the disinflation in advance, a credible inflation
objective very likely would reduce the real cost of transitioning to a
permanently lower inflation rate. Moreover, related to this, the
credible objective would allow the Committee to pursue a more activist
policy more freely in the short run without worrying about losing
credibility. The situation we face today is a good example of this.
Since we probably have not yet seen the full effect on the economy of
our tightening actions last year, and we are already beginning to see
at least a few signs of moderation in aggregate demand, one could make
a case for caution in approaching any further tightening in policy
today. However, under our current approach to policy, there obviously
is a big risk. If we exercise such caution, it could be
misunderstood, reduce our credibility, conceivably produce an

1/31-2/1/95

-40-

inflation scare in financial markets, and destabilize the economy.
That is one point.
Next, an explicit inflation objective would be an efficient
way to break out of our current Humphrey-Hawkins reporting conundrum.
The problems with targeting monetary aggregates are well known to
everybody including Congressmen. Consequently, in the HumphreyHawkins process, I would argue that if we continue to focus a sizable
amount of our attention on the aggregates, we will look a little
silly. On the other hand, if we don't provide some substitute, we
risk having our agenda set for us with the focus on whatever shortterm problems seem to be most pressing at the time as distinct from a
coherent, consistent longer-term strategy that befits a central bank
of our standing and stature.
Finally, it is worth noting that a number of other industrial
countries, as I am sure all of you are aware, have established
explicit longer-term inflation objectives in one form or another.
Most of these have been put into place over the course of the last
three or four years. I think the motive in most cases has been to try
to lock in currently low inflation rates. Obviously, we have only
limited experience with these new procedures, but if they are
reasonably successful over time, and I think they very likely will be,
I am not sure we want to be one of the few industrial countries not
moving in this direction. It is true, as Dave mentioned in his
memorandum, that the Bundesbank does not have explicit inflation
objectives, but it does have a strong legal mandate for price
stability, and of course, it has very broad public support rooted in
long and bitter historical experience. These are the main positive
arguments for an explicit inflation objective as I see them.
Just quickly on the main objection to such an approach: As
Dave points out, the main objection is that a short-term trade-off is
said to exist between real activity and inflation. Critics of
inflation objectives consequently argue that we can maximize our
contribution to public welfare and to economic welfare by exploiting
that trade-off. Hence, they argue that anything that prevents us from
doing that, like tying our hands with an explicit inflation target of
some sort, would be undesirable. As Dave indicates, this argument
would seem to be most compelling in the case of supply shocks, like
the oil shocks back in the 1970s. But as I see it, this argument
really does not have a whole lot of punch except in the limiting case
of a very rigid, inflexible numerical inflation objective. In
general, as I see it at least, there is nothing incompatible between a
credible long-term inflation objective on the one hand and having the
flexibility to cushion the economy against supply shocks as long as
the public understands and is confident that the longer-term
commitment remains in place while we are dealing with the short-term
problem. Indeed, far from reducing our flexibility, it seems to me
that a credible long-term objective arguably would increase our
flexibility in dealing with such shocks because we would not be
worried about losing credibility in that situation.
Let me move to the final issue I want to address: that is,
exactly how we should go about establishing a credible commitment-exactly what kind of objective should we set and what should we tell
the Congress? I want to recommend that we need something more
concrete to back it up. An important point here is that the inflation

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-41-

objective should not be used in the way that we used the old money
supply targets, that is, as a mechanism for guiding short-term,
tactical monetary policy actions. I apologize for the repetition:
The purpose of an inflation objective is to commit ourselves credibly
to maintaining the purchasing power of our currency, like the
Bundesbank's legal mandate does in Germany. I have to confess I had
to think about this a lot, and my staff had to get me in a room and
pursuade me of this. With these things in mind, I would argue that we
should not adopt a numerical target even in the form of a range
because I think that would set us up for failure. Instead, I would
recommend that the Committee commit itself firmly and publicly to the
objectives contained in the Neal amendment with respect both to the
language of the amendment in the way that it defines price stability
and also importantly with respect to the 5-year time horizon. As for
communicating this, the Chairman could state in his upcoming HumphreyHawkins testimony that the Committee is considering taking this step,
perhaps in the summer, given the increasingly obvious problems with
focusing on the money supply targets in the Humphrey-Hawkins process.
The Chairman could also urge the Congress to pass the Neal amendment.
I recognize that the amendment has not gotten significant support to
date, but the election has clearly changed the makeup of Congress a
good bit, and again the technical problems with using the money supply
as a nominal anchor are increasingly apparent to all. I think we can
explain it against that backdrop.
Finally, as I see it, there are some very strong advantages
to proceeding in the way that I just suggested. For one thing, we are
already on record in favor of the Neal amendment. Doing this would
not be a radical departure from the position the Committee has taken
earlier. Also--this is very important--doing what I have suggested
would not prevent the Fed from taking the kinds of policy actions that
we take today to stabilize employment and output. What it would do,
and this probably is the most important thing I am saying today, is to
discipline us to justify our short-term actions designed to stabilize
output and employment against our commitment to protect the purchasing
power of our currency.
In this respect, and this is also an important part of what I
would propose, I would recommend that we begin publishing some sort of
inflation report, perhaps semi-annually, in conjunction with the
Humphrey-Hawkins process along the lines of the report that is
currently put out by the Bank of England. That would help guide us in
making our short-term policy decisions, and it would also publicly
underscore our longer-term commitment. My view is that if we agree to
do this, the report should be prepared by the Committee's staff,
drawing on any System resources the staff wants to draw on. If we do
this, it seems reasonable to me to presume that progress toward
achieving our inflation objective would naturally supplant the money
supply targets, especially the short-run money supply targets, as a
principal focus of the Bluebook and other staff presentations. For
example, the short-term policy alternatives that we always have in the
Bluebook could be discussed at least in part from the perspective of
their consistency with our long-term inflation objectives, the rate of
progress toward that objective, and any risk that a particular
alternative would present with regard to missing the objective and
related matters.

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-42-

Let me end by saying that I realize that an explicit
inflation objective is not a magic wand: it is not going to solve all
our problems; it is not going to solve all the world's problems; it is
not going to grow any hair on my head. But I do think the kind of
objective that I suggested is a practical one and I believe it is a
feasible one. Over time, I am convinced that it could help improve
and increase our contribution to the nation's economic welfare. I
rest my case.
GOVERNOR YELLEN. I am strongly opposed to the adoption of
formal multi-year inflation targets. I thought I would begin by
outlining the case against them. This proposal has two distinct
features. The first has to do with the number of goals we should be
pursuing, a single goal or multiple goals. I am taking this proposal
to be essentially the strong one that Dave Lindsey suggested in his
memo, namely, that the inflation rate should be the sole objective of
policy for current and future years with no weight being placed on
achieving competing, ultimate goals for real variables. I am going to
speak against that proposal, and I note that it is a somewhat stronger
proposal than I heard Al just support. The second aspect of the
proposal has to do with numerical as opposed to qualitative targets.
Since I am particulary opposed to the single goal, that is what most
of my remarks are going to focus on rather than the numerical
character of it.
I began by asking myself the question, what is it that the
public cares about? The answer seems straightforward to me. It is
not just high and variable inflation; that is not the only aspect of
economic performance people care about. The public also cares about
real outcomes. Households and businesses very much dislike
fluctuations in output and employment, for good reasons. Quite
naturally, they prefer higher average output and lower average
unemployment. I consider these goals eminently sensible, not foolish
nor irrational.
Then I ask myself, what is it that the Fed can accomplish? I
conclude that the actions of this Committee affect not just the level
and variability of inflation but also at a minimum the variablity of
output and employment. I know that some people would argue against
our trying to reduce the variability of output on the grounds that
economic forecasting is so uncertain and that there are long and
variable lags in monetary policy, so maybe all we would do is to
destabilize the economy rather than stabilize it. But when I look at
the record, I just do not agree. It seems to me the record shows that
within limits, tuning works even if it is not "fine." The proof of
the pudding is in the eating. I would give the Greenspan Fed a grade
of close to A for its performance. I see this Committee as having
been leaning against the wind and, by so doing, significantly
mitigating fluctuations in output and raising social welfare in the
process.
The moral I draw is simply that the Fed should pursue
multiple goals. It follows almost automatically that when the
American people have sensible multiple goals and the Federal Reserve
affects multiple dimensions of economic performance, that the Federal
Reserve Act should enshrine all of those goals and we should do our
best to honor them. I simply can't see how we could support
legislation that in the extreme case, not quite what Al just

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supported, would in essence direct us to abrogate our responsibility
for stabilization policy. I think it would be dangerous at a time
when fiscal policy has been disabled for use in stabilization. I
understand that the mandate of the Federal Reserve Act to pursue
multiple goals is pretty vague. There really is no guidance in the
Act as to how to call the tough trade-offs. But I see the objectives
as fundamentally sound, and I think this Fed, in pursuing those goals,
has enhanced social welfare.
Fortunately, the goals of price stability and output
stability are often in harmony, but when the goals conflict and it
comes to calling for tough trade-offs, to me, a wise and humane policy
is occasionally to let inflation rise even when inflation is running
above target. Supply shocks, of course, like those in the '70s are
the most obvious case. To have avoided any uptick in inflation would
have required such a dramatic tightening of monetary policy that there
would have been a downturn of even more major proportions. With the
benefit of hindsight, it seems to me that maybe the Fed should have
accepted more unemployment and less inflation. There has been a
valuable lesson there for all of us. But the extreme proposal--that
we need to counter shocks with a pure inflation target--is to me
draconian. More recently in 1990-91, this Committee was sensibly
loosening monetary policy before price stability was achieved and, to
my mind, producing better economic results as a consequence.
I do not want to belabor this point; we could discuss it in
great detail. However, I want at least to mention that if this
Committee were to decide that it really wanted a quantitative monetary
policy rule incorporating a numerical inflation target--for example,
because it was thought to be important to have a nominal anchor for
monetary policy--we should not go with the type of rule embodied in
the Neal amendment, which is a pure inflation targeting scheme. Why?
Because there clearly are better rules. We could talk about those at
length but a simple approach, not necessarily the best, that dominates
inflation targeting would be a hybrid rule that would adjust monetary
policy--and this could be a mechanical rule if it were so desired--on
the basis of two gaps, not one. These would be the gap between actual
and target inflation and also the gap between actual and potential
output.
The next question is, what do central banks really do? When
I look at the behavior of the FOMC and other central banks, I simply
can't find a lot of cases in which monetary policy has ever been
driven by an exclusive focus on inflation performance. Consider, for
example, the policy of the Bundesbank--whose price stability
commitment, it seems to me, is not seriously in question. How do they
behave? They deliberately tightened monetary policy in 1991, but by
how much? Not by enough to keep inflation from rising even though
they knew inflation would rise. They deliberately chose to tighten by
less than what was called for to keep that from occurring. Now, if
you take the case of the FOMC, it seems to me that a reaction function
in which the real funds rate changes by roughly equal amounts in
response to deviations of inflation from a target of 2 percent and to
deviations of actual from potential output describes tolerably well
what this Committee has done since 1986. This policy, which fits the
behavior of this Committee, is an example of the type of hybrid rule
that would be preferable in my view, if we wanted a rule. I think the

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Greenspan Fed has done very well by following such a rule, and I think
that is what sensible central banks do.
Let me turn to the issue of credibility. A key argument in
favor of inflation targeting--Al made this point--is that it would
raise the FOMC's credibility and result in a lower sacrifice ratio.
Clearly, if we could achieve this, it would be a very worthwhile
benefit. The problem in my view is that it is not achievable. First,
when I look at the experience of countries that have adopted and
carried through inflation targeting programs, I consider the results
discouraging. Then, I think about the Bundesbank and ask myself why
it is, if credibility really lowers the sacrifice ratio, that the
Bundesbank bore such high costs, or rather Germany bore such high
costs, first in 1980-83 and then from 1992 through the present in its
efforts to reduce inflation. Then, I look at empirical estimates that
suggest that the German sacrifice ratio actually exceeds ours, whereas
I think there is little doubt that their credibility probably exceeds
ours.

The second point concerning credibility is that I do not
think inflation targets would raise credibility for the simple reason
that they would not be credible. Who would be prepared to believe
that the FOMC is single-mindedly going to pursue an inflation target
regardless of real economic performance, if not even the Bundesbank is
prepared to go that far? So, that means that the targets are going to
be perceived as a hoax. They are not going to be any more believable
than I would be if I told my child that I was going to cut off his
hand if he put it in the candy drawer. To me, an inflation targeting
strategy could easily undermine the Fed's credibility and reputation
because the policy itself just is not credible.
Let me conclude. We could talk a little about dynamic
inconsistency, but for the sake of time I think I will pass that up
unless someone wants to come back to it. Let me just make a final
point. My final concern in connection with FOMC support of inflation
targeting legislation like the Neal amendment, or some new version of
that, relates to what we will do if we go to Congress to testify for
it. My concern here is that we will most likely end up understating
the cost. My guess is that we will argue that price stability is a
goal of overriding importance, that it is so important and so
beneficial that it should be pursued at all costs. In truth, I think
we have excellent evidence that the one-time cost of lowering
inflation is high. Each percentage point reduction in inflation costs
on the order of 4.4 percent of gross domestic product, which is about
$300 billion, and entails about 2.2 percentage-point-years of
unemployment in excess of the natural rate.
If we testify, it seems to me that we should point out that
the benefits of price stability are elusive and that the costs of
additional output instability with such a plan could easily outweigh
the benefits of greater inflation stability. Why? Because
uncertainty about sales impedes business planning and could harm
capital formation just as much as uncertainty about inflation can
create uncertainty about relative prices and harm business planning.
I noticed that the Neal resolution contained a preamble, and it read
in part, "whereas zero inflation promotes the highest possible
sustainable level of employment, the maximum sustainable rate of
economic growth, and the highest possible rate of savings and

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I found it interesting to contrast this with the
investment..."
conclusion of the Federal Reserve System's price stability and
economic performance project in 1989 that read, "We have investigated
both direct and indirect evidence surrounding the hypothesis that
inflation adversely affects the performance of the real economy. The
bottom line of these efforts probably will not be surprising. It
remains exceptionally difficult to uncover clear-cut evidence that
moderate rates of inflation reduce perceptibly the growth or level of
measured GDP."
My final point is that, from a political standpoint, if we
support an inflation targeting amendment, and we do so without
appropriately emphasizing its costs in order to obtain a mandate to
achieve price stability at all costs, I believe there will be
consequences for us. We will end up being blamed when the realities
falsify the belief that this is close to a free lunch. On this point,
I would like to conclude by quoting a remark made by former FOMC Vice
Chairman Corrigan, which I gleaned from the transcripts of the
December 1989 FOMC meeting where this was discussed. He said the FOMC
should be "excruciatingly careful about what we claim." He said, "I
do worry a bit that in our collective zeal, we've got to be careful
not to oversell what can be done and at what cost. Because if we do
leave the impression of a cost and it turns out to be a lowball
estimate, we are going to get fried. There is just no question about
that whatsoever."
CHAIRMAN GREENSPAN.

You would never have known who was

speaking!
MR. JORDAN. I think Al laid out very well the arguments as
to why setting inflation objectives would be desirable and helpful for
the Committee to do in accomplishing our mandate. I took Janet
Yellen's response as being a combination of implementation problems
versus desirability issues, and those I think we need to discuss
separately. If we had Al's magic wand, what would we want to do?
What we would want to do is wave it and have businesses and households
in the country make their decisions in the expectation that any
increases in inflation--and in associated nominal interest rates--are
temporary and will be reversed. I would argue that we want to return
to a period like the one we had in the 1950s and early 1960s when
people looked at the shocks that happened along the way as transitory.
That is because they were confident that the central bank would
conduct its affairs in such a way that inflation rates would move in
the direction of zero and associated nominal interest rates to low
levels. I believe that the Bundesbank is in that position today.
Janet is right when she says that the public does not care
just about high and variable inflation; what they care about is
standards of living. She is raising a different type of issue-whether or not that mindset on the part of the American public would
in fact achieve the kind of rising standards that they want. They
want to be as rich as possible over time. If we believe that
stabilizing the purchasing power of money achieves that condition of
making people the richest possible over time, then that is what we
want to do. When I address the question of the appropriateness of
monetary policy such as at this meeting today and tomorrow, I cannot
do it thinking only about what is going to happen to the CPI or any
other measure of the purchasing power of money in 1995. We all know

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about long and variable lags. I also cannot do it based on anybody's
forecast or unfolding events as they occur with regard to output and
employment. I can only do it with regard to what is going to happen
to the future rate of inflation, at the soonest in the second year and
much more likely in the third and fourth years. Ultimately, I come to
a conclusion about what monetary policy is appropriate by asking
myself what is going to happen to inflation in 1996 and 1997. If it
is going back down, and if people have confidence that that is what we
are going to produce and they make their decisions based on that, then
I think that monetary policy is appropriate. If not, then I say
monetary policy is not appropriate. I would think that the American
public would want to have confidence in assessing our monetary policy
objectives, as distinct from monetary policy actions, by asking
whether we are going to produce a lower inflation rate sometime out in
the future. That is what an inflation objective does.
PRESIDENT MINEHAN. I think there are two issues here and
they tend to get mixed up. One is whether or not we should be
explicit about our objectives over a reasonably long period of time.
The second is whether or not we should focus solely on price stability
or inflation measures as a target of monetary policy. Looking at the
latter issue first, I would be very much in agreement with Governor
Yellen that monetary policy should not focus on only one target. We
need to recognize the short-term trade-offs between inflation and
economic growth, and we should not beholden ourselves to a single
measure in judging our effectiveness as a central bank. Getting away
from focusing on a single target for monetary policy, is there a case
for being more explicit about what we are doing over a longer time
period? In thinking about that, I ask myself what problem are we
dealing with here? I do not think the problem is that we have not
demonstrated a commitment to inflation fighting. We have committed
ourselves to inflation fighting. We went through a period of high
inflation and high interest rates in the early 1980s--when I tried to
get a mortgage and the terms were 19-3/4 percent and 5 points--and we
weathered that period, but we paid a big price for it. I think we
have been fighting inflation very effectively since then while
recognizing the short-term tradeoffs with economic growth.
The problem we really have here is that we have a
communications vehicle that we are required by law to use. It
involves the monetary aggregates, and there are not many people who
believe that they are an effective communications vehicle anymore. We
need to think about communications vehicles that are appropriate in
terms of explaining to Congress what we are doing over a period of
time. I do not think that Congress harbors any suspicion that we are
not fighting inflation. I think they have the suspicion that we are
too willing to fight it, that we are too willing to sacrifice economic
growth and employment in pursuit of inflation targets. In my view, we
should either leave well enough alone or we should adopt a series of
multi-faceted targets that might be better communications vehicles to
Congress than the monetary aggregates. Janet described using two
ranges or two kinds of gaps. We also could use nominal GDP, if we
wanted, as a target or range or something like that. So that is how I
come out on this. Frankly, I don't know if we can really decide this
issue. This is a big issue. We received a good paper, and I would be
in favor of trying to refine our thinking, however we come out, and
get something explicit on the table before we take a vote on this.

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CHAIRMAN GREENSPAN. Let me just say what I think the purpose
of this discussion is. To go to inflation targeting without a
Congressional statute is probably unwise. We do not have a Neal bill,
but there clearly is going to be a Connie Mack bill that will be very
close to the Neal bill, and we are going to be asked to comment on it.
The basic purpose of this discussion is to get our first cut as to
where this Committee stands for purposes of testifying on that
legislation. My own judgment is that if we do not announce any
specific inflation targets, our policy can actually be similar to what
Al Broaddus was suggesting. If we do announce explicit inflation
targets, they become in effect a statutory obligation for this
Committee to adhere to; and I am not sure by any reading of the
Humphrey-Hawkins statute that inflation targeting is consistent with
it. But as I said, there is a real legislative issue coming up on
which we are going to have a very significant effect, depending on how
we testify. I think it is a real issue. It is very important for
those of us who are going to testify on that bill to know where the
Committee members are since we will be speaking for them. President
Melzer.
PRESIDENT MELZER. Alan, in general, I would associate myself
with what Presidents Broaddus and Jordan had to say. I have my own
two questions, a la Cathy. My first is whether we agree that the
primary focus of monetary policy should be on achieving price
stability. Secondly, do we agree that we are more likely to achieve
price stability and be credible if we set specific targets for
inflation?
With respect to the first question, I take a very simpleminded approach. My view is that monetary policy only affects prices
in the long run. I have a hard time justifying setting objectives
with respect to things that we can't influence in the long run. So, I
would very much like to set objectives that are consistent and that we
can influence in the long run. I might add--this is something to
which Al has already alluded--that I don't think we have the expertise
to fine-tune the economy on the real side in any timeframe because of
the vagaries of forecasting and because of the uncertain effects of
the policy actions that we take. Frankly, even though the record of
the FOMC has been pretty good over the last ten or fifteen years, my
view is that one could conclude that perhaps our actions to stabilize
actually have been destabilizing from time to time. We made some
progress in bringing inflation down, but we are still a long distance
away from what I would consider to be price stability even though we
give lip service to that concept. The point that Al touched on, which
I think is very important, is that in the regime that we are in right
now, trying to serve two masters, we are incurring transition costs
all the time in both directions. As perceptions change concerning
what we have in mind as an acceptable rate of inflation, there are
necessary adjustments on the real side. One can talk about the
transition costs to zero inflation, but at least they are incurred
only once and once we have zero inflation, that is it. We are in a
mode right now where the economy is incurring transition costs all the
time in both directions, and I do not find that very satisfactory.
With respect to the second question--whether we agree that we
are more likely to achieve credible price stability if we set specific
targets for inflation--I think Al's answer to that is right. I do not
want to get bogged down in technical details. I have thought about

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the issue of targets, and I would be inclined to set them. I think
that if we do set quantitative targets--and we could do this with
respect to a trend rate of inflation so we would not be making a point
estimate for a given year or a relatively short period of time but
would be looking at a moving average over time--we could set targets
that we would be able to achieve over a reasonable timeframe.
CHAIRMAN GREENSPAN. Excuse me, are you talking about
inflation as distinct from the price level?
MR. MELZER. I think that is another issue. There are pros
and cons for both of them. I don't think it is productive to get into
that today, but if we could continue this discussion later, that is
clearly one of the issues we ought to have the staff look at and we
should discuss further. With respect to this point, clearly just
announcing that we have set targets would not do much for our
credibility. What really determines credibility in the long run is
how we perform. I guess I am saying that making ourselves accountable
for something that is quantifiable is much more likely to get us to
price stability than the regime we have been in. We have been talking
about price stability for years, but we are still a long distance away
as far as I am concerned even though I think the record of the FOMC
has been quite good.
The third point I would make relates to something you said a
minute ago, Mr. Chairman. That is, there will be legislative
proposals on this and hearings will be held. I think it is incumbent
on us to get ourselves in a position where we can state a meaningful
view as a Committee and try to influence the outcome. It is quite
possible that, regardless of what we think about inflation targeting,
we will get legislation. If we are confused about what we want, we
could well get legislation that we do not like. The other thing I
would say is that it is not clear to me, and this again is not the
time to discuss it, that the present legislation under which we
operate would absolutely preclude some sort of inflation targeting
regime. I think there would be some advantage to go along the course
that Al described where as soon as we can reach some sort of
consensus, assuming that there is some consensus in this direction, we
could move ahead to take some actions on our own. We could have the
staff look at various issues and announce that we are considering this
matter. We might indicate that we would consider this issue and
report on it in connection with the Humphrey-Hawkins testimony at
midyear and that we would be thinking in terms of setting some sort of
provisional targets down the road. Obviously, various questions would
have to be evaluated before those would be finalized. My point is
that if we acted in a sense independently of the legislative process,
the failure to get legislation would not necessarily preclude us from
proceeding with something that I think makes sense in any case and
possibly could be reconcilable with some of the other objectives in
the existing legislation. That is all I have.
CHAIRMAN GREENSPAN. May I suggest that we take a break now
for a short while. We have coffee out there and we will continue on
with President Boehne.
[Recess]
CHAIRMAN GREENSPAN.

President Boehne.

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MR.BOEHNE. I come out somewhere between President Broaddus
and Governor Yellen. Over time, the primary goal for a central bank
ought to be price stability, but we do not get there in a straight
line. Whether we like it or not, in the real world we have to deal
with short-term issues like liquidity problems, weakness in demand,
recession, that sort of thing. The important thing is that when we
deal with these short-run issues, we try to do it as best we can in
the context of pursuing our longer-term objectives.
The second point is that--while I appreciate the theoretical
arguments that if we make a commitment, the sacrifice ratio is less-in the real world what matters is not what people say, it is what they
do. We got off track in the late '60s and '70s not with what we said
but with what we did. We got back on track in the '80s and early
'90s. We did this, I think, not so much by worrying about whether
inflation went up a tenth or two over the business cycle; we did it in
a secular context. From cycle to cycle inflation rose in the '60s and
'70s, and from cycle to cycle inflation went down in the '80s and
'90s.
I do not think there is enough political support for the
pursuit of a single inflation goal without regard to short-run
considerations. If we got 50 people in the Congress to vote for that,
I would be surprised. In the real world, we have to deal with shortrun issues.
My own view is that we ought to continue largely as we have
for the last fifteen or so years. I think you best expressed that
view, Mr. Chairman, in one of your very recent testimonies, but I
don't remember the quote exactly. It went something like this:
That
we ought to aim to extend and hopefully improve upon the low inflation
record. I think we have to do it in the context of knowing that when
we have short-run issues, we can't ignore them. We are going to have
to deal with them. Just as we have worked inflation down from double
digit rates, I think we can get closer to price stability over time.
CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Mr. Chairman, I think that the recommendations
outlined by Al would be very useful. It would be useful, I think, for
us to communicate to the public as a goal some idea of a predictable
average level of inflation. I also believe we could deal with shortrun cyclical issues even within the context that Al suggested. I
would also say that as one looks at what is in the Greenbook and the
Bluebook, it is clear that we have a rather difficult period ahead of
us, and that suggests to me that it would be nice to have some
consensus about these issues within the Committee, regardless of
whether we go to the public. Quite frankly, I am not sure how we
would approach these issues that are covered in the Greenbook and the
Bluebook over the longer term without some operating consensus.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. Mr. Chairman, as all issues go, I think both
arguments have merit. I believe a couple of things: one, for us to
change our emphasis, there needs to be some kind of legislation, and
that is partly what this is about. Among the alternative approaches
that have been discussed, I am inclined toward something like the Neal
amendment because I think that price stability is a necessary
condition for long-term growth. At the same time, I would not be

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strongly inclined toward a numerical target, because I think there is
a measurement problem with that. So, I prefer the language in the
Neal amendment regarding the objective of price stability. I think
that having that would not negate our need to maintain balance, but it
would give us an emphasis toward price stability that is necessary for
long-term growth. It also would give us the important discretion to
handle shocks or to allow for events to take place which monetary
policy can address within a clear mandate toward price stability in
the long term that in turn will give us a better opportunity for longterm growth. That is how I would approach it.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. My instinct is similar to that of many others in
that I feel it would be a step in the right direction for us to adopt
some sort of inflation objective. As others have already observed,
inflation is something that the profession and the Committee believe
we can be held responsible for in the long run. It is related to
monetary policy, and controlling it may be the most important
contribution we can make to economic performance in the long run.
Having said that, I would be very careful about overselling
this at this point on a number of grounds. One that already has been
referred to is that, without Congressional support, I don't know that
our unilaterally doing this would buy us very much credibility.
Secondly, I come down on the side that ultimately we would need some
sort of numerical objectives. Otherwise, it is not clear to me how
the proposal differs very much from what we already are doing. Many
of us already have spoken over the years in favor of some kind of
price stability objective, recognizing that in the short run we may
pursue other objectives. Thirdly, I don't think this is an objective
that we can adopt or pursue independently of fiscal policy. Do we
really believe that if fiscal policy were in some sense exploding, we
simply would try to pursue price stability? I have real reservations
about that. Another issue is, do we need a penalty? If we fail to
gain credibility, if we fail to achieve the objective, does there have
to be some sort of penalty, as in New Zealand? I am not suggesting
that particular penalty! [Laughter]
Without that, what do we gain?
I would say the real sleeper issue--I touched on this earlier
and Janet raised it implicitly--is that when push comes to shove, I'm
not sure that we have very good evidence that going in this direction
really makes a lot of sense from the point of view of economic welfare
as opposed to, for example, stabilizing inflation at the current rate,
if that is a feasible alternative. We talk as if we do and we hope
that we do, but the analysis that I see on that subject does not lead
me to be very confident. I think we have to hold ourselves to the
highest standard on that issue because if the question is put to us in
Congressional testimony concerning what benefits we can expect in
terms of economic performance from taking inflation down from 3 to
2-1/2 percent or whatever over the next x years, we have to be
prepared to address that question in a serious way. It is a tough
question.
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. Mr. Chairman, it seems to me there are two
potential ways to go here: one is primarily quantitative and the other

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I guess there are some hybrids. I would be
primarily qualitative.
very leery about a predominantly or entirely quantitative approach
because I think it might very well imply performance that we would not
be able to deliver or might not even want to deliver under some
circumstances. Either of those developments would be intensely
In the case of qualitative-type goals,
counterproductive over time.
it is hard for me to see how the Fed is going to do itself much good
or to cause much good by unilaterally stating such a goal. I just do
not see that as being very helpful to our credibility. For one thing,
every one of us has repeatedly put forward publicly our commitment to
price level stability. There should not be any question in anybody's
If
mind as to where every person at this table stands on that issue.
we did announce quantitative goals and there subsequently was a
shortfall, it would be extremely counterproductive even if the
shortfall was for a very good reason.
It would impair our credibility
tremendously.
Now, if we are going to have to testify on a specific
proposal in the Congress--it used to be a Neal proposal and now
perhaps it will be a Mack proposal--I think we are going to have to
look at it quite specifically. If it is too soft, it will be
somewhere between useless and worse. If it is too rigid, that would
probably be a mistake also because there has to be some allowance over
time for shocks, external events of all different sorts. Gary just
mentioned the relationship between fiscal policy and monetary policy.
We all agree that it is terribly difficult to fine-tune, perhaps
impossible. I think we would have to look at the specific proposal to
see if there is adequate flexibility in it, appropriate timeframes,
appropriate social welfare goals, and so forth and then delve into the
details. We are just going to have to see what is proposed rather
than try to make a broad general statement today or sometime in the
future.
CHAIRMAN GREENSPAN.

President Forrestal.

MR. FORRESTAL. Mr. Chairman, I think the Yellen-Broaddus
debate was very useful in setting up the merits of both sides of this
issue. I think inflation targeting has a lot of appeal.
The main way
that it appeals to me is that it would help us to focus our policy
over the long term and give us a longer-term focus than I believe we
have had until now. Our focus has been far too shortsighted, and
inflation targeting would help us in that respect. On the other hand,
I don't think that we have a mandate for inflation targeting. Now, it
was not clear to me when I read the materials whether we were talking
about an inflation target that would be set unilaterally by the
Committee or through legislation. I would have very, very serious
questions about our ability legally to set an inflation target given
the Humphrey-Hawkins mandate. On the other hand, if we are talking
about proposed legislation and whether to support it, I still would
raise the question about whether there is a social mandate in the
country. Any inflation target to be credible has to be accompanied by
widespread agreement that it is indeed our mandate.
Gary Stern hit on another aspect of this--the question of
mild inflation. I think everyone in the country agrees that if we had
inflation of 10, 12, 14 percent, something would need to be done about
it.
But is 3 percent inflation so harmful to the economy that it
needs to be reduced? Just announcing or adopting an inflation target

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does not do anything for our credibility. We had the same experience
with the aggregates when they were working. Most of the time, we were
lowering those aggregates, and I don't think that necessarily bought
us a lot of credibility. The Bundesbank has been mentioned a couple
of times. It seems to me that the situation in Germany is quite
different because there is a very clear mandate on the part of the
German people to have low inflation. As Janet Yellen mentioned, an
inflation target can backfire if we do not use it judiciously. The
bottom line for me is that I do not believe that the only goal for a
central bank is price stability or low inflation. I believe that it
is the primary objective of a central bank but that we have other
goals as well. As Governor Kelley indicated, much depends on the
structure of the legislation that might come through; we would have to
have escape clauses and all the rest. But if we are talking about an
explicit target, I would be very, very leery of that. If I were asked
today to decide this issue, I would say I would be against an
inflation target and I would associate myself entirely with the views
of Governor Yellen, But I do think that it is an issue that needs to
be explored further. We need to give additional thought to this,
particularly in light of the legislative language that might develop.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. As usual, let me defend the status quo. We
have a dual objective in the Federal Reserve Act now. I think it
works very well. I think the case that it is broken and needs fixing
is extremely thin. Some of you may remember that I defended the
Federal Reserve Act at Jackson Hole, thereby provoking a great deal of
controversy. I have not changed my views on that one iota. Many of
the reasons were enunciated by Janet Yellen. But the fact of the
matter is: there is a short-run trade-off, and it does matter to
people. There is no existing evidence--and I can't say this too
strongly--that having such targets leads to a superior trade-off.
None at all. It is not one of those cases in which the evidence is
equivocal. There is nothing that can be cited. We know that the
employment costs of inflation reduction are very substantial. There
is even a reasonable consensus about how to measure them. The
benefits of moving, as Gary Stern said, from 3 to 2-1/2 percent or
lower inflation are very hard to measure. We would be hard pressed to
come up with anything convincing that led to a large number. The case
for inflation-only targeting comes from the view that the central bank
needs more discipline. This view, by the way, comes out of academia
with a lot of baggage, some of which I think is pretty silly, having
been in that world a very long time. The view is that you have to
control these central bankers because they do not know what they are
doing, and you can't trust them to be true to the mandate to fight
inflation! I do not see the behavior of the Federal Reserve over time
as fitting that charge.
Next--this is very important to me, but it is not something I
ever thought about before I was on this Committee--is the issue of
honesty. Many central banks claim to have only a price stability
mandate or objective; none of them acts that way. I would not like
the Federal Reserve to be in that position. The Bundesbank was
mentioned, but the Bundesbank does not act that way. If it did, you
could ask yourself why it lowered interest rates for two years while
inflation was still 3 to 4 percent. They were not at price stability;
they said they were not happy with the inflation rate at that time;

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and yet they were lowering interest rates. You do not fight inflation
by lowering interest rates--not the last time I checked! Like Janet
Yellen, I do not think being fundamentally dishonest in this way
breeds credibility. The alternative is to be fundamentally honest and
really do what our legislative mandate says.
We do not have a Mack proposal, so I think I have to agree
with Mike Kelley that we can't be against it until we see it. I read
a short colloquy between our Chairman and Senator Mack in the
Congressional Record in which the senator clearly says his objective
is to take away from the Fed any concern with short-run employment.
That is what he wants to do. If we had such a directive from
Congress, we could either refuse to do what Congress told us, which I
do not think is a very good idea, or we could in fact ignore the
employment objective, which I am guessing will be the intent of
Senator Mack's proposal, if there is indeed a proposal. That is not a
choice I would like to have. If the proposal is going to be anything
like what we think it is going to be, I would certainly urge that the
Federal Reserve oppose it in testimony.
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. I think we have just proved the anti-economist
adage that, if we lay all the economists in the world end to end, we
will not reach a conclusion. I will at least try to touch both ends.
At the last meeting I was looking for a bridge to both sides of the
river; I will continue that analogy. I thank you for raising the Mack
measure because I think it focuses our discussion.
The first point I would make is that if it comes down to a
choice between Humphrey-Hawkins and a Senator Mack proposal, I think
the right way to do the Mack proposal is to see it as a way to change
Humphrey-Hawkins. Governor Blinder probably incorrectly characterized
Humphrey-Hawkins as giving us a dual objective; it does not. It gives
us seventeen, eighteen--heaven knows how many; there is a paragraph of
objectives. That is not a good directive for the Federal Reserve. I
think I can say that few of us would select Humphrey-Hawkins if we
were drafting this kind of legislation. The gain here is that we are
opening a door that we should use as a vehicle for change.
Second, I view as very well taken Janet Yellen's point that
we should not oversell and should not underestimate the costs of a
Mack proposal. We need to be honest, and I do not think there is any
disagreement on that at this table. The Mack legislation would be
costly. Third, I think if we look at the loss function, or the other
side of the loss function which is a gain function, we find that
politicians are well aware of the gain function. The reason we have
fourteen-year terms is the recognition that politicans are well aware
of the gain function and want to exploit it. They exploited it as
recently as the late 1970s, and we had a very painful disinflation to
pay for it. If there was an advantage to changing the law toward
focusing on price stability, it would not necessarily be to change our
behavior but as a recognition of this political disequilibrium. I
think that is a real plus in passing something like that.
Fourth, one of the things we all taught in economics was
that, if we have one instrument, we can only work with one target.
don't think it necessarily follows that the target should be price

I

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inflation. I think it should be nominal GDP, and I believe that is
somewhat in line with-what Governor Yellen said. But once we pick
nominal GDP as our objective function, it begs a second question that
has to be answered. It is that a nominal GDP target probably has to
be consistent with some desired level of inflation. So, having this
process and having Congress tell us some desired level of inflation, I
think is probably good. But our target should not be the desired
level of inflation; our target should be nominal GDP. You disagree?
Well, not wildly!
[Laughter]
The final part of whatever Congressional testimony we have on
this subject is that the real focus of Congressional action should not
be to tell us what the inflation rate should be, although that would
be useful. It should be on the policy actions they control that
affect the nonaccelerating rate of inflation. I do not think it is
given to us by God; I do not think it is etched in stone; I think it
is given to us by the Congress. I think that higher real minimum
wages raise the NAIRU and lower real minimum wages lower the NAIRU.
We can go through a whole list of other things. So the right way to
improve the loss function or gain function is not in this room; it is
up there on Capitol Hill. Maybe part of our objective should be to
remind them of that.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. Although the Humphrey-Hawkins Act
is in fact full of goals I reduce them, as I think Governor Blinder
did, to two that I describe as sustained economic growth and price
stability. But I find that to be really a single goal, since I am
absolutely convinced that the best way to achieve sustained economic
growth is through price stability. I prefer to state the objective of
price stability in words rather than as a numerical goal. I believe
that in achieving our goal of price stability, we should seek a
downward secular path in inflation from business cycle to business
cycle. That goal means somewhat more disinflation because I do
believe that the present level of inflation at, say, 2-1/2 to 3
percent is higher than one wishes to have for either economic or
social reasons.
I question the whole idea of credibility. Nobody has been
able to prove that credibility has bought the Bundesbank or any other
central bank the benefit of a lower cost to reduce inflation. In
fact, Stanley Fischer presented a very good paper at the 300th
anniversary of the Bank of England proving rather the contrary. There
is no particular benefit in the so-called credibility, and I think
credibility mainly makes central bankers feel better about themselves.
It seems to me that the record of this Committee over recent years has
been as good, if not better, than any central bank I can think of,
including specifically the Bundesbank. I think it would be very
unconvincing as a public policy goal for us to position ourselves as
driving toward some number for inflation, which presumably if one
could figure out how to measure it accurately would be zero, where we
know the costs of achieving it would be very high and we are very,
very uncertain of the benefits.
CHAIRMAN GREENSPAN.

Governor Phillips.

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MS. PHILLIPS. We all come at this in slightly different
ways. I do think it is important for any government entity or quasigovernment entity, however we are classified, to communicate its longterm goals--which are not unlike a mission statement that any kind of
entity would have. Inflation is probably the area where we have the
most control in the long run. I do not think that we have as much
control in the area of employment in the long run, given fiscal policy
and other effects. It seems important to me for us to state clearly
that our long-run goal is to control inflation. Now, I certainly
recognize, and I think Ed Boehne stated very clearly, that we operate
in the real world and we have to take into account certain short-run
issues, be they business cycle issues or liquidity issues, whatever.
But it seems to me that if we make monetary policy decisions in the
context of a long-term goal that we are then still being true to our
mission.
If I look back at the period when we were easing, one of the
things that I looked at, and I think a lot of people around the table
looked at, was the kind of progress we were making on inflation. Even
while we were easing, we were still looking at the fundamentals of
price movements to see whether or not we would be doing some kind of
damage to our ultimate objective of price stability. I come down on
the importance of expressing clearly that control of inflation is our
major goal. It is clear that we do not have it as a mandate now. So,
what do we do in the interim? Even in the existing Humphrey-Hawkins
reports, I think we could start to be more explicit about looking at
perhaps a range of inflation measures. We could look at it as a
monitoring goal somewhat like the way we look at the monetary
aggregates. Obviously, the Congress ultimately is going to have
something to say about it, but it seems to me that if we take the
initiative to start working in this area, we would be more in the
driver's seat than simply reacting to a piece of legislation that
comes forward. Unless we have a specific proposal before us, it
certainly is difficult to say, yes, I would be for this or against
that. But as a general matter, I think that it would be important for
us to communicate that we want to control inflation, with price
stability as our long-term goal.
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE. Mr. Chairman, the proposal for a balanced budget
amendment implies to me an abject admission of total lack of self
discipline on the part of the Congress. I do not think we need to
make that kind of admission about our pursuit of the goal of stable
prices. If we set a target, we do not get any credit for hitting it
from three feet away; we have to hit it from a hundred yards away. It
seems to me that not being able to achieve the goal that we set up
then makes us subject to an enormous amount of criticism that is quite
justified because we said we can do this but then fail to do so. I do
not see how we can commit to that kind of objective as long as fiscal
policy over which we have no control is out there and can be the loose
cannon on the deck or the wild card in the inflation wager. I
recognize that Humphrey-Hawkins makes the monetary policy mission of
the Federal Reserve a little more difficult because it is a threelegged stool on which it is not very easy to keep the seating. But I
do not think it is inconsistent with pursuit of a policy of stable
prices. That is demonstrated by the progress that has been made in
reducing the level of inflation over time. I am much more in sympathy

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with Governor Yellen's analysis and conclusions than the rigidity that
is implied by what Al has proposed.
CHAIRMAN GREENSPAN.

President Moskow.

MR. MOSKOW. Mr. Chairman, I am from the "if it ain't broke,
don't fix it" school. It is not that the Humphrey-Hawkins bill is the
ideal piece of legislation, which it clearly is not, but I think as
Governor LaWare said, this FOMC has implemented it extremely well.
Our record is good, and I think that opening it up now and trying to
make changes in it may raise other problems that we do not want to get
into. If we are to have any type of targeting or numbers or even
ranges, that should require legislation. The reason I say that is
that for targeting to be successful it clearly would require the
efforts of the legislative branch, the executive branch, and of course
our own efforts. Looking at the experience of other countries that
was reported in the staff paper, for those that had targets, I could
see that in every case the central bank was doing it jointly with the
finance ministry. Therefore, the executive branch was clearly tied
into it; it was not the central bank doing it alone. In most of those
countries, the central bank is independent. I think it clearly has to
be a government-wide effort to do this; it just can't be the central
bank alone for reasons that others have mentioned here.
On a numerical target, I would be concerned if we announced a
numerical target for inflation that we just would not gain that much
and also it would limit our flexibility. When thinking about this in
talking to our staff, I came to the same conclusion that Larry Lindsey
came to, namely, that we should choose nominal GDP as the target to
give us more flexibility. But there are some problems with nominal
GDP, too. I think we would still have the escape hatch issue,
although it may not be as severe as just choosing an inflation target.
If we have a nominal GDP target, we still have to have a long-term
inflation target within the nominal GDP. Even then, there could be
some cases where we probably would go beyond the nominal GDP target
and we would have to lay those out in advance. If we lay them out in
advance, that affects our credibility. Would people really believe
this? Clearly, nominal GDP would be much better than a long-term
inflation target alone, if we are going to go that route. I also
thought the paper was interesting in noting that in the New Zealand
case, when they started to bump up against the inflation target, they
suggested redefining measured inflation to exclude some things that
affect prices.
I guess my conclusion is that we should not make any changes
unless they are necessary. If we have to respond to some legislation
that is on the table, then I think we should at least seek some
alternatives. We should have this fleshed out a little more by the
staff, and look at some options and alternative ways to respond
specifically to that legislative proposal.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. On the narrow question of how to respond or
testify on a Connie Mack bill, we need to be in a position to support
the idea that price stability is our primary long-term goal. I would
hate to see us in a position of having them offering it and us
rejecting it. I agree with Ed Boehne that it is highly unlikely that

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Congress will actually go through with it and give it to us. I do
think that we have a pretty good thing going right now. Our story is
that price stability is our long-term primary goal but not our only
goal. It contributes to the other goal, which is high output and
employment. Humphrey-Hawkins is written with multiple goals. There
is a paragraph full of them. However, in the public mind and I think
in Congress' mind, there really are only two goals: price stability
and employment growth. We pretty well have finessed that issue, as we
have it right now. Ed mentioned that in the 1970s, inflation
ratcheted up with each cycle and that in the 1980s and early 1990s it
has ratcheted down in each cycle. It seems to me that we are now just
one cycle away from price stability under current arrangements.
CHAIRMAN GREENSPAN. Listening to this is really quite
interesting. We now understand why this Committee has had difficulty
confronting this issue. It is because we are as split down the middle
as we could possibly get. I wonder, however, how much of the
difference is real and how much is imagined. The reason I put it that
way is that I ask myself periodically what range of actions do we have
available to us, and how does that compare to an earlier period? What
strikes me about where we are is that even though the Federal Reserve
is an independent institution in the legal sense, meaning that our
decisions are not subject to further evaluation by other authorities,
we are in fact very dependent on the culture and the philosophy of the
society in which we function. It is a subliminal issue and one needs
only to have been exposed to it for a long time to realize what the
differences are.
When I first got into goverment in 1974, inflation was just
beginning to take hold as a big issue. For the first time--I think it
may have been at the Rambouillet Summit or the 1977 Summit--it was
generally agreed among the G-7 that inflation was the cause of
unemployment. Now, this was an extraordinarily unusual thought that
was not present in earlier years. One could see the changes that were
beginning to emerge. I remember Arthur Burns, with whom I used to
visit quite often and whom I had known since graduate school, would
speak against inflation like none of us here is used to hearing. If
one looks at what the Federal Reserve did in that period, that antiinflation attitude is scarcely to be seen in the policy or in the
numbers or in anything. Then I ask myself, how is that possible?
Here was a stalwart inflation hawk and look at the record. The answer
is that he had to deal with an environment in which the philosophy was
still partially held over from the fifties and the sixties when, for a
while, there was a notion held very broadly that a modest amount of
inflation was good, not bad. The issue of price stability was never
an issue that was presumed to have the importance that it subsequently
has acquired in our era. There is no one today among the 535 members
of the Congress who would say that inflation is a good thing. Thirty
years ago that number would have been a minority, but I would submit
to you that it would not have been zero.
There has been a fundamental change, and I think it is the
result of the extraordinarily negative experience we all had in the
late 1970s. That is, the culture changed very dramatically in the
1980s, and what we have now is a basic view that inflation matters.
In the debates that we have on the Hill--Humphrey-Hawkins and the
like--there is never a question of whether we should accept a little
inflation for some decrease in unemployment; that usually was the

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relevant discussion twenty years ago. The discussion now centers
around the assertion that there is no inflation and that monetary
policy is too tight.
This really raises some very interesting questions as to
where we are. My own impression is that even if we now locked into
law a fixed inflation rate--say, 2 percent or 1 percent--and the
Congress voted for it with a large majority, in the first recession
everyone would be arguing to go in a different direction. I am not
certain that there is enough knowledge in the Congress about what the
true trade-offs are to get useful, informed opinions because we are
dealing with people who generally are not economists and have not been
involved in some of the monetarist or other policy subtleties with
which we deal. I would not even take as a given, if the Congress gave
us authority to have an explicit goal, that we really would be able to
adhere to it and say the reason that we are raising rates now when the
unemployment rate is going up 2 points a month is that we are worried
that we won't meet our inflation goals. I will tell you that if we
could get 80 percent of the Congress to vote for that goal, 95 percent
would take a different position when the world changes.
My own view is that a general long-term view of price
stability of the Neal form is a very useful conceptual anchor for us
to do basically what we have been doing. This is essentially, as Bob
McTeer mentioned just a moment ago, that we are sort of one cycle away
from being there. But the problem is that we do not go in a straight
line, to the extent that we are even focusing on it. You may recall
that a couple of years ago, we all basically said we were going to
have to move early on the up side or we would not achieve anything
resembling price stability. Now, I submit to you that is exactly what
we did. We did follow a price stability objective in a cyclical
sense, that is, one where the inflation rate is going to be lower at
each progressive cyclical peak and lower at each progressive cyclical
low. But that objective is not being implemented in a straight line
because we have recognized, and I think correctly, that the Congress
would not give us a mandate to do that.
If we got legislation in the form of, say, something like the
Neal bill or a considerably watered down version of the earlier Mack
proposal, it probably would be useful for us because it would give us
a particular goal. But if we tried to implement it in an explicit
form independently of where we were in the business cycle, my
suspicion is that we would find that all that support would just
evaporate. I would not say the current policy is the best we can do.
I hope that this Committee would subscribe, as I believe it does
subscribe, to the ultimate goal that low inflation/price stability is
where we would like to be, other things equal. What we would not
state as a goal is that we would like the unemployment rate to be 5
percent, independent of everything else that is going on. I think we
ought to have an inflation goal that is qualitative, as Al Broaddus
says, one that is defined in operational terms, not in terms of
numerical targets. We would always be moving in the direction of
price stability, recognizing that we would not do so in a straight
line because I do not think we have the philosophical, cultural, or
political support in this society for that. There still is a shortterm Phillips curve. People respond to it; they are aware of these
trade-offs, and to deny them, I think, is a misunderstanding of how
our political system works. If we do have to testify on a Mack bill,

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which I think we will, we have to support or should support the view
that low inflation or price stability is very valuable to have as a
long-term goal. Until we see the actual bill circulated among the
members and they are polled individually, I am not sure, just
recording what everybody said, that we would find a way of breaking
what looks to me like a "on the one hand or on the other hand"
situation; basically, what we have is two-handed FOMC members.
That is all I have to say. Does anybody else want to raise
any questions? I may have ended up being last. Why don't we wait to
see what type of legislation we can get? I think it will be a very
important piece of legislation for us. Rather than try to develop a
position in advance, I would suggest that we wait and see what the
actual legislation is and try to get a consensus for our response if
we can find one in this group.
The last item for today is a report by Ted Truman on
developments in Mexico in the last 48 hours or so.
MR. TRUMAN. Thank you, Mr. Chairman. I am sure you have
heard more than you would like about Mexico's situation in the last
few days and weeks. Nevertheless, I thought it would be useful to
summarize the state of play with regard to the Mexican situation as of
this afternoon. I will touch on five topics: first, the now
apparently dead legislation in the U.S. Congress; second, the total
U.S. plan to deal with the Mexican crisis that would be aided by
certain FOMC actions; third, the IMF program; fourth, efforts to
mobilize other forms of multilateral support; and finally, the Bank of
Mexico's request to make a further drawing on the existing Federal
Reserve/ESF swap lines. We need a sense of whether the Committee is
inclined to approve the increase in the swap line.
First, I can be very brief on the now apparently dead
legislation that would have provided up to $40 billion in U.S.
government guarantees of Mexican government securities, The prospects
for passage of that legislation have gone steadily downhill since it
was announced almost three weeks ago. Decisions were made last night
and this morning by the President and the bipartisan leadership to
stop pushing for the legislation. I think it is fair to say that the
future of the legislation is nonexistent, but I won't belabor the
point.
Turning to where we are now, before I say anything more, I
would note that I am acutely aware of the strongly held view on this
Committee that the central bank should not be expected to underwrite
foreign or other debt issues, in large part because covering such debt
obligations would involve the inappropriate use of central bank funds.
That being said, the U.S. authorities faced two broad alternatives as
it became clear that the legislation would not pass. We could
conclude that we had tried and failed in what the Chairman has called
the "least worse" approach, which was to leave Mexico to fend for
itself. Alternatively, we could try to help by using an approach that
is feasible but worse.
MR. LINDSEY.

Ted, I'm sorry, we are having trouble hearing.

MS. MINEHAN.

Please speak up a little.

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MR. TRUMAN. In the end, the second alternative was chosen.
The materials that were distributed to you contain several items. The
first page is a statement by the President and the Congressional
leadership. Despite the note on top, which is barely legible but says
that the new financing package is on hold and has not yet been
cleared, the package has now been cleared. Attached to that is a
summary of the currently proposed program, and behind that you will
find President Clinton's speech this morning to the National Governors
Association in which he announced this change of strategy. The last
item is the announcement by the Managing Director of the IMF this
morning regarding the Mexican situation and the proposed IMF package.
The new approach would basically involve the heavy use of ESF
lending to Mexico in the form of short-term swaps, medium-term swaps,
and possibly loans and guarantees of Mexican government securities.
The latter two types of operations apparently are legal for the ESF
but apparently also would set a precedent. The total could be up to
$20 billion. To provide the ESF with the necessary dollar liquidity
to undertake these operations, the Federal Reserve would be asked to
agree to warehouse foreign currencies now held in the ESF, at present
$19-1/2 billion in holdings of DM and yen. The reason is that the
liquid dollar assets on the ESF's balance sheet are only about $5
billion. In addition, the Federal Reserve has been asked to
participate directly as well. The form, consistent with precedent and
with what I said earlier about the role of a central bank in such
circumstances, would be for the Committee to agree to increase its
swap line somewhat as part of this operation. However, there would be
a "take-out" in the form of a commitment from the Treasury that the
ESF would take over any System obligation that was outstanding for
more than 12 months. We are not going to make a formal recommendation
to the Committee for action on a specific proposal today. However, an
increase in our Mexican swap line to $6 billion would, in my opinion,
be reasonable as long as we get the take-out. I also think the limit
on the warehousing of foreign currencies for the ESF should be raised
to $20 billion with the understanding that the special increase is
linked to the Mexican situation. I should also say that a further
understanding could be that we have a situation that could last for as
long as ten years. The Committee may want to discuss these
suggestions today and vote on them tomorrow.
The third topic is the IMF program. Last Thursday, the
Mexican authorities announced agreement with IMF management on an
economic program in support of Mexico's stabilization efforts. The
program is scheduled to be considered by the IMF Executive Board on
Wednesday with the first disbursement by Friday, assuming the program
is approved. The program as first proposed was unprecedented in its
size, both absolutely and relative to Mexico's quota at the IMF. It
was three times Mexico's quota, or about $7.7 billion, of which $3.9
billion was to be released on approval of the program. The economic
content of the program is tighter than that proposed by the Mexican
authorities on January 3rd in terms of its fiscal policy parameters
and especially its monetary policy parameters. On the surface the
program is designed to achieve the same macroeconomic objectives: In
terms of growth, as you will recall, the Mexican program called for
growth of 1-1/2 percent year over year; inflation in the Mexican
program was set at 19 percent December over December; the exchange
rate was to get back to 4.5 pesos per dollar; and the current account
balance was to be cut to a deficit of $14 billion this year. However,

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implicit in the program is the notion that some, and probably all, of
these objectives will have to be revised and that the terms or
contingency arrangements of the program will need to be further
tightened as well.
Following the collapse of the U.S. legislative proposal, the
Managing Director of the IMF decided this morning to make two changes
to his recommendations tomorrow with respect to the program. The
first is to increase the size of the program by $10 billion, which he
hopes to finance from non-BIS-member central banks. There is some
question about that point, and if the funding is not obtained from
those central banks and governments, then it would come from the IMF's
own resources. Second, he would have the IMF disburse the full amount
of the original program immediately.
On my fourth topic, other multilateral efforts, the
extraordinary size of the IMF's original program can be explained by
two factors. The first is a recognition by IMF management of the
serious threat to the international financial system posed by the
Mexican situation. The second is a recognition of the need,
especially as perceived by the United States Congress, for greater
international "burden-sharing," as they call it, in efforts to
stabilize Mexican financial markets.
With respect to burden-sharing, we and the Treasury have been
discussing certain proposals with our central bank colleagues. The
first is to enlarge from $5 billion to $10 billion the BIS facility in
favor of Mexico that was agreed upon in principle on December 30th.
The second is to make the financing from the BIS readily available to
meet current short-term financing needs. On the first point, the BIS
agreed that the increase, in principle, could be announced as part of
the package that was unveiled this morning, although you will note
that some of the language of the subsequent announcements suggests
more agreement than actually exists, as is almost always the case.
We are less optimistic about agreement on the second point.
The Treasury, with our technical support, also has approached
three groups of other countries to ask them to assist Mexico. You
probably have heard that a group of Latin American countries-Argentina, Brazil, Chile, and Colombia--generally has responded
favorably, although the modalities for the assistance are not yet
agreed upon. In addition, the Treasury has approached a group of
countries in the Far East and another group of countries in the Middle
East for participation. I suspect these efforts will now be rolled
into the IMF endeavor to raise an additional $10 billion to finance
the Mexican program through the Fund.
Last, as you know, the Bank of Mexico so far has drawn $1
billion on the $10 billion Canadian and joint Fed/ESF swap facility.
Those drawings have been made available to the Bank of Mexico rather
than being locked up at the Federal Reserve Bank of New York. We
understand that as of the end of the day, Mexican reserves will be
between $2.4 and $2.9 billion including those drawings. There is some
uncertainty about how much they lost today, whether it was $1 billion
or $650 million. And then Mexico intends to announce the level of its
reserves tomorrow. Governor Mancera has made an urgent request that
we allow a further drawing to enable him to pad his reserves somewhat.
After consultation with the Treasury, the Chairman has suggested that

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we allow the Bank of Mexico to draw an additional $2 billion, $1
billion on each swap line, with the understanding that this entire
amount would be locked up at the Federal Reserve Bank of New York and
not immediately available for use by the Bank of Mexico. On that
somber note I will stop and would be pleased to answer any questions.
MR. MELZER. Ted, what is the status of the collateral
arrangements that you discussed on the conference call we had some
time ago?
MR. TRUMAN. The security arrangements with respect to the
existing enlarged swap arrangement are all in place. Under this new
proposal, they would remain in place behind the ESF's operations
because the ESF would be committed to taking us out first. So this
arrangement would be behind ours as well--any money would go to us
first. Those are essentially the same arrangments as those that have
been widely talked about in connection with the guarantees
arrangement.
"Collateral" is the word that I fight against a lot, Mr.
Chairman. I have had too much feuding with the lawyers on this point.
MR. MELZER.

What are the security arrangements?

MR. TRUMAN. They are an "assured means of repayment."
The
way they work is that the non-Mexican customers receive irrevocable
instructions from the Mexican government as of a specified date, a
date which would be after a payment was due on the guaranteed bonds or
whatever debt instrument we are talking about, to make their oil
payments to a bank in the United States, an account of Pemex in the
bank in the United States. Those receipts would be immediately paid
into the government account and from the government account into a
Bank of Mexico account at the Federal Reserve Bank of New York. By
prior agreement, though that is not required but useful, the Mexicans
would then acknowledge that the Federal Reserve Bank of New York would
have the right to set off funds in that account against claims of the
United States government that had been assigned by the United States
government to the Federal Reserve.
MR. MELZER. What would that support?
of time, what would those receipts be?

In a one-month period

MR. TRUMAN. I think it is about $6 or $7 billion a year, so
it is about $500 million a month. The Chairman has pointed out that
this is a mechanism that would allow repayment.
It is also fair to
say that if there were circumstances where the repayment was
difficult, it might be difficult to fully enforce the mechanism. But
I think the most likely scenario would be that a subsequent agreement
would be made.
It may be good in this circumstance that the agreement
would be between the Mexican government and our government; we would
be the agent, but we would be left out of it.
The subsequent
agreement in effect would say:
Because of other disasters that have
happened with Mexico, rather than taking all your oil receipts we
would take a more practical amount--not $6 billion a year but $2
billion a year. So, rather than paying off $20 billion over 3+ years,
they would pay it off over 10 years.
MR. MELZER. What ability do the Treasury or the ESF have to
take us out of an obligation if funds are not appropriated by

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Congress? Do they have the ability just to say, we committed to this
and we are going to pay the Fed off?
MR. TRUMAN.

Yes, they could.

MR. MELZER. But if they can do that, why can't they just
advance it themselves?
MR. TRUMAN. They could, but I think they feel that it would
be useful to their objectives to have a lot of people-from?

CHAIRMAN GREENSPAN. Can I just suggest where the funds come
How about a credit against our payment to the Treasury?

MR. LINDSEY. Why do we come before other creditors to the
Treasury--I guess that is another way of stating the question--with
regard to any funds? In other words, why do we come in front of
Social Security recipients?
MR. TRUMAN. We would come in front of the Exchange
Stabilization Fund, not the Treasury.
CHAIRMAN GREENSPAN. It is the Exchange Stabilization Fund.
The point, you know, is that this is not an either/or situation. For
example, the Treasury can validly pay us off with a note. Treasury
obligations are on our balance sheet right now. If they took us out
with a special Treasury security, we would put it on our balance
sheet.
MR. TRUMAN. There are two issues about whether we are
dealing with the Treasury itself or with the ESF.
CHAIRMAN GREENSPAN. Let me put it this way: If the ESF
loses its whole balance sheet, we have more problems than we know!
MR. LINDSEY.
to be pesos!

But 80 percent of their balance sheet is going

MR. TRUMAN. The Treasury is very conscious of the fact that
if they make this arrangement--that is the reason for the warehousing
of up to $20 billion--they would need to allow for the fact that we
had advanced $4, $5, or $6 billion. Therefore, we would have to have
a contingent claim on them for that $6 billion--if that's the amount-12 months down the line. They would have to be able to take that
claim over, if necessary, either by advancing their own swap or by an
arrangement with the Mexicans under this program whereby the Mexicans
would use their proceeds to pay us off.
CHAIRMAN GREENSPAN. Could I just formally respond to
Governor Lindsey? There is a question here of whether or not the
amount the United States Treasury gives us has to be appropriated
funds, which I think is really where our examination of the issue has
to be. In examining the take-out, we ought to make certain that we
talk to them with respect to the question of what happens if they do
not get the appropriated funds.
MR. TRUMAN. Mr. Chairman, the Exchange Stabilization Fund
does not have appropriated funds.

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1/31-2/1/95

CHAIRMAN GREENSPAN. Are we going to be getting a take-out
from the Exchange Stabilization Fund?
MR. TRUMAN.

I think that is what is in the program.

CHAIRMAN GREENSPAN.
SPEAKER(?).

Okay.

That is not the same as the Treasury.

MR. TRUMAN. Even if we didn't, the precedent in the 1960s--I
think there was a question then about whether the Treasury could
engage in foreign exchange operations outside of the ESF--was the use
The Treasury floated Roosa bonds to
of Roosa bonds in the 1960s.
obtain foreign currencies and used some of those currencies to take us
out.
That did not involve appropriated funds. That was treated as a
debt-management operation. The Roosa bonds were issued under their
debt-management portfolio.
CHAIRMAN GREENSPAN. Since we have double collateral, if you
will excuse the word, the interesting question is:
If there is a
default, do we go first to the oil proceeds or to the Treasury?
MR. TRUMAN. I would suggest, though maybe it's not the right
thing to suggest, that we would go first to the Treasury. If the
Treasury went to the oil collateral, if I may use that word, that
source of repayment would go first to us.
MR. HOENIG. When you say "go first to the Treasury,"
Treasury then is providing the backing, not the ESF?
MR. TRUMAN.

I said the "Treasury;" I meant the ESF.

MR. HOENIG.

the

Okay.

CHAIRMAN GREENSPAN.
MR. BOEHNE.

President Boehne.

I will forego my question.

MR. BROADDUS. If I may, Mr. Chairman, I just want to make
sure I have the numbers straight. We now have a $3 billion swap line.
SEVERAL.

$4-1/2 billion.

MR. BROADDUS. Right, $4-1/2 billion. I want to make sure I
understand. Is the $20 billion package on top of the $18 billion
total package we have now?
MR. TRUMAN.
MR. BROADDUS.

No.
Then it is the same thing?

MR. TRUMAN. It subsumes the $9 billion that we have now.
The $18 billion is comprised of $9 billion from the United States, $1
billion from the Canadians, $5 billion from the BIS, and $3 billion
from the commercial banks.

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MR. BROADDUS. Let me just cut through and ask what our
exposure would be including the amount of warehousing we would be
contemplating in the total package?
I don't consider warehousing to be exposure,

MR. TRUMAN.
but--.

MR. BROADDUS.

Okay.

MR. TRUMAN. The figures would be what the Mexicans draw from
us and our warehousing with the Treasury.
VICE CHAIRMAN MCDONOUGH. It's $6 billion for the Mexicans
with a take-out from the Treasury.
MR. TRUMAN. Yes, with a take-out from the Treasury.
Essentially it's $26 billion with the Exchange Stabilization Fund.
MR. LINDSEY.
MR. TRUMAN.
so it would be-MR. BLINDER.

$26 billion?
The $6 billion would be part of the $20 billion,

It's twenty minus six, is it not?

MR. TRUMAN. Six billion dollars would be dedicated to taking
us out.
The twenty includes both what we advance in the short run and
what the ESF advances. The maximum exposure to Mexico of the ESF and
us that is now contemplated, matches, so to speak, the $20 billion of
the warehousing.
MR. FORRESTAL. Is the new amount from the IMF in addition to
the stand-by arrangement they have already--the $7-3/4 billion?
MR. TRUMAN. They haven't approved that stand-by arrangement
for Mexico yet; they will consider that tomorrow.
MR. FORRESTAL. If they do, is it in lieu of that $7-3/4
billion or in addition to it?
MR. TRUMAN. The two are added together.
$17-3/4 billion rather than $7-3/4 billion.
MR. HOENIG. Let me just ask:
in terms of its assets?

So it will now be

How big is the ESF right now

MR. TRUMAN. Roughly $25 billion in liquid assets, of which
$5 billion is in dollars and $20 billion is in foreign currencies. It
also has about $9 billion of SDRs, but most of that is matched on the
liability side of the balance sheet by liabilities to the Federal
Reserve.
MR. MCTEER.
announcement today?

How have the markets reacted to this

CHAIRMAN GREENSPAN.

Ted, how did the markets close?

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1/31-2/1/95

MR. TRUMAN. Quite positively. The last time I looked the
peso was about 5.70, having weakened earlier to a new low of 6.55.
CHAIRMAN GREENSPAN. When I spoke to Governor Mancera he said
it got as low as 6.70 to 6.80.
MR. FISHER. It closed today at around 5.70 to 5.80 and their
stock market was up about 9 percent.
It's very positive after
yesterday. I caution that the peso level is only at Friday's close.
CHAIRMAN GREENSPAN.

What happened in Brazil and Argentina?

MR. FISHER. I don't have the closing levels in front of me.
The stock market in Brazil was up strongly.
SPEAKER(?).

What about the U.S. market?

MR. FISHER. In the U.S. the Dow was up about 14 and the
dollar was up about 2 pfennigs.
CHAIRMAN GREENSPAN.
MR. FISHER.

The bond market was up 25/32.

The long bond closed at 7.69 percent.

CHAIRMAN GREENSPAN.
sorry; go ahead, Cathy.

Any further questions for Ted?

I'm

MS. MINEHAN. The amount of funding that was initially
suggested for commercial banks and investment banks was a small amount
of the original $18 billion, $3 billion or so. My understanding of
that from banks in our own District was that it was being made
contingent on the $40 billion. Now that the $40 billion is gone, is
there any part of this package that is coming from any of our
investment banking organizations?
MR. TRUMAN.
I don't think it was ever contingent on the $40
billion because it was put into the market before the $40 billion in
guarantees was announced. But it was contingent on the BIS facility
that existed. It was to be paid out pari passu with the BIS part of
the package.
The truth of the matter is, speaking frankly, the banks
have not been particularly supportive of this operation.
MS. MINEHAN.

Right.

MR. TRUMAN. My guess is that once this situation stabilizes,
there will be some effort to suggest that the banks could be a little
more supportive. One of the dominant themes on Capitol Hill has been
the question of who peddled this paper, and although a lot of it is
not on the balance sheets of the banks, they did a lot of peddling.
MS. MINEHAN.
plus 10 plus 1?
MR. TRUMAN.

Is the way to add up these numbers 20 plus 15

Twenty plus--

MS. MINEHAN. If the IMF is preparing an expanded support
package totaling $15 billion, should that be $17 billion?

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MR. TRUMAN.
MS. MINEHAN.
MR. TRUMAN.

$17 billion!
Twenty, 17,
Yes.

10, and 1?

Well, 2 would be the last number.

MS. MINEHAN.

Oh yes, I forgot that.

Okay, a total of $49

MR. BLINDER.

Someone will throw in another billion.

billion.

SPEAKER(?).
MR. BLINDER.

A billion here, a billion there.
We usually manage to double count one of these

things.
SPEAKER(?).

Yes.

MS. MINEHAN. The amount now contemplated, whether it is $49
billion or $50 billion, is now some $10 billion over the $40 billion
that was in the proposed legislation, which seemed like a big number
to begin with.
MR. TRUMAN. On the other hand, the number before was the $40
billion plus the $7 billion plus the $5 billion. So, the two totals
are broadly commensurate.
MS. MINEHAN.

Okay.

MR. LINDSEY. Ted, credibility has been a problem all along.
I want to ask two questions. First, you said that Governor Mancera
wants $2 billion so he can pad his balance sheet before it is released
tomorrow. Now, one of the things that would be most useful in the
long term would be for the Bank of Mexico to provide an honest
description of its balance sheet not only to us, which would be
useful, but to the public at large.
MR. TRUMAN.
MR. LINDSEY.
going to stop?

Absolutely!
After we pad his balance sheet tomorrow is this

MR. TRUMAN. Governor Mancera is very conscious now that he
has a commitment to announce his reserves after the end of every
month. My understanding from the people I have talked to is that his
intention would be to say, as he did the last time the Bank announced
its reserves--and this is a small but significant step forward--that
his reserves are X and that those include drawings on the North
American swap lines of Y.
MR. LINDSEY.
balance sheets?
MR. TRUMAN.

But they are not releasing the Bank of Mexico's

Not yet, but I think that will be part of the

Treasury--

CHAIRMAN GREENSPAN. I think we will find, after Governor
Mancera reported all his money supply and reserve numbers in the Wall

1/31-2/1/95

-68-

Street Journal today, that it is going be difficult for them to say
the drawings do not exist.
MR. LINDSEY.
MR. TRUMAN.

That is right.
They existed--and that was the problem!

VICE CHAIRMAN MCDONOUGH. Could I clarify something? What
Governor Mancera said just a couple of hours ago was that, if before
the end of the day today he is informed that we the United States are
willing to make these $2 billion available, he would envision when he
announces his reserve figures to say that they have X, say $2.4 to
$2.8 billion, and in addition, because I don't think we can get value
to them today, that he had agreement from the Federal Reserve and the
Exchange Stabilization Fund for an additional $2 billion, value
tomorrow presumably. So he will lay it out accurately, I think.
MR. TRUMAN. I think the major concern--and that is only
partly addressed by this since we tentatively plan, at the moment
anyhow, to lock up funds--is that announcing he has $2.4 billion in
reserves, given the kind of problems he is up against, does make him
look rather naked.
MR. LINDSEY. My second question has to do with our
credibility. I don't know what questions to ask, and I hope you will
help me out in that regard. I have this document in front of me,
which includes a page entitled "What is the Exchange Stabilization
Fund?" The document came from Treasury International Affairs. I
gather it was written by them.
I have written enough of these to know
what you do, and that is to tell your point of view. Paragraph 3, not
to mention the dots indicating an omission in paragraph 2, got me a
little nervous. Paragraph 3 says these holdings in the ESF are used
to enter into swap arrangements with foreign governments, to finance
exchange market intervention, to provide short-term bridge finance,
etc., and all these things are great. So, basically paragraph 3 is
establishing that this is not unprecedented. My question would be:
Do we do all these nice things if it's not in support of the dollar?
Is this unprecedented with regard to the fact that we are supporting
another currency?
MR. TRUMAN.

The language before the dots is--

MR. LINDSEY. I am talking about the third paragraph. I will
go to the second paragraph in a second. I'm sorry. I am running a
little out of order. It is saying the ESF has done all these things.
MR. TRUMAN. The legislation governing the objectives of the
ESF was changed, I think for the most part in the mid- to late-1970s.
The changes included the language that the government of the United
States and the International Monetary Fund have the obligation to
promote orderly exchange rate arrangements leading to a stable system
of exchange rates. That was interpreted to include making loans to
Bolivia in helping it maintain a system of stable exchange rates.
MR. LINDSEY.

So that has happened before?

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1/31-2/1/95

MR. TRUMAN. Yes. They have made loans to or financial
arrangements with at least 37 countries around the world over the last
50 years.
MR. LINDSEY. I think we all will be asked questions about
this. Can you read this paper and tell me that there is not something
missing that I should know about, meaning that this is not only the
truth but the whole truth?
MR. TRUMAN. I can only say that Treasury lawyers have looked
into the question of whether these operations are legal under this
broad authorization of what they can do and what the purpose is-MR. MATTINGLY.
MR. LINDSEY.

If I can help out?
Yes.

MR. MATTINGLY. It's pretty clear that these ESF operations
are authorized. I don't think there is a legal problem in terms of
the authority. The statute is very broadly worded in terms of words
like "credit"--it has covered things like the gold swaps--and it
confers broad authority. Counsel at the White House called the
Treasury's General Counsel today and asked "Are you sure?" And the
Treasury's General Counsel said "I am sure."
Everyone is satisfied
that a legal issue is not involved, if that helps.
MR. LINDSEY.

Is there anything missing on this page?

MR. MATTINGLY. No, there is not. If you look at the last
paragraph, for example, that is part of the statute.
MR. LINDSEY.

About notifying Congress in writing in advance?

MR. MATTINGLY. The statute says that with the permission of
the President they can make loans.
MR. MELZER. In the penultimate paragraph, what is the
identified source of repayment?
VICE CHAIRMAN MCDONOUGH.

The Mexicans historically have been

very sensitive about that. Now the whole world is informed that there
are oil payments as an assured method of repayment. The Mexicans, for
reasons with which you would be very familiar given Mexican history,
have been rather sensitive about that being quite so open as it is
now.

MR. MELZER. Does this legislation contemplate taking 100
percent of a country's oil payments for four years to insure
repayment?
MR. TRUMAN.

Not the legislation--but operations for three

years.
MR. STERN. But you indicated that in fact that might not be
the way it falls out.

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1/31-2/1/95

MR. TRUMAN. I was trying to live up to Governor Lindsey's
entreaty that I suggest the questions one could ask as well as the
answers.
MR. MELZER. You said this might be outstanding to the ESF
for what--10 or 20 years?
MR. TRUMAN.

We have used these arrangements five times since

SPEAKER(?).

The oil?

1982.

proceeds.

MR. TRUMAN. The provision for payment from oil export
We never have had to have recourse to them.

MR. MELZER. I don't mean that. Has the ESF ever been used
to provide financing, as I think you said earlier was a possibility,
that was outstanding for as long as 10 or 20 years?
MR. TRUMAN.

Ten.

MR. MELZER. Ten years. Is there any precedent for that?
The law seems to contemplate short-term bridge financing.
MR. TRUMAN. The earlier ESF balances agreement also ran for
multiple years. Whether it ran as long as 10 years I can't remember,
but it is unusual to go that long. There is a difference between
whether it is legal and whether there are precedents for having done
it. It is unprecedented in that the loans are expected to be
outstanding that long.
repayment guarantee.

So they got involved in offering us a

MR. MCTEER. May I ask a question about the $40 billion that
was in the proposed legislation? I believe that legislation did not
contemplate giving the Mexicans any money but was offering loan
guarantees that in effect would have substituted the credit of the
U.S. government for the credit of the Mexican government. Presumably,
they would have had to roll over short-term debt at very, very high
interest rates because of the default risk. Was the point of the $40
billion guarantee to eliminate that default risk and to lower their

interest rate structure?
MR. TRUMAN.

And to allow them to stretch out the debt--to

replace short-term debt at high rates with long-term debt.
MR. MCTEER. Okay. Now we have stopped talking about the $40
billion; now we are talking about a certain number of billions but the
whole nature of it has changed. Have they said what they are going to
use this money for? I think it's different from what they were going
to do if we had given them the loan guarantee. Is this just strictly
for use to intervene in the foreign exchange markets to drive up the
peso?
MR. TRUMAN. I think the Treasury's intention is to secure a
financial plan from the Mexicans about what they will do with that
financing--that is, their whole debt-management strategy. This, of
course, would have to be worked out by agreement between the Treasury
and the Mexicans and we would participate in terms of our own part in
that. As would have been provided for in the legislation, the plan

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would have to be in place before a substantial amount could be drawn
free and clear.
MR. MCTEER. This does not address their credit risk problem,
though. Anybody who invests in their paper still has that to
overcome.
MR. TRUMAN. The Mexicans would in effect be substituting
credit from the U.S. government or the Exchange Stabilization Fund
rather than from the private market as under the previous guarantee
program.
MR. MCTEER. So, instead of taking our money and
their operations in their financial markets, they will be
money and offering it as a promise of repayment. Is that
saying? It just seems that the whole nature of the thing
and we have not gotten rid of the credit risk problem.

using it in
taking our
what you are
has changed,

MR. TRUMAN.
In one case they would have borrowed the money
with the full faith and credit of the United States in the private
market--in the guarantee mechanism.
MR. MCTEER.

Right.

MR. TRUMAN.
In the second case they either do that, which is
one possibility, or they would borrow the dollars from the United
States Treasury which would borrow in some sense from the ESF. The
ESF does not have dollars but it has Treasury bills that it could
sell, and the proceeds would be invested in Mexican obligations.
MR. BOEHNE.

But we have moved from loan guarantees to direct

lending.
MS. MINEHAN. Yes, to direct lending; we are in more of a
credit risk position than we were before.

this?

MR. HOENIG. Ted, why is the Federal Reserve involved in
Is it because of a liquidity problem for the ESF?
MR. TRUMAN.

We are involved for two reasons.

One, the ESF

does not have the liquidity, so that involves us in the warehousing.
The other relates to our participation--this would be short-term
participation--through the existing swap line, the enlarged swap line,
and the suggested super enlarged swap line.
MR. HOENIG. The latter would have us involved for how long?
For the ten years that was mentioned earlier?
MR. TRUMAN. No, I think for one year. That is one of the
reasons why I did not put a specific proposal to you today. What I
had been thinking, but I wanted to do it tomorrow morning when I had a
clearer head, is that you might want to set something up so that they
could draw up to $6 billion. But once they had drawn $6 billion and
the drawing had been outstanding for 12 months it would have to be
repaid, and they could not redraw on the enlarged portion of the swap
line. The Committee would decide over what period--or maybe it could
be for two periods--the Mexicans would be allowed to draw on the
enlarged swap line. And after that point they might be allowed to

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roll the drawing over up to three times and then be required to repay
any unpaid balances. As the drawings were repaid, the enlarged swap
facility would be extinguished and they could not redraw on it. The
swap line would drop back to our normal swap line agreement and any
further drawings would require Committee clearance.
MR. HOENIG.

Okay.

MR. FORRESTAL. Could I ask a question? Ted, this is a
slightly different issue. A couple of days ago there were rumors in
the market that the reserves of the Mexican government had dropped
from post devaluation levels of about $6 billion to $2 billion. The
Bank of Mexico immediately denied that those levels had gone down so
much. Now, tomorrow they are going to announce that they have roughly
$2 billion in reserves plus an agreement to get $2-1/2 billion from
us. That is still considerably below the $6 billion which was already
lower than their earlier reserves. What is going to happen?
MR. TRUMAN. They announced on the 9th of January that their
reserves were $5.6 billion.
MR. FORRESTAL. Yes, but they quickly denied that their
reserves had slipped to the $2 billion level.
MR. TRUMAN.

As of yesterday their reserves were above $2

billion.
MR. FORRESTAL. My question is:
going to do to the market confidence?

What is this announcement

MR. FISHER. I don't think anyone thought five days ago that
their reserves were still at $5 to $6 billion. There is no
credibility loss because they are down closer to $3 billion.
Yesterday, the market was saying that they were at $2 billion; the
Mexicans denied it and said that they were above $3 billion. Now, one
can split hairs but they were by all accounts, and in terms of their
conversations with us, above $3 billion.
CHAIRMAN GREENSPAN.

They were at $3.4 billion.

MR. FISHER. Yes, $3.4 billion. We are getting down to small
numbers, but no one thinks there will be a credibility loss because
they were at $6 billion earlier and tomorrow they will announce $2
billion.
MR. FORRESTAL.
In other words, you don't think that the
announcement tomorrow will in any way offset what has been done by the
President and our facility?
MR. FISHER. It's not going to offset it entirely. People
will, as people in this room did, sort of take a little breath and
say, well, that is a low number. But I think the President's package
and all the things that have come out today should mitigate the
effects of that to a great extent.
MR. MELZER. What are the implications of the Treasury just
dusting out what they have in the ESF to provide liquidity to the ESF?

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MR. TRUMAN. Do you mean sell those foreign currency assets
in the market? In this case, it would be just like any other exchange
market intervention, I think.
MR. MELZER.
MR. TRUMAN.
reasonably liquid.

Are they liquid holdings?
Yes, Peter holds them for the ESF.

They are

MR. FISHER. Yes, they are reasonably liquid instruments.
I
think the sum jumped up today. The dollar/mark today was--well, I
think dollars had been a little oversold and people were covering
back. But some of it was rumors that, in order to do anything, the
United States might be selling all the marks and yen immediately.
Now, that was mostly a skittish thing going into a rather anxious,
jerky market. I don't put too much stock in that.
MR. MELZER.
of the dollar today.
MR. FISHER.

Although that might explain some of the behavior

Yes.

MR. TRUMAN. It is fair to say that as a policy measure, one
of the reasons why the Treasury chose to go with the loan guarantee
originally rather than using the ESF was that by going to the ESF,
even with our cooperation, they felt there might be some sense that
their ability to defend the dollar with existing foreign exchange
balances was being impaired. And, therefore, if forced to sell out to
the market, their ability to defend the dollar subsequently would be
difficult without foreign exchange reserves, even aside from what one
may think about the effectiveness of intervention. The Treasury is
not particularly "gung ho" on intervention, but they are "gung ho" on
having some powder in the magazine.
CHAIRMAN GREENSPAN.

Okay.

Shall we call it an evening?

MR. TRUMAN. We need some sense of the Committee's view on
the "drawing" or whatever word you want to use.
CHAIRMAN GREENSPAN. Yes. As Ted indicated, we think it
would be useful in this context to agree to our billion dollar lockup
of reserves to Mexico. The reason for the lockup, frankly, is that
until we know that everything is in place, I would not feel
comfortable exposing ourselves even with the collateral.
But if we
get a take-out and everything is moving along, then all the risk
elements to the Federal Reserve will be gone. I think we'll probably
get fairly good confirmation of that soon--by tomorrow, do you think?
MR. TRUMAN.

It may take us a little while to work out the

take-out.
CHAIRMAN GREENSPAN. Is there any objection to our
authorizing a $1 billion drawing from the $4-1/2 billion swap line to
be locked up for the Bank of Mexico?
VICE CHAIRMAN MCDONOUGH. As president of the Bank where the
money will be kept, I can assure you that we will keep a very close
eye on it!

1/31-2/1/95

-74-

MR. MELZER. Is this a matter that needs Committee approval
or are you just consulting?
CHAIRMAN GREENSPAN. No, actually it does not need approval,
but I would feel uncomfortable if there were a significant negative
response even though you have already given me the authority. This
situation is changing and has changed sufficiently that I want to make
certain that there are no significant changes of views on the overall
position.
MR. MELZER. I am very concerned about the overall proposal
and how it would involve the Federal Reserve. To the extent that a
further drawing would involve us further in this arrangement, I do
have concerns. At the same time I recognize that you have the
authority to do it and that you are being prudent in terms of how that
money would be secured. It is hard to object to that in isolation.
In fact, I don't have the right to, really! But it does concern me in
terms of being another step in the direction of a toe in the water,
then the foot, the leg--that is what I am concerned about. I know we
are going to be discussing other aspects of this issue tomorrow, but I
feel that if I did not express that concern now, I would not be
totally forthcoming.
CHAIRMAN GREENSPAN. We are going to get to the other issues
first thing tomorrow morning. Yes, Tom.
MR. HOENIG. I have to ask you, when you say "lock up"-Are we committing to this now? Is this something that, if we have a
change of heart after our discussions later, we can not take back
because we are in this now?
CHAIRMAN GREENSPAN.

I don't think so.

MR. TRUMAN. As President Melzer said, previously--the action
was taken on December 30th--you approved a special increase in the
Mexican swap line for a short period of time.

Now, in fact the

drawings by Mexico are still within the $3 billion swap line that
existed before it was expanded with the special arrangement on the
30th of December. So, you are operating under what was previously
agreed upon.
MR. HOENIG. I understand and I hear what Tom Melzer said.
What the Chairman is saying is that things are changing quickly. Yes,
we have approved it, but what are we buying into? That's what I just
do not know.
MR. TRUMAN. The answer, I suppose, is that participation in
this current phase requires action on the warehousing limit for one.
Secondly it involves acting on the proposal with respect to raising
the $4-1/2 billion swap line to some number, or not raising it, and
articulating how long the enlarged amount would be outstanding before
it reverted to the $3 billion normal size of the swap line. So, if
the Committee does that, I am done.
CHAIRMAN GREENSPAN.

Jerry.

1/31-2/1/95

MR. JORDAN.

-75-

I am not voting this year but if I were, I would

oppose the package because of the warehousing. Once this Committee is
in on the warehousing, we are in and we are going to be in-CHAIRMAN GREENSPAN.
is a subject for tomorrow.
MR. JORDAN.
tomorrow!
here.

The only thing I object to is that that

Okay.

CHAIRMAN GREENSPAN. You can be the first one on the floor
I am just saying the clock is ticking. Let's get out of
[Meeting recessed]

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-76-

February 1, 1995--Morning Session
CHAIRMAN GREENSPAN. Since the Mexican discussion may be
open-ended, I thought it would be desirable to put it at the end of
the agenda and start this morning's session with Peter Fisher on both
foreign currency and domestic open market operations. Peter.
MR. FISHER. Thank you, Mr. Chairman. I will be referring
eventually to the three colored charts on the single sheet of paper
distributed this morning. [Statement--see Appendix.]
CHAIRMAN GREENSPAN. Peter, we have seen the current account
deficit of the United States rise continuously in recent years.
Projections now suggest yearly deficits of around $200 billion in the
next couple of years, and there is no evidence of any retreat. It has
always been the conventional wisdom that, because of the prominence of
the dollar in world portfolios, the U.S. dollar was driven largely by
portfolio shifts and that the net flow of claims against the United
States, which are virtually all in dollars, really was not a major
force because of the huge size of the stock. But when we are getting
deficits of $200 billion, that strikes me as no longer de minimis, and
I am curious to know how you evaluate the presumably depressing effect
on the dollar from the cumulating current account deficits. How would
you evaluate the general effect of the deficits on both the level and
the trend? In other words, are they fully discounted in the market so
that there is only a level issue? Or are they not fully discounted,
implying that there is further potential erosion stemming from the
fact that we are going to borrow, net, $400 billion over the next two
years?
MR. FISHER. There are two aspects I would focus on. One is
the trend, as you point out. What is disturbing, or important, to the
foreign exchange market is the sense of rising current account
deficits; the foreign exchange market sees the trend in the current
account as being against the dollar. If there were to be forecasts of
stable $200 billion current account deficits for 5 or 10 years, that
might be something to which the foreign exchange market eventually
would adjust. So, I think a big component is the fact that the
deficit seems to be ratcheting up, and people in the market do not see
where the process might stop. Obviously, the level is also important;
and in the past year, as you have all read and have heard at this
table, the combination of the current account deficit and the outflow
of U.S. savings in search of portfolio diversification abroad was seen
as having a piling-on effect by the foreign exchange market. Market
participants did not see where the demand for dollars was going to
come from.
I certainly err in the direction of being interested in some
of the micro mechanics of markets, so you will have to forgive me.
But I think it also is important to keep in mind that, increasingly,
all sorts of managers of funds and portfolios abroad who are
interested in holding dollar assets view the foreign exchange exposure
component of that as something that has to be managed completely
differently. These foreign holders set aside their dollar assets
subject to exchange rate exposure and give them to someone to manage.
And so, even if foreign investors view holding U.S. Treasuries as a
very good investment, they probably have passed off to some other
manager X billions of their dollar exposure to be managed on a perhaps

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1/31-2/1/95

slightly more aggressive basis in the foreign exchange market. And so
stable flows--stable for the foreign exchange market--may be a thing
of the past for the portfolio manager.
CHAIRMAN GREENSPAN.

Any other questions for Peter?

MR. BLINDER. I have one. It has two parts, the first of
which is probably unanswerable, but if you want to give it a shot, go
ahead. The question is: What would you imagine the implications are,
for the peso and the Canadian dollar, of another 50 basis points on
the federal funds rate?
MR. FISHER. With regard to Canada, I would expect the
Canadians to add 50 basis points themselves. The Bank of Canada has
leaned very strongly against the wind in the last few weeks and in
doing that has impressed their markets. That is, the Bank of Canada
raised its rates, and when market rates started to come back down, the
Bank kept taking action to make sure the rates stayed up. After that
was done two or three times, the yield on 30-year bonds fell 30 basis
points. If the Bank of Canada adjusted basis-point-for-basis-point
with us, I think the Canadian dollar would be relatively stable
against the U.S. dollar. I don't mean to jump too much into the fun
the Committee will have this morning, but I think the important
question is compared to what?
MR. BLINDER.

Yes, compared to zero.

MR. FISHER. If it is a 50 basis point increase in the
federal funds rate compared to zero, I think zero would be quite bad
for the Canadian dollar. I also think our own markets would be rather
disturbed by zero and that it would be worse for the peso than 50
basis points. If one looks at where the market would like to price
Mexican assets, 50 basis points added to the cost-of-carry just is not
worth anything. So that is not the issue. The issue is stability of
the interest rate environment.
CHAIRMAN GREENSPAN.

Further questions?

Yes, Tom.

MR. MELZER. I had understood Ted Truman to say yesterday
that $1 billion had been drawn down on our swap arrangement, and you
just said $1-1/2 billion, Peter.
MR. TRUMAN. Combined. The Mexicans drew $1 billion earlier,
divided equally between the Federal Reserve and the Treasury. Last
night they drew an additional $2 billion, of which $1 billion is from
the System.
MR. FISHER. Yes. I was referring to their total drawings
for the month on the Federal Reserve. That is, we did $500 million
earlier in the month and last night we accepted their request and
locked up an additional $1 billion.
MR. MELZER. So the total outstanding on our portion of that
facility is $1-1/2 billion?
MR. FISHER.

That is right.

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1/31-2/1/95

MR. TRUMAN. I was talking about the combined amount for the
United States and Peter was talking about the Federal Reserve portion.
MR. MELZER.

Okay.

If not, would
CHAIRMAN GREENSPAN. Further questions?
somebody like to move to ratify the transactions of the domestic open
market Desk?
VICE CHAIRMAN MCDONOUGH.
CHAIRMAN GREENSPAN.

So move.

Is there a second?

MS. MINEHAN AND OTHERS.

Second.

CHAIRMAN GREENSPAN. Without objection.
the staff report with Messrs. Prell and Hooper.
MR. PRELL.
Appendix.]
MR. HOOPER.

Thank you, Mr. Chairman.

Let's move on now to

[Statement--see

[Statement--see Appendix.]

CHAIRMAN GREENSPAN. How high is the unemployment estimate
that the CEA is currently using?
MR. PRELL. It looks like 6 percent is the fourth-quarter
level that they are working with at this point.
CHAIRMAN GREENSPAN. They cannot publish that in the CEA
report. Going up to the Hill and saying "our program will raise the
unemployment rate by more than 1/2 point" will hardly get ringing
endorsements.
MR. PRELL. Given that their projected output growth will be
pretty much in line with their estimates of the trend of potential
output, it will look somewhat anomalous on that basis. But when they
were developing these numbers earlier, they were working from a much
higher base.
It is hard to tell but they could say in the Economic
Report that the news is good, the numbers now look better, and so we
have adjusted the figures that appeared earlier in the budget.
CHAIRMAN GREENSPAN.

Questions?

MR. JORDAN. Mike, in both the Greenbook and in your oral
presentation you remarked that you had reexamined the economic model
that you use, the approach that you use, in bringing these forecasts
together, and you concluded that your model tracks well enough. It is
within the confidence intervals for 1994.
And as best you can tell,
there is not enough evidence yet to say that the NAIRU is different
from 6 percent. Accepting that, I went back a year to see what the
forecast was.
I am assuming that looking at things ex post is still
the best way; the model itself of necessity had to be built judging
this ex ante--hindsight does not help here. A year ago the projected
unemployment rate for the end of 1994 was 6.8 percent, and for 1995 it
was 6.8 percent. We are now at 5.4 percent. I look at your current
projection for the unemployment rate for this year and your projection
for 1996, which we did not have a year ago, and I also look at the

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1/31-2/1/95

CPI, which came in below the estimate for 1994 but is now projected to
be .3 percent higher for 1995 than you had it a year ago. So, if the
model is still working, that means the lags are a lot longer than you
estimated earlier and the projected outcome is someplace further out
in the future, or it would cost 1.7 million jobs to reduce the
inflation rate by .3 percent just to make the model consistent with a
year ago.
MR. PRELL.

I think we went through this last time, and I

won't repeat the four-part harmony answer on the 1994 error. In a
sense, we were thrown off by some movements in the numbers in 1993
that caused us to hesitate to follow the model religiously. Looking
back over the past year--as you noted and we noted in the Greenbook-the behavior of prices is not out of line with the model forecast over
the past couple of years on the assumption of a NAIRU in the 6 percent
area. The behavior of compensation, including the latest reading,
might on balance be a bit more favorable--too high in 1993 relative to
the model and on the low side in 1994--and that perhaps raises some
question, but it is still within the confidence interval. At this
juncture, as we go forward in this forecast, I think the predictions
are well in line with conventional short-run Phillips curve analyses.
We run many different models and we get different answers, and I think
this is a reasonable ballpark estimate of what the history embodied in
these models would suggest is likely to happen in 1995 on the
assumption that we get this kind of employment data.
MR. JORDAN. I'm still missing something. If the difference
between .8 percent above the NAIRU on last year's projection and .6
percent below it is only .3 percentage point in the CPI, how wide is
your confidence interval around the NAIRU?
MR. PRELL.
MR. JORDAN.
percentage point?

I would say usually 1/2 percentage point.
So the NAIRU is 6 percent plus or minus 1/2

MR. PRELL. I think that is a reasonable range. We might
narrow it a bit but we would be pressing science pretty hard.
MR. JORDAN.

Okay.

CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Mike, the estimated equilibrium real interest
rate is mentioned in the Bluebook in the section where there is a
discussion of the simulations of the FTS model. A very interesting
result is that, if the greater fiscal restraint were put into effect,
the equilibrium real interest rate would decline by 1-1/2 percentage
points. I found that very interesting, and I assume it was a result
of some simulations of alternative scenarios. Could you describe the
process by which you get this estimate? I would really be interested
in what your estimate of the level would be if there were no fiscal
restraint.
MR. PRELL. Basically, we have an estimate of about 1-1/2
percentage points for what the elimination of the structural deficit
would do.

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1/31-2/1/95

MR. PARRY.

That is exogenous?

MR. PRELL.

No.

MR. KOHN. It is a 1-1/2 percentage point decline in the
equilibrium real rate that came out of the model simulations.
I think
to get a sense of the level you might look at the chart in the
Bluebook that follows page 11. The end point there for the funds rate
is 6-1/2 percent without fiscal contraction and 5 percent with the
contraction. That is your 1-1/2 percentage point decline in the real
rate. The inflation rate is about 3-1/2 percent, so I would say that
without fiscal restraint the equilibrium real funds rate--this is
cutting things much too fine--is approximately 3 percent.
MR. PRELL. This is obviously an "iffy" proposition and to
some extent one might view this as schematic as opposed to very
precise.
MR. PARRY.

I understand.

MR. PRELL. It is our belief that real rates have been
elevated by the structural deficits of the 1980s and elimination of
the deficit would yield a lower real rate. One of the things we have
to speculate about in this forecasting process is the anticipatory
effects that might result. Estimating those effects is very
difficult. One has to think beyond the financial markets to other
kinds of responses--to expectations about cuts in taxes and federal
spending.
MR. PARRY. Well, as I said, the fairly significant decline
in the equilibrium real interest rate is a very interesting result.
MR. STOCKTON. Mr. Chairman, I would like to come back for
just a moment to try to provide a footnote to Mike's response to
President Jordan. One thing to remember is that a year ago when we
were dealing with the changeover in the Current Population Survey, we
were expecting that revision to add in excess of 1/2 percentage point
to the unemployment rate. We now think the addition is more like .2
percent.
So, that is part of the explanation for the difference last
year, and the revision also is leading us to change the projected
unemployment rate in comparison with what we were indicating earlier.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. Just a clarification question to you, Peter.
You talked a little about, and the Greenbook also referred to, some
backing off in the growth of foreign demand for U.S. exports.
But
this morning you are still talking about continued robust growth. Am
I understanding you correctly?
Is there still some backoff in your
projection?
MR. HOOPER. The decline in foreign demand is related to the
Mexican situation. Excluding Mexico, we do not expect a significant
change.
MR. HOENIG.
elsewhere?

You are not looking for a change in Europe or

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1/31-2/1/95

MR. HOOPER. There is a little drop in Canada's rate of
expansion because of their monetary policy tightening-MR. HOENIG.

But otherwise the outlook is still pretty

MR. HOOPER.

Yes.

strong?

CHAIRMAN GREENSPAN. If there are no further questions for
the staff, obviously the rest of us have all the answers. Who would
like to start? President Parry.
MR. PARRY. Mr. Chairman, growth in the Twelfth District
economy is gathering momentum. Employment growth has picked up and
the unemployment rate has continued to fall, in large part due to
improvement in California. Within the state, economic conditions have
improved in both northern and southern California. Recovery in our
District should stay on track, although several recent developments
will likely damp overall growth and have more pronounced effects on
some regions. In California, for example, floods are affecting some
communities quite a bit, but without having much effect on the state
economy overall. In Orange County, the losses in the county's
investment pool have been marked down to about $1.7 billion. Also,
spreads between rates on California State debt and other tax-free
debt have narrowed some.
The earthquake in Japan also is reverberating in California,
holding down shipments between the damaged port of Kobe and major West
Coast ports such as Oakland, which counts on Kobe for about 9 percent
of its business. High-valued shipments between Oakland and Japan
reportedly are going through ports other than Kobe, but the increased
transport costs are limiting shipments of lower-valued products such
as animal feed.
The devaluation of the peso could hit states like Arizona and
California harder than most other states. But assuming that the
currency situation stabilizes, we do not expect this to prevent
further economic growth. Still, some businesses in southern
California are greatly concerned about the situation in Mexico. An
area of particular concern is San Diego where the unemployment rate
has not improved as much as has been the case in Los Angeles and where
retail sales recently have weakened as a result of the crisis in
Mexico.
Turning to the national economy, it is clear that employment,
output, and spending all exhibited surprisingly strong growth last
year. As a result, the economy now has attained levels of labor and
capacity utilization that are inconsistent with steady inflation, to
say nothing of progress toward lower inflation. In our outlook,
nothing suggests that the monetary tightening of last year will slow
the pace of real economic activity sufficiently over the forecast
horizon to produce any slack in the economy. This point is also amply
demonstrated by the Greenbook forecast. With no further tightening,
there likely will be a deterioration in the inflationary environment
in 1995 and 1996 as well as beyond the forecast horizon. Thank you,
Mr. Chairman.
CHAIRMAN GREENSPAN.

President Minehan.

1/31-2/1/95

-82-

MS. MINEHAN. New England continues to recover from the
recession at a moderate pace, with substantial variation in employment
growth from state to state. Long-term structural issues continue to
plague the region with defense downsizing, uncertainties in health
care, and re-engineering downsizing or rightsizing--whatever you want
to call it--affecting many of our large employers. On top of all of
that, we do not have any snow! Tourism buoyed the District through
the summer and the fall; it has been less of a factor this winter as
mild temperatures and some rain have dimmed ski area prospects.
Beyond employment and the weather, other indicators suggest that
economic activity is continuing to expand. Specifically, help-wanted
ads, consumer confidence, housing permits, and a lot of anecdotal data
show some strength to the continued recovery. Manufacturing contacts
are generally positive but retailers are more varied. We continue to
hear reports of input price increases, especially paper, but selling
prices have not yet ticked up generally. I might also note that while
everybody is complaining about paper prices, producers of paper in
Maine have a different attitude; they think that paper prices are
about where they should be.
I noted at our last meeting that the District's bank loan
growth trailed the rest of the country substantially, with annual
growth rates in all categories about half or less than that of other
Districts. We have done a little work with the Senior Officer Loan
Survey to try to determine why that is the case. The First District
has shown relatively stable loan demand and no relaxation of credit
standards. This is quite different from the nation as a whole and
undoubtedly reflects concerns by the banks in our District about asset
quality after the recession. In addition, First District banks still
have relatively larger securities holdings than banks in other areas.
They have had sizable realized and unrealized portfolio losses this
year, and their stock prices have suffered as a result. All in all, I
think their appetite for risk in 1994 was not very great, though
continued moderate growth in 1995 in the region and nationally may
change that somewhat.
Turning to the Greenbook, I applaud the inclusion of a "no
change" baseline to compare with a likely alternative path. It was
very helpful to me in assessing what the various factors are in the
Greenbook forecast. I was a little struck, though, by how little
difference it seems to make whether or not we do anything. In the
baseline forecast, inflation rises by .4 percent this year and only
about .1 percent next year--if I have those numbers right--while
unemployment stays well below the NAIRU in both years. In the
alternative path, we make marginal inroads on inflation in 1996, again
without the unemployment rate rising above the natural rate. It may
be that things have changed in the labor markets along the lines
suggested in the Greenbook, but I do not know that we have any
evidence of this; I think that is close to what you were saying, Mike,
when you were talking about the Greenbook analysis. As Part II of the
Greenbook points out, there is no reason as yet to expect much
compensation growth, given that the third-quarter unemployment rate
was 6 percent. We have had only one quarter with the unemployment
rate below the natural rate. We need to avoid the human tendency to
indulge in some wishful thinking. Our own expectations are that
inflation will be a bit more of an issue than the Greenbook suggests,
especially in the baseline projection.

1/31-2/1/95

-83-

In sum, I think the Greenbook is really well done this time.
I liked it a lot. I am putting in a vote for you to do it this way
more often, Mike, even though it is more work for you.
CHAIRMAN GREENSPAN.

President Moskow.

MR. MOSKOW. Mr. Chairman, on balance the Seventh District
economy is still growing at a moderate to vigorous pace, although
there has been some easing recently in a few interest-sensitive
sectors. As I said to the Committee last time, two U.S. auto
manufacturers reported cuts in orders from dealers as early as midDecember but no reduction in consumer sales at that time. More
recently, there has been a lot of discussion in the press about a
possible slowdown in the auto industry. In addition to dealer orders
being down, reports now indicate that for some models inventories have
risen, production schedules have been trimmed, and new incentive
programs are being offered. In addition, used car prices have been
declining in our District. The challenge is sorting through all this
information to determine to what extent demand has moderated. Our
assessment is that while there has been some moderation in sales
growth, most of the recently reported signs of slowing overstate the
degree of moderation, in part because 1994 was such a strong year for
auto manufacturers, suppliers, and dealers. We expect auto and light
truck sales to increase about 2 percent in 1995. This is
significantly slower than the 8-1/2 percent increase in 1994, but
production would reach a strong level of about 15.4 million units in
1995.
One area where the signs of slowdown are becoming clearer is
in the single-family housing sector. For example, builders and
realtors in the Chicago area started seeing slower traffic and sales
in the fourth quarter of last year, particularly in December despite
quite favorable weather that month. Reports from District retailers
are mixed. Sales gains remain heavily concentrated in hard goods,
with apparel sales still slow. Some retailers express concern about
high inventory levels, although it is interesting that the Loan
Officers Survey indicates that banks are not concerned about loans for
inventory financing. Competitive pressures are still reported to be
intense, and increased promotional activity is widespread. The
District's manufacturing sector ended 1994 on a very high note with
many industries, especially in durable goods manufacturing, reporting
a record or near-record year. While some industries expect to exceed
those levels this year, the widespread expectation is that growth will
moderate. Utilization rates are quite high and in many cases above
the peaks reached in 1989.
As I reported earlier, raw materials price increases are
pervasive. Although many firms are unable or unwilling to pass on
such price increases to their customers, some firms are now expressing
the belief that price advances are becoming more feasible. For
example, rapidly rising sales and backlogs have led to two price
increases within a month in the heavy paper industry. Obviously, we
did not hear this from Cathy's Maine producers.
In agriculture, recent developments indicate the District's
farm sector is holding up better than we had anticipated. A sharp
unexpected decline in exports from China has significantly enhanced
U.S. corn export prospects. However, the peso devaluation will

1/31-2/1/95

-84-

undermine some of the near-term agricultural trade benefits that had
been expected to accrue from NAFTA. In particular for the Midwest,
some of the recent gains in corn exports may be lost. In addition,
the earthquake in Kobe may briefly disrupt our trade patterns with
Japan, which is the largest foreign market for U.S. agricultural
commodities.
On the employment front, labor markets remain quite tight.
In many metropolitan areas, the reported unemployment rate is below 4
percent, including a rate of 3-1/2 percent in the metropolitan
Detroit area. A few reports indicated outright shortages of clerical
workers, and concerns were expressed about the inability to find
sufficiently well qualified workers. Wages for clerical workers are
reported to be up more than 10 percent from a year ago. Overall
economic activity in the Seventh District is consistent with a
national economy that has moved into a range where a pickup in
inflation is considered likely.
Turning to the national picture, our outlook for real GDP
growth in 1995 is similar to the Greenbook's alternative projection.
Growth in real GDP should taper off significantly over 1995. The
inflation outlook is one area where we are less optimistic than the
Greenbook, even assuming further monetary policy tightening this year.
While we tend to agree with the Board staff estimate of the NAIRU, we
expect to see consumer prices responding more rapidly to the low rate
of unemployment than is forecast in the Greenbook. As a result, we
expect CPI inflation to rise perceptibly to ranges in the neighborhood
of 3-1/2 percent by the second half of 1995.
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE. The Philadelphia region continues to expand,
with some evidence that the pace of expansion is slowing. Wage and
price increases generally remain subdued, but with labor markets
tightening, there is some concern, more than I have heard before,
about building inflationary pressures. Manufacturers report that
industrial activity is still on an upward trend, but some slackening
from the pace of the fourth quarter is occurring. Gains are more
common in metals and equipment, while steady-to-declining activity is
more characteristic of nondurables. Retailers in general were
reasonably pleased about holiday sales. They did not do as well as
they had hoped, but well enough not to be complaining. Sales in
January were more subdued with lots of discounting, especially for
apparel, which was the weakest area in December. Existing
nonresidential structures are still selling at prices below
replacement cost in the Philadelphia area, so there is little need for
new construction. Residential construction is clearly feeling the
impact of higher interest rates. Loan volume is growing moderately,
with middle market companies prominent among new borrowers. There are
still reports--I would say an increasing number of reports--that
underwriting standards are slipping and complaints from bankers that
loan pricing does not adequately compensate for risk. With rising
loan demand, there is more competition for deposits. Labor markets in
the District have tightened noticeably during the last couple of
months. Some employers expect upward wage and price pressures down
the road. Others believe that there is still much potential for
further productivity gains and that such gains plus intense
competition will continue to contain wage and price pressures.

1/31-2/1/95

-85-

My reading of the national economy is that we are likely to
see moderating growth as the year progresses, largely from less robust
personal consumption, less inventory investment, weaker residential
construction, and perhaps not as strong export growth as we previously
thought. Nonetheless, moderating growth is still a forecast with the
usual amount of uncertainty surrounding the degree of moderation and
the timing. On the inflation side, the weight of historical evidence
points toward some cyclical rise in the inflation rate. It is
probably true, however, that the economy is now less inflation prone
than it was in the last decade or so. Whether it is a little less
prone or a lot less remains to be seen. The answer is probably in
between--not as optimistic as some would have us believe but better
than our models suggest.
CHAIRMAN GREENSPAN.

President Forrestal.

MR. FORRESTAL. Mr. Chairman, the Southeast economy continues
to expand, although we have seen some deceleration during the fall and
early winter. Employment growth in the District outpaced the nation
last year but our unemployment rate fell relatively less because of
in-migration to the area. We are expecting an unemployment rate of
5.7 percent for December when the final numbers come in. Retail sales
growth has been relatively strong, led by durables, although we have
seen a noticeable decline in auto sales from very high levels.
Dealers view the current pace as sustainable. Tourism is mixed at the
moment. In the very large Florida market, the usual strong inflow of
Canadian visitors has been restrained by weakness in the Canadian
dollar and, to some degree, by the high cost of health care for
Canadians when they travel outside Canada. Also, unseasonably warm
weather in other parts of the country has hurt Florida resorts and
cruise bookings.
Manufacturing activity grew moderately in December and early
January and the outlook for capital expenditures improved. Production
levels remained quite high in industrial chemicals, paper, pulp, and
metals. Manufacturers report that the markets for building materials
and home furnishings have softened recently. In the important defense
contracting area, contractors remain under pressure but foreign
military orders are bolstering activity at some plants. A broad range
of industries in the region have posted significant gains in exports
since the implementation of NAFTA, but there is now considerable
concern that the sharp devaluation of the peso will cut into those
exports; in fact, we are already beginning to see a little of that.
Realtors in most of the District report that sales of single-family
homes have slowed due to rising interest rates, but multifamily and
commercial construction continues at a pretty good pace. Bank lending
activity is mixed in the District. We are getting some anecdotal
reports about a lessening of underwriting standards, but consumer
default rates are continuing at a quite low level. We still hear
reports of difficulty in getting skilled and unskilled workers; that
is particularly true in Tennessee.
On the inflation side, we are seeing more pressures on prices
but that is somewhat sporadic. The deceleration in housing has eased
pressures on prices of materials and has alleviated shortages of semiskilled labor in many areas. Retailers anticipate that vendors are
going to raise prices on new merchandise, but they are concerned that
they are going to be unable to pass these increases through to the

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consumer level. Reports of rising prices of raw materials remain very
widespread with the pressures most intense for chemicals, paper, and
textiles.
Looking at the national economy, I too would like to applaud
the staff for including an alternative forecast. I think it is very,
very helpful. I would hope that this can be done on a more frequent
basis. We revised our forecast upward when it became clear toward the
end of the year that the deceleration we had anticipated was not going
to take place. We do show some moderation in the future. Our
baseline forecast is pretty much the same as that in the Greenbook,
although we do show somewhat greater strength in real GDP than the
Greenbook and somewhat higher inflation. I would like to believe that
capacity utilization constraints are not going to be as important as
they once were and that the shortage of labor is not going to pass
through into wages, but that may be wishful thinking. At the end of
1996, we have a 3.6 percent rate of inflation. Again, I would like to
hope and believe that that will be the cyclical peak for inflation and
that it will come down from that, but that may be wishful thinking.
I think the really important question and the difficult issue
that we have to face will be the need to stop adjusting our policies
at a time when current data still appear strong. If we believe in
policy lags, we need to start asking ourselves how we are going to
know and what we will look at that will make us decide that we have
done enough. It is the opposite to the question of inflation. When
we see inflation, it is too late, and it may be too late for us to
stop when we begin to see deceleration. That is a very tricky issue
for us to face. Thank you.
CHAIRMAN GREENSPAN.

President Broaddus.

MR. BROADDUS. The reports we have received lately indicate
that overall conditions in our District are still generally robust.
Like a lot of other people, we have seen some signs of deceleration in
parts of the District and in some industries, but really nothing of
size. There are just too few signs to reach any definitive conclusions at this point. At their January meeting, our directors were
uniformly bullish. They said their local economies were holding up
surprisingly well in the face of recent interest rate increases. They
also reported widespread optimism regarding the outlook for their
local areas in the year ahead. One director at the meeting did
express concern about the weakness in apparel sales over the holiday
season, but even she said that in general things look pretty strong.
Some directors continue to report rising price pressures at
earlier and intermediate stages of production. These people still
expect at least some of these increases to be passed through to final
prices in the near future. In fact, our monthly service-sector survey
did show a pickup in retail prices from November to December. Our
latest monthly survey of the manufacturing sector suggested a slight
decline in the growth of manufacturing activity in our region, but the
various indexes we use remain quite high in terms of levels. The
North Carolina economy, as I have reported before, still is extremely
robust--lots of manufacturing activity there. There are some signs in
the middle part of the state, in areas like the research triangle of
Raleigh-Durham and in the Charlotte area, of some labor shortages and
at least a few signs of upward pressure on wages in some industries.

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Another thing from the District that might be worth mentioning: One
of my directors who is especially conscientious in gathering useful
anecdotal information for us called me late last week. He told me
that in the last week three general contractors, whom he normally
surveys for each of our meetings, had called him of their own accord
and told him that just in recent days they either had to revise or, in
one case, actually withdraw a preliminary bid on a major construction
project because they were getting bids from their subs that were much
higher than anticipated. The main reason for this appears to have
been increased pressures on prices of materials, but apparently labor
costs also played a role.
As for the national economy, I would join Cathy Minehan and
Bob Forrestal and others in complimenting the staff on their analysis.
I thought it was very well done. I was especially interested in the
impact that the changed assumption has on the outlook for major
macroeconomic variables over the next couple of years. The assumption
of a constant funds rate compared to the December projection does have
a noticeable cumulative upward impact on GDP growth and employment by
the end of 1996, with only a relatively small increase in the
inflation rate--.3 percentage point by the fourth quarter of 1996 to
be exact. In any case, it is fair to say that this new projection is
calling for what reasonably could be descibed as a classic soft
landing. I think a favorable outcome like that is certainly possible;
that is basically what we are projecting. As a number of people have
pointed out, we already have seen some initial signs that our
tightening actions last year have begun to cause growth to moderate at
least in some sectors. But again, as everyone knows, we recently have
gotten a string of exceptionally strong economic reports that indicate
clearly that whatever may be happening going forward, the economy has
entered this year with a great deal of momentum. Even housing seems
to be holding up pretty well in the face of higher interest rates.
Back at the December meeting, I said that I thought the risks in the
national outlook were more balanced than they had been earlier in the
year. I still think they are more balanced than they were several
months ago, but I think they are less "more balanced" than I thought
back in December. In this regard, it is worth noting that the long
bond rate, while it is still well below its high in mid-November, has
stopped declining. It stopped declining in early December and has
been basically in a holding pattern at around 7-7/8 percent since
then. That suggests to me that people still think the expansion at
least for now is continuing at an unsustainable pace. I think they
are waiting to see what we are going to do about it.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. The Ninth District economy remains healthy.
Unemployment rates are almost uniformly low throughout the District.
Employment gains over the past year have been very substantial, and
there are labor shortages in many parts of the District right now
which over time certainly will slow the pace of expansion. Not
unrelated to what has been going on, there are also housing shortages
in many parts of the District. Apartment construction in some of
those mid-size communities is very substantial, at least by their
historical standards. Obviously, that will help to alleviate the
housing problem over time, but right now, even if employers in those
communities could attract more labor, they would not have any place to
house them. Despite these circumstances, there is still no widespread

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evidence of an acceleration of wages. There are perhaps a few more
reports than there were a few months ago of some pickup in wage
pressures, but they still are not widespread. That is not what I
might have anticipated given the clear evidence of labor shortages.
Overall, the District economy continues to do quite well.
Natural resource industries had a very good year: We already have
talked a little about paper and forest products; mining of iron,
copper, and so forth also has done well. The retail sales picture has
not been much different than elsewhere in the country. We have had a
bifurcated pattern where hard goods have been selling well and soft
goods, especially apparel, have not. I don't pretend to have any
insight into why that should be the case. The weather has been mild
and the lack of snow has affected tourism, which had been running
quite strongly for a good number of years. So, it has not been a good
winter in many parts of the District as a consequence of the weather.
The other thing I might mention about the District economy is
that it seems to be widely, though not universally, expected that 1995
will not be as strong a year as 1994. I suppose there is nothing
remarkable about that in the sense that 1994 was quite a good year as
was 1993, and people just naturally are cautious that this can't go on
forever and there may be a sense that we are bouncing off the ceiling.
These attitudes have been around for a while; there is nothing that
has triggered them. It may be that people simply have been taking
another look at consensus forecasts that things will slow, but that
does seem to be the prevailing attitude.
With regard to the national economy, I must admit I am a bit
uncomfortable about the inflation outlook. I am particularly
uncomfortable if I adopt the Greenbook framework, which emphasizes
capacity pressures and a NAIRU of around 6 percent. It seems to me
that, in that environment, we will get an acceleration of inflation.
Maybe it will be modest and only cyclical but, of course, the outcome
probably is not wholly independent of what we choose to do. In my
judgment, that is where the risk is.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. Thanks, Alan. The U.S. economy continues to
grow more rapidly than forecasters had expected and likely more
rapidly than can be sustained, with a four-quarter growth rate through
the end of last year of about 4 percent. The unemployment rate fell
1.3 percentage points in 1994 to 5.4 percent in December. In the
Eighth District, unemployment is averaging 4.2 percent in the major
states and stands at 3.9 percent in the St. Louis area, the lowest
level in decades.
Nationally, employment gains have been robust, with the
economy adding about 307,000 jobs per month from January through
December 1994. This trend has been mirrored in the Eighth District
over the last year: Arkansas and Kentucky registered payroll
employment gains at an annual rate of nearly 6 percent during the
fall. Some of our District states have picked up some momentum.
During 1994, employment in our District actually was growing more
slowly than in the nation as a whole. In fact, contacts throughout
the Eighth District report that labor markets are the tightest they
have seen in years, with wage pressures in evidence in some markets.

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District retailers reported holiday sales up 6 to 7 percent
over year-earlier levels, and post-holiday sales generally have met
expectations, reducing retail inventories. In a recent survey of
small businesses in the District, about 3/4 of the repondents said
they expected the current boom to continue or gather strength over the
next six months.
In general, the performance of the economy has made a mockery
out of the slowdown scenario widely predicted last summer for the
second half of 1994 on the basis of the inventory buildup in the first
half of the year. Is it possible that the slowdown scenario now
widely predicted for 1995 is also wrong? Our forecast envisions real
output growing about 3 percent in 1995 with the CPI inflation rate
increasing to about 3-1/2 percent. Unemployment in the fourth quarter
is forecast to be about the same as its current level. Other
forecasts--both from the private sector and the Greenbook, even in the
case where no further tightening is assumed as in the Greenbook--look
for a sharper slowdown in 1995 than we do. These forecasts of a weak
economy appear to be based in large part on two observations:
(1) the
economy has a strong tendency to return to trend, and (2) the level of
inventory investment has been abnormally high. While it is true that
the economy does tend to return to trend, the pace at which such a
return occurs is highly variable and still could be many quarters
away. Though recent economic performance has been strong, it has not
been nearly as strong as in some other expansions and above-trend
growth might well be sustained through 1995 as the economy continues
to work off the enormous amount of liquidity that was created in 1991
through 1993. A prospective downturn in inventory investment is
another negative consideration, but I continue to think that most of
the recent inventory accumulation has been planned, which I believe is
consistent with what Mike said, as a means to meet expected demand.
The inventory/sales ratio is holding at an historically low level.
In short, while a slowdown is bound to occur at some point,
presently there is little hard evidence of it. In my view, the risk
of misjudging the thrust of demand growth on inflation remains
significant despite the widespread opinion that substantially slower
growth is ahead. In that light, a disturbing feature of the current
situation is that most private forecasters expect little improvement
on inflation over the next two years or for that matter over even

longer periods. That observation reflects poorly on the credibility
of the FOMC's commitment to price stability. With respect to CPI
inflation, the recent Blue Chip report predicts 3-1/2 percent
inflation in the current quarter and little change to the fourth
quarter of 1996 where the projection is 3.6 percent. Likewise, the
current Administration assumption has inflation rising to 3.4 percent
in the outyears of their budget projection horizon and basically
staying there indefinitely. Recent long-term government bond yields
of somewhat less than 8 percent suggest longer-term inflation
expectations substantially above current inflation. We certainly have
a way to go to establish the kind of inflation credibility that
existed before we lost it in the 1970s.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. Thank you, Mr. Chairman. The Tenth District
economy remains strong, bolstered by healthy gains in its key
industries across the states. Our directors from all parts of the

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District report a robust pace of business activity. A director from
our utilities industry reports strong growth in electricity sales to
important industrial customers including manufacturers of steel,
automobiles, and plastics. In the transportion industry, growing
demand for shipments of coal, automobiles, and other products
continues to strain capacity. A national manufacturer of home
improvement products in our District reported exceptionally strong
sales over the last year. His company has, for the first time in
several years, successfully passed increases in prices to his
customers. Director reports about shortages that I commented on
previously are not coming in strong. Whether that is because some
have stopped reporting because they already have done so several times
or because conditions have changed is not certain.
Recent employment data confirm anecdotal reports of economic
strength. Nonfarm jobs in the District were up nearly 3 percent
December over December this past year, nearly matching the national
average. Three of our states including New Mexico had job growth
twice the national average. District manufacturing activity continues
to strengthen, with most of the improvement in the durable goods
industries. Our contacts in the automobile industry tell us that the
District's assembly plants are operating at very high rates of
capacity. Construction activity remains brisk but the industry's mix
is shifting. Housing construction is slowing, while commercial and
public works construction is strengthening. The energy industry
remains weak due to crude oil and natural gas prices. The
agricultural sector has strengthened on improvements in livestock
prices. Bank credit continues to increase at most of our District
banks, with strong loan growth more than offsetting runoffs in
holdings of securities. Our bank directors remain very positive about
economic conditions.
At the national level, I believe there is still considerable
momentum in most sectors of the economy. I think this momentum will
extend well into the second quarter of this year, at least. We are
perhaps beginning to see some moderation, but it is a moderation from
a very high growth rate and it leaves overall growth well above
potential. I do remain concerned about inflation prospects. I am
pleased that we have not yet seen an acceleration of inflation at the
consumer level. Anecdotal evidence as well as our experience over the
postwar period suggest it is a matter of time. More specifically, I
agree with the Board staff's assessment that rates of unemployment and
capacity utilization are currently at inflationary levels. Given the
lag structures, I still would expect to see a gradual increase in
inflation in final goods this year.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. Thank you, Mr. Chairman. A pause
has developed in New York City, which has slowed the economic
expansion in the Second District despite sharp recorded drops in the
December unemployment rate in both New York and New Jersey. The
weakness, fortunately, is largely confined to the New York
metropolitan area. In the remaining two-thirds of the District,
recovery appears to be intact, led by moderate gains in New Jersey and
more modest growth elsewhere in New York State. In December, New York
State payroll employment was stagnant following four consecutive
months of decline. The comparable New Jersey figures have not been

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released, but employment growth has averaged 1.6 percent at an annual
rate over the past five months. Probably because of reduced earnings
and bonuses in the financial industry, personal income tax collections
for New York State and City fell 7 percent below a year ago in
In contrast,
December and were up just 2 to 3 percent for the year.
personal income tax collections were up nearly 20 percent in New
Jersey in September, the latest reported month, while the year-toSeptember gain in the state was over 9 percent. Realtors reported
that the sales rate of existing homes declined from the third to the
fourth quarter and the median price fell between 5 and 10 percent,
depending on the location in the District. The aggregate consumer
price index for New York and northeastern New Jersey rose at a rate of
just 2.1 percent in December and 2.4 percent for the year. In the
finance sector, people continue to be very blue. Members of the
securities industry reported sharp declines in fourth-quarter
earnings, ranging from 50 to 80 percent. Numerous new layoffs were
announced among banks and brokerage firms, including the very
strongest.
Despite all that, there does seem to be something of an
improvement in attitude in New York State. Even in the area between
Albany and Buffalo, traditionally a strong manufacturing area and
where the unemployment rate is not that high--ranging in about the 4
to 5-1/2 percent area--the attitude that I encountered up there six or
seven months ago was generally very dismal and now it is improving
quite a lot.
Fortunately, it is not that people think the new
governor is going to wave a magic wand and fix everything. It is
rather that with the likelihood of a more pro-business state
government, they are getting more of a notion of helping themselves.
For example, in Syracuse where I was last week, a manufacturing
company could not find enough workers and was planning to leave the
area. The Chamber of Commerce managed to find enough skilled workers
from among its member businesses to enable the company to stay in the
town. That attitude of "let's do it for ourselves" is something that
I have been encouraging in speeches up there. We do seem to be making
some progress in spreading the notion that if the governor can do
something good, that is terrific. But if business can help itself,
that is even more so.
On the national level, we too have a general difference with
the Greenbook in that under the current policy assumption, we have
real GDP somewhat stronger, almost 1/2 percentage point higher.
Unfortunately, we also have the CPI at 3.3 percent Q4-to-Q4. We have
a very low unemployment rate at 5.1 or 5.2 percent. We have done some
"what ifs."
Even if the optimists are right and the NAIRU is 5-1/2
percent instead of 6 percent, it would appear that we have a rate of
economic growth in the system that is going to create more inflation
anyway. It is only if we have very low employment growth and
relatively slow additions to the work force that in our forecast we
would get up to the 5-1/2 percent unemployment rate. So, we do have
considerable concerns about the likelihood of inflation picking up,
and in fact our economic forecast under current policy assumptions
shows a pickup.
I also applaud the new approach in the Greenbook.
I think it
has, among other things, helped us to talk about the economy and not
talk about policy in this part of the meeting.

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1/31-2/1/95

CHAIRMAN GREENSPAN.

President Jordan.

MR. JORDAN. There is
District to add to what we put
Mike Moskow said about what is
most respects, developments in

not much I could say about the Fourth
in the Beigebook or especially to what
going on in the Seventh District. In
our two Districts are very similar.

We pay a lot of attention to manufacturing, both because it
has been so strong in the Fourth District and because of its absolute
share or relative size. Manufacturing employment in Ohio, for
instance, is twice the national average and is very heavily
concentrated in motor vehicle production and related capital goods.
So, we pay a lot of attention to it. Our average workweek last year
was about 2 hours longer than for the country as a whole. Our
unemployment rate is much lower. The rate in Ohio as a whole is over
a full percentage point lower; and in certain metropolitan areas in
Kentucky and within Ohio and western Pennsylvania, unemployment rates
are much lower than that. Nevertheless, we are not seeing an effect
on manufacturing wages, which rose only 1.1 percent last year, less
than the national average. We are not hearing stories from people in
the industrial sector about wage pressures. We are hearing that they
are planning to spend a lot more for a third year on expanding
capacity or improving productivity. A lot of them have plans to
reduce their current work force through productivity-enhancing
investments. We have very recently heard some negative reports out of
Cincinnati.
The phone company there has announced a very large layoff
and Federated moved an operation down to Bob Forrestal's District; so
we will experience a loss of about 1,500 jobs in Cincinnati.
When I turn to the national economy, I do not know what to
say about the Greenbook. I like having the alternative in there. It
seems useful to have the staff draw up for us what they think an
unchanged fed funds rate would imply and then an alternative. But the
baseline for this Committee always ought to be to derive the policy
that achieves our objectives. Unless the Committee has changed its
objectives, the baseline should be producing a downward trend in
inflation in the future, moving us toward price stability; an
alternative forecast could be drawn from that. So, I would have
flipped around the baseline and the alternative that the Committee
would discuss. In trying to assess what I think about the two
alternatives as they are presented, I have problems with such things
as the assumptions about the fiscal policy. It has always mystified
me why shrinking the federal government by having it spend less,
borrow less, and maybe even tax less has a negative effect on the
economy. I don't know what to make of the fiscal policy assumption.
I do not find the inflation outlook satisfactory even under the
alternative forecast. Either the model is wrong as to what it would
take to get there or the objective should be viewed as unsatisfactory.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. The Eleventh District remains strong except for
the border areas. The most optimistic word comes from Lubbock where
we heard at our last board meeting that the biggest tightwad in west
Texas had just bought a new pickup truck.
[Laughter]
Of course, the
mood is just the opposite of that on the border in Brownsville, El
Paso, Laredo, and McAllen--places like that. They were already weak
because Mexico had been imposing a $50 limit on what people coming

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across the bridges could buy and take back into Mexico. Mexico has
been doing that for more than a year, but this peso devaluation comes
A lot of merchants in those towns are being devastated
on top of it.
right now. Also, one measure of U.S./Mexican trade is the length of
That backup
the backup on both sides of the bridge in Laredo on 1-35.
is not nearly as long as it was before the devaluation. The effect is
not just on the border. All of Texas is going to be hit somewhat
because Mexico is our number one foreign trading partner, and the
share of our trade is much higher than it is for the country as a
whole. But abstracting from that, the District economy is, overall,
still very strong.
On the national economy, the only straw in the wind that I
can offer is some anecdotal evidence that retail sales, while weak in
December, have picked up in January. J.C. Penney indicates that their
national sales in January were far ahead of expectations. Their
weakest areas in January were California and Texas--California because
of the rains, presumably, and Texas because of the peso.
My economists do not want me to say anything about the weak
growth in the aggregates because they believe that it is well
explained. But after many years of paying attention to them, it is
hard not to be a little concerned that they seem so uniformly weak.
But I won't bring that up.
[Laughter]
CHAIRMAN GREENSPAN.

Especially since they have recently gone

up!
MR. MCTEER. The main other thought I want to convey is that
I agree with Bob Forrestal in that I think the most crucial question
for us now is what we should be watching to know when it is time to
stop tightening monetary policy. How do we deal with the lag when
policy is moving to restrain the growth of the economy?
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. Thank you, Mr. Chairman. I want to join what
sounds like virtually universal praise for the new approach in the
Greenbook. I thought it was very, very helpful to have it stated this
way.
I also want to agree with what Bob Forrestal and Bob McTeer
were saying about the tendency to go too far. There are some caution
signs out there. Even those rabid inflationists, the Shadow Open
Market Committee, have suggested that we might want to consider
saying, "enough is enough."
I am not sure exactly what a soft landing is all about, but I
would like to pose a thought as to what it is. We tend to approach
policy by looking at a way of restricting flows sufficiently to get
the economic expansion down to a sustainable growth path. In
practice, most major recessions including the 1991, 1982, 1980, and
1974 recessions involved wealth destruction. That was the main cause
of the slowdown in the economy. I am toying with the notion of
defining a soft landing as one where the slowdown is accomplished
without wealth destruction. I hope we keep that in our minds when we
think about how far we are going to go in raising interest rates. The
Greenbook is about right in saying that we are going to have a

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slowdown, but I think it is going to occur a little later than the
Greenbook is indicating.
I am very concerned about the situation in the consumer
sector where I think we are going to be seeing a cut in flows anyway.
The consumer is simply overextended. Of the roughly $250 billion
increase in personal consumption expenditures from the fourth quarter
of 1993 to the fourth quarter of 1994, 44 percent was put on
installment credit, meaning credit cards or auto loans. People just
can't finance 44 percent of their increased spending through higher
debt and do that for very long. Mortgage data are a similar concern.
If you look at increased mortgage payments over gross investment in
housing in 1993, the ratio was 77 percent. The 80 percent figure is
pretty standard for a first-time home buyer. If you figure that
existing homeowners also are going to be taking out mortgages,
however, that will take appreciation out of existing homes.
If that
calculation is made, increased mortgages exceeded net investment in
housing by $55 billion, meaning aside from our capital gains, people
were taking money out of the housing sector as well as financing 44
percent of their increased spending on installment credit. That is
just not going to go on for much longer. The question is:
When is it
going to stop?
I think the Greenbook has the fiscal policy slowdown just
about right, but the fact is we just do not know, and we are going to
have to see. Again, I think the risks as in the consumer sector are
probably on the down side and not on the up side. The risks come
because our Congress is not a smoothly functioning machine. The
biggest cog that I can see, and it is a whopper, is the debt ceiling
bill. Assuming Congress can pass a budget resolution in April, which
is probable, the debt ceiling traditionally has been something on
which every congressman can hang a bauble and try to get it through
because the legislation has to pass or else the government shuts down.
Since we have that coming up, I think that the risks in fiscal policy
are big and their financial ramifications are also large.
Similarly, I think the risks in the net export sector are all

on the down side.
If one thinks about the uncertainties: When is
Deng going to die in China, or is he already dead, and what will that
mean? Russia seems to be in chaos; the Middle East seems bankrupt;
Latin America will speak for itself. All of these problems suggest
that we have a lot of downside risks to the economy.
There is a major upside risk that has not been mentioned and
that I think will tend to delay the timing of the slowdown. That is
the cut in FDIC premiums, down to 4 basis points, that was announced
yesterday by the FDIC. That cut is in effect going to be pumping $5
billion more into the capital of the banking sector. That $5 billion
would have been very, very valuable back in 1991 when bank capital was
constrained. At present, given that banks are not capital-constrained
but will want to put that capital to use, I look forward to such
things as getting two credit card solicitations a day instead of the
current one, and similar frivolous uses of bank credit. All of this,
I think, is going to postpone the inevitable slowdown.
I am in agreement with the Greenbook that we are going to
have a slowdown. It will be flow-based. But I think it is going to
occur later than in the Greenbook projection. That raises the

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question of whether we have gone too far, and I think it is a fair
question. We also have to balance it with what I think is a very
risky international situation. There I come back to being a twohanded economist, and I am not going to bore you with both hands.
Instead, I am going to wait to hear what you are going to tell us, Mr.
Chairman.
[Laughter]
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE. Mr. Chairman, as a dedicated cynic when it comes
to evaluating the good intentions of Congress, I am more than
moderately skeptical about a balanced budget program. I have grave
doubts about the wisdom of a balanced budget amendment.
I do not
expect the states to ratify the amendment even if it passes the
Congress because of the realization that expense cuts at the federal
level will undoubtedly shift costs to the states. For those reasons,
I am unable to embrace the baseline forecast even though I expect some
slowdown as a result of earlier policy moves.
Consumer confidence remains high. In spite of the additional
debt load that Larry has referred to, credit lines have been increased
automatically by many purveyors of revolving credit. That is a great
temptation for consumers to continue to run up their debts.
Eventually the debt load will catch up, but I think the easier credit
standards will build in some more lead time.
I am convinced also that
we may still underestimate the export sector of the economy, even exMexico. High capacity utilization creates conditions that I think are
even more favorable for making price increases stick. I believe that
upcoming labor negotiations may well result in a greater focus on
basic wages rather than benefits and work rules. The stage now seems
to me to be set for further upward pressure on inflation. The rest of
my speech I have had to delete because of the prohibition against
mentioning policy.
[Laughter]
CHAIRMAN GREENSPAN.
Governor Kelley.

We have a real blackout this time!

MR. KELLEY. Mr. Chairman, looking at the possible courses
for the economy, one end of the spectrum would be that the expansion
is slowing now, or it soon will be slowing, and that the slowdown will
be adequate. A real doomsayer would say that the economy already is
locked into an excessive downturn. At the other end of the spectrum,
one could make a case that the expansion is roaring along unimpeded at
4 percent plus and we are soon going to be into a true boom/bust
cycle. We very seldom in this life get the extremes one way or the
other.
There is, of course, a big broad gray area. It might be
described as a bit of a slowdown now, or soon, but one that may not be
enough to accomplish our policy objectives, and, looking ahead, the
expansion is very likely to reaccelerate. Along that broad spectrum,
history tells us that inflation will appear under those conditions.
When will it occur and how strong will it be when it does? Are we
getting that slowdown? Well, my guess is that we probably are to some
degree.
I won't take the Committee's time to go through all the
different components; you all know what they are. We probably will
get a little slowing, led maybe by autos and housing, less inventory
accumulation, the Canadian and Mexican situations, and of course a

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good bit of monetary policy tightening earlier that is still going to
hit.
But that slowdown may not turn out to be very deep, and it may
not continue if policy were to remain unchanged.
We still have booming consumer confidence. As the Committee
knows, I have been very concerned about the consumer for a long time.
I thought consumers would get conservative a long time ago. They have
not yet, and I am about ready to capitulate in the short run. I do
not see that happening any time soon, given where we are with new job
formations and so forth. Business investment will continue to be
strong. We have a weak dollar and the foreign economies are beginning
to come back, other than the two immediately adjacent to us.
I have a
hard time seeing real interest rates as being what one would call
high. It seems to me that they are more on the high side of neutral
at this point.
All in all, it seems to me that the risks are still tilted to
the up side. What we are most liable to get in my view is a little
slowing that is not adequate to realize our policy objectives and an
expansion that is likely to reaccelerate later. Following Governor
LaWare's lead of eschewing any comment on policy, I will stop right
there.
CHAIRMAN GREENSPAN.

Governor Phillips.

MS. PHILLIPS. Thank you. I think that the impressive
national growth that we have been talking about around the table today
is showing a few tentative signs of abating. I would cite spending
that is off its highs. We talked about the inventory buildup in the
fourth quarter and a flattened yield curve--inverted or humped at
times. But even if growth does abate, I do not think it is likely to
do so by much, at least not very soon. Business investment is
continuing. Fourth-quarter profits are strong enough to finance
continued investment. The returns on investments are still greater
than the cost of capital. Business has a continued commitment to
improve productivity in a competitive economic environment. Just as
we are seeing some slowdown reported in the housing area, commercial
construction is now recovering and helping to take up some of that
slack from housing. But even housing is stronger than might have been
expected. With employment at fairly lofty levels, it is likely we
will continue to see consumer spending maintained, albeit possibly at
a reduced but still quite respectable pace. The banking system is
quite strong and can certainly support expansion. While the financial
markets generally have moved sideways in 1994 and thus are not as
supportive of direct financing, I think we are past at least some of
the uncertainties in financial markets, and that is likely to be less
of a risk. The uncertainties I am referring to are Orange County and
Bankers Trust. Mexico certainly is still a factor, but so far that
appears to be contained or focused on the foreign exchange markets.
If Congress actually continues to concentrate on deficit reduction,
that too should provide support for the markets. In my view all of
these factors provide an environment for the continued momentum that
we saw coming out of 1994.
It seems to me that there may be a different way of stating
whether or not we are at the cyclical turning point. Since the
economy is operating at or above capacity, we have to ask ourselves
How long
why we are not seeing increases in producer or CPI prices.

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can the economy actually operate above capacity without price
increases? There are a lot of explanations for why it seemingly is
operating above capacity. Maybe we do not have the correct capacity
measures. The 85 percent capacity that everybody cites may no longer
be applicable in view of the re-engineering and the improved computer
and information systems. In any case, firms are adding to capacity.
There has been some discussion today about whether we have the NAIRU
right at 6 percent or whether it is plus or minus 1/2 percentage point
from that level, and whether or not the unemployment rate at 5.4
percent actually implies that workers are more willing to move. I
think that there is some evidence to support the notion that there is
more flexibility in the labor market than a 5.4 percent unemployment
rate might imply. One can look at the number of involuntary part-time
workers and the seemingly higher losses in permanent jobs. The ECI
has shown little wage pressure, implying that people are concerned
about their jobs. The discontent of the American electorate certainly
is being well argued at the other end of Pennsylvania Avenue. Over
the longer term, average real wages have fallen. There is continued
uncertainty about downsizing. I do not think that any of these
explanations is particularly satisfying, and all of us could mount a
pretty good argument against any one of them. But we clearly seem to
be at a stage of testing the confidence distributions around the
estimates of capacity, both the NAIRU and the production capacity
level of 85 percent. And while we are in the range of testing these
capacity levels, we clearly are in the inflation danger zone.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. Thank you, Mr. Chairman. If you will pardon
the metaphor, I would like to see your praise of the change in the
Greenbook and raise it.
I thought the change in the nature of this
Greenbook raised its usefulness for thinking about policy from next to
zero to a quite considerable level, which is more than a small
increment. Not only that, but when I read the details, it changed my
outlook somewhat and I want to talk about that.
I prepared my Humphrey-Hawkins projection, like all of you,
before I had the Greenbook and before I had the staff do some further
work that flowed from the Greenbook. I will talk about that in a
moment. I winged it, just like most of us do; and I wrote down 2-1/2
percent as my growth forecast for 1995, which I now see puts me
squarely in the middle of the members' projections. The Greenbook is
at 2.2 percent for 1995, which sounds like splitting hairs, but that
assumes no further increase in interest rates, which was not my
guesstimate of what the FOMC would do. Therefore, I dutifully
followed the instructions and embodied further rate increases in the
forecast. So, the difference is a bit more than a split of a hair.
I must say that when I went over the details in the Greenbook
line by line--consumer durables, producer durables, the government
sector, the works--I found it difficult to find a piece of the GDP
that I thought would grow faster than the Greenbook forecast. I found
it extremely difficult to make an argument to convince myself that
things look better than the Greenbook indicates on lines 1, 2, 3, 4.
That then led me to the question of how I could make these numbers add
up to growth of 2-1/2 percent. I think the reason that I was higher
has to do with my belief in a forward momentum to the economy, which
several people also mentioned, and I am sure that it colored my view.

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Belief in momentum gets things right most of the time, which is why we
believe in it. But it always misses at turns; it always underestimates turns. All of us fall victim to that, including me. I know
that if I were doing my Humphrey-Hawkins projections again today with
the benefit of the Greenbook, I would come in lower than I did about a
week ago.
Choosing between the two scenarios in the Greenbook in terms
of preferences I find an easy call--I will come back to that when we
talk about policy--in that I would prefer the baseline scenario. Let
me say what I mean. If I believed the Greenbook religiously, given
the two choices, I would like the baseline outcome a lot better than
the alternative, which I would characterize as following the financial
markets. But let me leave that for later.
The difference between the two scenarios quantitatively,
sticking to positive economics, is the staff estimate of the decrement
to GDP growth from tighter money: some .3 percent in 1995 and 1.1
percent in 1996.
I had various staff members produce seven other
estimates of that same parameter--that totals eight. Mike knows all
this; this is not behind his back. Those other seven estimates were
clustered tightly around the 1995 number, averaging a decrement of .4
instead of .3 percent.
For 1996, while the estimates were, of
course, more spread out, the average was extremely close to the 1.1
percentage point difference that you see in the Greenbook. These are
estimates from vector auto regressions and from other large
macroeconometric models. That gave me a lot more confidence about the
difference that policy would make than I had 10 minutes after opening
the Greenbook. It convinced me that that was about the best estimate
we could make of the decrement in GDP growth from tighter money. The
best estimate that we can make is quite different from saying that it
is the truth, of course.
The key question in front of us now--that almost everybody
around the table has spoken to in their turn--is how much of a
slowdown we can expect without further tightening, or indeed with
further tightening.

I think there is a strong consensus, which I

share, that given our dual objectives we need a slowdown from the 4.0
percent growth rate in 1994 to something no bigger than 2-1/2 percent
and quite arguably, but I would say correctly so, less than 2-1/2
percent. The question for me is whether that is in the cards and, if
so, where it is coming from. I think it is coming from three places
and I want to go over that.
First, it is coming from the swing in inventories. I find
the Greenbook forecast for inventories very reasonable, leaving aside
the timing; nobody has a clue about the timing, including Mike and me.
Over the next four quarters, comparing the fourth quarter of 1994 to
the projection for the fourth quarter of 1995, the Greenbook forecast
has a swing in inventories that by itself will clip 1-1/2 points off
the GDP growth rate, that is, comparing 1995 to 1994.
Secondly, we have monetary policy, as you might have guessed.
I asked the staff to answer the following question for me, and I got
eleven different answers.
These eleven stem from using different
techniques to answer the same question. This is the question:
Imagine that, instead of easing monetary policy in 1991 and 1992 and
then holding the federal funds rate low in 1993 and tightening policy

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in the last year, the Open Market Committee had simply locked into a
constant real federal funds rate. It simply would not have gone down
and then come up. One could call that, although I guess we don't use
that term anymore, a "neutral" monetary policy. The reason I got
eleven different estimates is that neutrality can be defined at
different levels; it is not obvious where one puts neutral. Also,
there are different estimating techniques having to do with different
macro models and vector auto regressions. So I got eleven different
estimates. If you compute the effect of that difference in policy on
growth in 1994 and growth in 1995, you can then subtract one from the
other and get an answer to the following question:
What is the
difference in the monetary impulse, positive or negative, hitting the
economy in 1995 versus 1994? As I said, I have eleven different
estimates of this number. It won't surprise you that they differ
quite dramatically. The highest number, which comes from the staff's
large econometric model, is a subtraction from growth of 2-1/2
percentage points comparing 1995 to 1994. The lowest number came from
the Meyer model, which is only 1/2 percentage point lower. These
numbers were clustered so that, if I did what was done to produce the
Humphrey-Hawkins table and threw out the outliers and looked at the
central tendency, the estimates of the decrement to growth coming from
monetary policy would be concentrated in the 1 to 1-1/2 percent range.
I conclude from that that using a number like a 1 percent subtraction
is a quite conservative, though not quite minimalist, estimate of the
decrement to growth from all the monetary policy of recent years.
The third factor that I add to this list of negatives is
Mexico; much in the way that Peter Hooper earlier discussed, that
gives us a number in the range of 1/4 point. So, I add them all up:
1-1/2 percentage points from inventories, 1 point from monetary policy
at the minimum, 1/4 point from Mexico. And that gives me, say, 2
percent and not 3 percent, because it is not correct to add them all
up; there has to be some double-counting in there. So, it gives me a
mental number in the ballpark of 2 percent, plus or minus, with plenty
of error I want to emphasize, around that.
Since we are starting at 4
percent, if we subtract something like 2 percent, that leads me to the
conclusion that there is a very good chance that GDP growth in 1995
will come in below 2-1/2 percent and a reasonable chance that it will
come in below 2 percent.
I want to remind you that that is based on
the Greenbook baseline of no further tightening, which was not my
personal forecast. You might say that that is a very pessimistic
attitude. Now, I come back to where I started. The outlook is
tempered somewhat by the realization that the surprises to GDP growth
that we have had in the last few quarters have been coming in
positive. In my estimation, one ought not to ignore that, so I
mentally tend to bump up that more pessimistic outlook. It leads me
to the conclusion that the risks are about balanced around a forecast
very much like the Greenbook forecast for 1995.
They had the number
at 2.2 percent. I wrote in my notes here between 2 and 2-1/2 percent
for 1995 with quite symmetric risks around that. As I said, if I were
redoing my Humphrey-Hawkins projection now, that is what I would put
down.
CHAIRMAN GREENSPAN.
MR. BLINDER.
MR. KELLEY.

I can?
Yes.

You can still change it.

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1/31-2/1/95

MR. BLINDER. Okay, mark me down; thank you.
I did not know
that.
I thought I was bound when I put it down. It actually got
typed, so I thought that once it was typed, that was the end.
MR. LINDSEY.
MR. PRELL.

When is the deadline?
We were going to propose next Monday.

MR. BLINDER. Okay, mark me down. Thank you, Mr. Chairman.
On inflation, if we have overshot the natural rate, as seems likely to
me, we should get a slow upcreep in inflation, as in the Greenbook,
and continuing out in further years, as in the Bluebook. The analysis
in those two documents seemed pretty much on target to me. Apropos of
yesterday's discussion, however, this will leave the cyclical peak of
these forecasts for inflation well below what it reached in 1990, and
I think that is the right measure of progress on inflation. I do not
accept the proposition, though I have heard it from a few people
around the table today, that the measure of our success is to keep
inflation going down every single year without any exception. When I
put all of that together, the outlook for growth and the outlook for
inflation look pretty satisfactory to me. Thank you.
CHAIRMAN GREENSPAN.

Governor Yellen.

MS. YELLEN. Governor Kelley mentioned that it is possible to
spin out two rather different scenarios concerning the economic
forecast at this point, and I agree with him. In one scenario, no
significant slowdown is in sight and the inflation outlook is pretty
worrisome. In the second, we do have a slowdown in progress. We have
already seen the first signs of that and it could be larger than the
Greenbook anticipates. Frankly, at the moment I am losing about the
same amount of sleep worrying about each of these possibilities. I
think the baseline Greenbook forecast resolves the various
uncertainties in an extremely sensible way to come up with a point
forecast.
It is giving reasonable weight to the new data that point
to a slowdown, but it also is maintaining some skepticism about its
magnitude. I want to convey my compliments to the chef on the
forecast and I want to add my thanks for having changed the
presentation for which I am very grateful; it also helps me think
about policy.
What I conclude, though, is that the risk in the forecast has
increased a lot.
My level of uncertainty about where things are
headed is higher than at any previous time over the last six months.
Now, it seems to me as I read the newspapers that the press is almost
uncritically accepting the slowdown scenario, producing new anecdotes
in support of that view almost every day. I think there are signs
that the economy is slowing down. Governor Blinder has explained why
we should be expecting to see a slowdown, based on the idea that we
still have restraint in the pipeline, and it should be making a big
difference between 1995 and 1994 as he explained. I am not going to
review that reasoning, but I want to comment about some of the
evidence.
We had a surprising and unanticipated slowdown in retail
sales in November and December, resulting in consumption expenditures
in the fourth quarter that were lower than the Greenbook anticipated
and inventory accumulation that was higher. Governor Lindsey has been

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pointing to the massive buildup in consumer debt, which arguably will
soon lead to some significant retrenchment. I think we could end up
with a larger inventory cycle than is anticipated in the Greenbook.
Reinforcing the possibility of a slowdown, we have a decline in
durable goods orders, once defense orders are excluded. It looks to
me as though those numbers are somewhat consistent with capital
spending growth at least cooling off. All the anecdotal evidence from
the reports about home building suggests that we have an industry that
is on the verge of decline. We had a Dodge report yesterday pointing
to a significant slide in construction spending. We now see
automobile companies offering rebates on popular models, lowering
production plans, and shutting down assembly lines for some periods.
Dealer orders for inventories appear to have declined, maybe because
the cost of carrying them is higher now, but maybe also because
traffic through showrooms has declined. On the international front,
as Governor Blinder pointed out, we have risks of declines in our
exports to two of our most important trading partners, Mexico and
Canada, with the possibility that if the Mexican crisis harms other
emerging markets, our exports can suffer there too. We now have
passage of a balanced budget amendment in the House and talk of fiscal
restraint, and I certainly do not know where that is headed. I do not
disagree in any way with what the Greenbook has done to produce a
point forecast, but I see some downside risk there, too.
I couple those negative demand side factors with the fact
that inflation has been well contained--running lower in the fourth
quarter than I think anyone expected, with the ECI numbers suggesting
no significant evidence of wage pressures even in very tight labor
markets including the Midwest. Now, I agree with the assessment of
Phillips curve models.
I do not think there is significant reason to
change our estimate of the NAIRU at this stage. A couple of numbers
seem to be off, but they are within the range of forecast errors, so I
am not yet buying into the idea that the NAIRU is lower than 6
percent. But that possibility is alive in my mind; I do not have a
closed mind to it, and I don't think any of us should. I consider
that a live possibility but not one I am yet ready personally to
endorse.
Then I come back to the issue that Bob Forrestal mentioned,
and I think it is important especially given the lags in policy. I do
not want to cross the barrier into policy, but we can ask just how
high rates are at this point. Are they high or low by historical
standards? I come out with an assessment that they are not low by
historical standards. The real fed funds rate is not low even given
where we are in the business cycle. A couple of years ago, John
Taylor, a Stanford professor who was a member of the Council of
Economic Advisers, devised a very simple monetary policy rule that I
look at to provide a rough sense of whether or not the funds rate is
at a reasonable level. One property of this so-called Taylor rule is
that it is quite sensible in the sense that it takes his forwardlooking econometric model and looks for rules that perform well. As I
mentioned yesterday, the Taylor rule is a hybrid rule; it is a policy
rule based on the output gap and on deviations of an inflation target
from 2 percent. It performs well, but maybe even more importantly it
provides an incredibly close approximation of the Fed's reaction
function since 1986 with the sole exception that the Fed eased more in
1992 and 1993 and then tightened more since early February 1994 than
the rule would have called for. With the inflation and output gaps at

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present levels, this rule right now would be forecasting a funds rate
of 5.1 percent. Other sensible rules, including nominal GDP targeting
rules that we mentioned yesterday, would also be looking for a fed
funds rate at this point in the 5 to 5.6 percent range, so we are not
so far from target.
Having said all of that, it seems to me that one also could
discount most of what I just said about the slowdown. We are all
looking for evidence of a slowdown, and I am worried that saying we
are there, as Cathy said, may be wishful thinking--two retail sales
numbers do not make a trend. Consumer debt is up but so is income,
and the debt service burdens of households are not rising. Consumer
optimism is high. Order backlogs are growing even if durable goods
orders have tapered off, and the levels remain high, and that hardly
presages a downturn in investment spending. Yes, inventories have
risen a bit, but inventory/sales ratios are not high, and the downside
risk from this source is somewhat limited. In any case, the Greenbook
is anticipating a decline in inventory investment. The inventory
downturn would have to be still larger to create significant downside
risk. Automobile manufacturers, of course, do not want sales to fall
off, but we are counting on some slackening in demand for autos. With
respect to housing, it may be strong because employment and personal
income have been growing. One could argue that seeing will be
believing; we really have not seen anything much happen yet in spite
of the anecdotes.
If I had to assign probabilities to these two different
scenarios at the moment, I would put a .7 on the strong scenario and
a .3 on the weak one that I started with, coming out exactly where the
Greenbook does on balance. But the conclusion I want to leave you
with is that my level of uncertainty has increased enormously, and I
think the potential forecast error at this point is extremely high.
My policy conclusions follow from the idea that the risk at this point
is extremely high.
CHAIRMAN GREENSPAN.
Is coffee there?
MR. BERNARD.

Thank you.

Shall we break for coffee?

Yes.
[Coffee break]

CHAIRMAN GREENSPAN. Anyone who wishes to revise his or her
projections for the Humphrey-Hawkins report can contact Mike Prell
through Monday. Close of business Monday, is that correct?
MR. PRELL.

Sure.

CHAIRMAN GREENSPAN. Let's move to the longer-run ranges for
I call on Don Kohn.
the aggregates.
MR. KOHN. Thank you, Mr. Chairman. First, I want to point
out that the Secretariat is distributing or will distribute a memo
sent to me from David Small that contains some of the information that
Governor Yellen talked about this morning, including Taylor's rule.
It is for your information and gives everybody access to what she was
looking at; she indicated that a number of people had asked her about
this material. Secondly, for the sake of expediting matters a little,

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I will spare you some of the pearls of wisdom that I was going to talk
about in terms of long-run scenarios. They will probably still be
good in July; I have saved them on my word processor.
[Laughter]
I
did want to say a few words about the fiscal policy situation--we have
one scenario on that--before getting into the long-term ranges.
[Statement--see Appendix.]
If not, let me just
CHAIRMAN GREENSPAN. Questions for Don?
say what I think may be the consensus of the group that is implied in
Don's recommendation. I think we successfully brought the ranges down
to where they are finally consistent with price stability in the
context of a restoration of the old relatively stable M2 velocities
and somewhat similar M3 velocity relationships. To tamper with that
at this stage with no particular purpose would give signals that I do
not think we really have any intention of giving. While there is a
technical question with respect to the possibility of M3 running above
the upper end of the range and hence the possibility of going to
alternative I-A, I think Don's suggestion is basically a sensible one.
We can certainly make that adjustment in July if such M3 growth
appears to be probable for this year. But having perhaps achieved
price stability nirvana in terms of our target ranges, we have to have
good reasons to change them. Does anyone else want to speak on this
issue? Let me just ask in general, is there any dissent to the views
that I have just expressed? If not-MR. LINDSEY.

We all care passionately!

MR. BLINDER.

Is there a vote for "who cares"?

CHAIRMAN GREENSPAN.
MR. BERNARD.

Do we need an official vote?

Yes.

CHAIRMAN GREENSPAN. Why don't I just move Alternative I and
ask the secretary to call the roll.
MR. BERNARD.
Chairman Greenspan
Vice Chairman McDonough
President Hoenig
Governor Kelley
Governor LaWare
Governor Lindsey
President Melzer
President Minehan
President Moskow
Governor Phillips
Governor Yellen
MR. BLINDER.
I lost my vote!
MS. PHILLIPS.

You skipped me, but I will vote "yes" anyway.

He took your "who cares" seriously!

CHAIRMAN GREENSPAN.
MR. BLINDER.

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

That's right.

Maybe it is recorded.

I may have been recorded as "who cares."

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CHAIRMAN GREENSPAN. Let's now move to the current monetary
policy and the directive. I will again call on Don.
MR. KOHN.
--see Appendix.]

I will be even briefer, Mr. Chairman.

CHAIRMAN GREENSPAN.

Questions for Don?

[Statement

Yes, Jerry.

MR. JORDAN. Don, one of the alternatives you gave us in the
top panel of Chart 4 of the Bluebook assumes the NAIRU is 5-1/2
percent. If I understand this, the line labeled "Tighter" is not
tighter compared to where we are.
It seems to me to be based on
The bottom two panels
maintaining the fed funds rate where it is.
tell me what your assumption would imply for the CPI and the rate of
unemployment.
MR. KOHN. I agree that that chart is not well labeled. The
long-dash line is the tighter alternative from the two previous
charts. The short-dash line answers the question: What would the
funds rate have to be with a lower NAIRU to get the same inflation
outcome as from the tighter alternative? It is not well labeled.
MR. JORDAN. Mike's response to me earlier was that if we
knew the "true" NAIRU was 6 percent, that really means we can say
with reasonable confidence that it is someplace between 5-1/2 and
6-1/2 percent. This tells me that if we knew it truly was 5-1/2
percent, then we are really saying it is someplace between 5 and 6
percent.

MR. KOHN.

A reasonable supposition.

MR. JORDAN. I do not have a clue where it is, but I am just
trying to understand what these charts say.
CHAIRMAN GREENSPAN. Further questions for Don?
If not, I
will start off as usual on the policy side. Coming out of the fourth
quarter, if we had seen no signs of slowing or of kinks in the
unbelievable set of one-sided data, I think we would be in serious
trouble at this stage. Fortunately, there are now tentative signs,
not necessarily persuasive but definitely beginning to appear, of
slight cracks along the road. It is crucial that those cracks
continue to develop or we will have a serious problem ahead.
I would view the economic outlook at this stage as largely a
balancing of forces, with capital goods markets, inventories, and the
so-called interest sensitive sectors--housing, motor vehicles, and so
forth--being the crucial elements in the outlook. In the capital
goods markets, the data are uniformly very strong. That is, the
backlogs are continuing to rise as Governor Yellen mentioned. We are
beginning to see backlogs in the equipment area where, even though
actual orders are flattening out, they are still very significantly
above the level of shipments and hence the forward commitments
continue to stretch out. In the nonresidential building area, starts
and permits clearly are turning up quite significantly. They are
erratic but, smoothing through these data, it is very obvious that
there has been a rather marked pickup in nonresidential building. One
sees it also in evidence that prices of commercial real estate finally
are coming off their market lows.

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As far as capital goods in general are concerned, the cost of
capital continues to be quite low, and this is consistent with fairly
strong forward commitments. The profit figures remain quite
extraordinary. Preliminary estimates for the fourth quarter being
tabulated by Business Week and others show very strong year-over-year
profit figures. And as was noted in Part II of the Greenbook, private
analysts' surprises on the up side are twice as large as those on the
down side. This is the type of environment for the capital goods
markets that essentially says there is a long way to go before this
economy tilts down, provided the financial system does not intervene
and upend it in the type of context that Governor Lindsey was raising,
namely, one where we get significant wealth destruction that
immediately causes the whole system to readjust. One can say that
while the stock market is not low, it clearly is not anywhere close to
being as elevated as it was a year or so ago in relative terms. We
have taken a lot of the bubble out of the market. Indeed, I would
think one of the successes of our policy to date is that we have taken
the degrees of instability that one can envisage in stock prices down
to a much reduced level of concern. What that does is to feed back
into the longer-term outlook for capital goods, which is very
difficult to undermine in any meaningful way. Certainly, business
confidence indexes look strong; all of them are on the upper side of
the ranges in which they have fluctuated. The quality spreads within
the financial markets also attest to the fact that the forward risk
premiums implicit in capital investment are quite modest.
It is very difficult to find roots of a recession in business
cycle annals where the capital goods markets did not join in. So,
unless we are ready to argue that something is going to break in those
markets, it is very difficult to draw the scenario of a recession
coming any time soon. And with profit margins not yet turning down,
the lead times that usually are associated with this type of market
really remain quite extended into the future before any credible
downturn can be presumed. I leave out of this the usual changes that
will probably occur in the motor vehicles area. Class 8 trucks, the
very heavy duty trucks, in general have been going flat out for so
long that there is only one way they can go:
One of these days they
are going to tilt down and that is going to happen sometime this year
I am pretty sure.
On the inventory side, we are looking at a very interesting
set of data. There is no question, as a number of you have indicated,
that the rate of accumulation is essentially unsustainable. The
reason basically is that the accumulation is a much larger ratio to
the stock of inventories than is typically the case, and one must
assume that it will slow down. I leave the inventory/sales ratios out
of that for reasons I will get to. The problem, however, in making
the case for a very major contraction and an immediate impact on GDP
is that a substantial part of the rise in inventories has reflected
imported goods. The normal average proportion of inventory change
accounted for by imports has been about 17 percent, say 15 to 20
percent. During the last three quarters the share of the total change
in inventories coming from imports has been approximately 30 percent.
So, if we are forecasting lower inventory demand, roughly a third of
that can be presumed to involve imports that do not impact dollar-fordollar on GDP. I do not think there is any question that inventory
accumulation is going to slow, but I do not see any evidence to
suggest that the slowdown started in January because C&I loans, which

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have been a reasonably good estimator of book value changes, if
anything look stronger since the end of the year. And there is no
anecdotal evidence to suggest that inventories are backing up and that
these loans are financing unintended accumulations. So, while there
is the presumption that liquidation or slow growth in inventories is
about to occur, it is still a forecast and it does not show up in any
of the data with which we tend to work. More important is the fact
that the level of inventories remains low. One can see this in a
number of ways other than the obvious inventory/sales ratios. One way
is to take the domestically produced inventories, leaving out the
estimated imported inventories, as a ratio to domestic sales.
That
ratio is quite low and is actually still going down. These are the
inventories that have a direct impact on domestic production and
employment.
Secondly, and this is not an independent observation, the
ratio of inventories to output, after trade markups are subtracted, is
still very low and does not show any uptilt at all. We have discussed
this previously:
If you are looking for inventory overhang, the
question is not the constant-dollar total value of inventories that is
required for estimating the national income, but how many units of
inventory are out there.
It doesn't matter so far as domestic shoe
production is concerned--to whatever extent we still manufacture
shoes--whether the shoes in inventory are at the retail level or at
the factory shipping point. At the retail level they are a much
larger dollar figure in the inventory figures, but that markup does
not matter. There is very little evidence at this stage that we have
accumulated levels of inventory that have to be readjusted. I think
that is going to occur at some point and it may very well be the
trigger of the next downturn, but it is not here, at least not yet.
What we see, as we would ordinarily expect, is that the lead times on
deliveries of materials are still quite long. There is pressure on
facilities as a consequence of that, and we are also seeing various
types of shortages, all of which underscore the fact that inventories
are low and that there is very little unintended inventory
accumulation in the pipeline. I might say, however, that it is
possible from a statistical point of view to get a very sharp
reduction in the rate of inventory accumulation, and hence a
significant decline in the rate of GDP growth, that does not get
captured fully in the import data because there is too much noise in
the data. So we may actually get a much lower GDP increase in one of
the next several quarters than we currently expect, and certainly less
than is projected in the Greenbook, but it may be more a statistical
discrepancy question than any real economic phenomenon.
In the interest-sensitive areas, where housing starts are the
biggest item, single-family starts are probably being held up by smoke
and mirrors. The current level is hard to believe even with all the
arguments with respect to income and the like. I think it is almost
inevitably going to come down and will be the biggest item, I would
say, in an aggregative sense that we will have in holding down the
growth rate in final demand. Sales of existing homes also will be
falling significantly. That in turn will tend to reduce the capital
gains realized on the sale of homes and will contract spending in the
retail areas because a substantial amount of the realized capital
gains, which are essentially financed by increases in mortgage debt,
goes into consumer markets. Part of Larry Lindsey's concern is that
the household debt numbers are already quite large and hence a sort of

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double-whammy effect will probably soften retail sales to some extent.
I should say, however, that while it is mixed there is evidence that
motor vehicle sales were down in January; I gather that we have to be
very careful about the official January figures because there is a new
method for reporting when the cutoff for monthly sales occurs. From
what we can gather from the Johnson Redbook and the Mitsubishi general
merchandise surveys, January soft good sales are actually quite
strong. So, it is not by any means clear that the retail sales
markets have carried forward their deterioration from the fourth
quarter. I do think, however, that we should not expect--in fact we
should not hope for--strong retail sales in the next couple of months
because if we do get that, then the notion that the expansion is
slowing becomes very seriously in doubt.
The other data that we have for the January period are all
consistent with the view that the economy has not shown very much in
the way of a slowdown. There is some evidence. I think motor
vehicles and housing starts probably are the major areas where the
slowdown will occur. But initial claims are still quite low. Insured
unemployment looks to be quite low, really at the bottom of recent
ranges. Certainly, when one looks at the credit data, it is very
difficult to find any evidence that monetary tightening is
constraining debt flows. Consumer credit restraint seemingly is going
out of style. If Larry Lindsey is right, there will be more credit
cards--did you say two offers per day are now coming in, Larry?
MR. LINDSEY.

Moving up toward two per day, yes!

CHAIRMAN GREENSPAN. Thanks to Ricki!
[Laughter]
C&I loans
are just extraordinary. Consumer loans extended by commercial banks,
especially when securitization is added back in, are also remarkable.
And apparently we are still getting some easing in credit terms, which
seems to suggest that bankers have not been told about our monetary
policy tightening! This is an unusual phenomenon this late in the
business cycle. So, the presumption that monetary restraint is taking
hold in any material way at this stage is not self-evident in this
case. As both Janet Yellen and Cathy Minehan pointed out, when we
have a policy of trying to achieve a soft landing, we have to be
careful that wishful thinking does not overcome our better statistics,
if I may put it that way. There is a possibility that the expansion
could slow fairly quickly and if that were to happen, granted the very
strong capital goods markets and especially if inventory investment
fell quickly to a new adjusted level, the second half of this year
could be stronger than the first. That obviously presupposes that the
first half turns out to be weaker than expected. What I find very
difficult to envisage is a smooth adjustment the way it is in the
Greenbook. There is one very important reason. It has never happened
that way. The Greenbook of necessity has to provide smooth forecasts.
So, something different is going to happen this particular time. So
long as capital goods markets hold and are not undercut, we probably
will have reasonably solid growth; but because of the inventory
situation, as Governor Blinder pointed out, we have a really good
potential to bring the rate of growth down to moderate levels which
for want of a better term pushes the economy toward a soft landing.
Having said all of that, an argument can be made to stay
where we are at this particular time. That argument would have
considerable force were it not for the fact that the markets expect a

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50 basis point rise in the context of an exchange market for the
dollar that has not been all that impressive. We know that to the
extent we choose to go against market expectations, we create a degree
of volatility; indeed, that is the purpose of going against the
market. But there are times when doing so is probably unwise. And
were we to hold still at this point, we would in my view be taking
unnecessary and undue risks. The risk on the exchange rate side is
that the dollar would undoubtedly fall. The problem is not so much a
decline as how quickly and how far it would decline in the context of
the way world markets have been behaving, where countries that are
viewed as slightly suspicious find the foreign exchange vigilantes
running at them. The United States is just barely investment grade,
if I may put it that way. I don't think we have much leeway on the
down side to take those risks.
So, in my judgment, raising both the funds rate and the
discount rate by 50 basis points makes the most sense. I think the
risks are relatively small, especially since such tightening is so
When
heavily discounted. But we have to be a little careful.
something is so fully discounted as the 50 basis points that is
presumed here, the normal assumption is that markets will not adjust.
That is not true. There are a lot of people who play on both sides of
this and there will almost invariably be some adjustments. Frankly,
it is unclear to me where they are going to come from. I wish the
bond market had not been so strong for the last two days because one
possibility is that we will get a bond market selloff in line with the
principle that you buy on the expectation and sell on the news. This
type of rally suggests to me that if we move up 50 basis points it is
not self-evident that bond markets are going to be firm because of
their pattern over the last two days. What I think is reasonably
certain is that if we do not move now, we will have the makings of a
little nervousness in these markets, and that is something which in my
view doesn't make any sense for us to foster at this point.
Let me end there and just note that having said all I said
about tightening, granted how I see the economic outlook, I think we
will be truly symmetric if we raise the federal funds rate to 6

percent. It is by no means evident that if this cracking that we have
seen continues and mushrooms in one form or another, there will be
another tightening of policy. I'm not saying that there will not be;
but while we could see that we had a way to go when we moved back in
November, I think the issue is much more murky at this stage.
Accordingly, I would suggest thinking in terms of going to symmetry if
we move 50 basis points.
I have held forth a little longer than I
intended. Who would like to speak next? President Melzer.
MR. MELZER. Alan, I am in full agreement with what you
recommend. The only thing I would add is that I would accompany that
increase in the funds rate with an increase in the discount rate.
CHAIRMAN GREENSPAN.

I'm sorry, I thought I said that.

MR. MELZER. I'm sorry, I missed it.
My reasons are much the
same; let me just quickly tick them off. First of all, in my view we
must continue to restrain the growth in the monetary aggregates to
ensure that incipient inflationary pressures are contained and that
progress is made toward price stability. Secondly, though the growth
in the narrow aggregates has been very slow over the last year, their

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behavior must be evaluated in light of the very rapid growth rates in
In addition, as the Bluebook notes, two factors
1991 through 1993.
are estimated to have depressed M1 growth by about 3 percentage points
in 1994.
Both of those I think argue for continued restraint. While
an argument can always be made to wait for more information, our
credibility in fixed income and foreign exchange markets is fragile in
my judgment. That would be very consistent with what you said, Alan.
An imminent action is widely expected. Failure to move now might
result in adverse consequences for the economy, especially if
subsequent information supported continued strong demand and rising
prices as I think is likely. Finally, I would note that the current
account deficit is rising and will approach $200 billion in 1995 based
on the Greenbook forecast. This makes it all the more important that
we focus on maintaining the value of our currency by keeping inflation
low. I don't think it happens very often that I can do this, but that
may be a more gentle way of saying exactly what you said about
maintaining investment grade, Alan.
CHAIRMAN GREENSPAN.

President Minehan.

MS. MINEHAN. I also am in full agreement with your
recommendation. I meet with people from a lot of the mutual fund and
money management organizations prior to coming to Federal Open Market
Committee meetings just to get a sense of where they think the markets
are. This time they were very strongly tilted toward an expectation,
as you all know, that we would move by something like 50 basis points.
There would be a good deal of surprise if we did not. It is not that
we necessarily want to have a policy that follows the markets, but I
am in total agreement with your view that there is a volatility issue
to be considered. President Forrestal hit on a key point and that is
the issue of knowing when and how to stop the policy tightening
process.
I am a bit concerned about that.
I think 50 basis points
puts us on a trajectory that is roughly halfway between the baseline
and the alternative scenario. It is well within what we in Boston
were projecting in terms of our Humphrey-Hawkins targets.
I agree
that the risks would be balanced and I agree with symmetry, but I hope
when we see things begin to slow down that we will be as forwardlooking on the way down as we have been on the way up and sensitive to
know when to stop tightening and perhaps even when to back off.
CHAIRMAN GREENSPAN.
MR. BROADDUS.

President Broaddus.

I support your proposal fully, Mr. Chairman.

CHAIRMAN GREENSPAN. Let me just say that I agree with Cathy
Minehan. I think the point she has made probably should be in the
front of our minds at every meeting for the next few meetings because
we made a big case of being up front on the tightening side.
If we
seriously believe that there is a long lead time, while we may say our
broad approach should be asymmetric in the sense that we are phasing
toward price stability, it still implies that we should move ahead of
the curve where there is the necessity to do so.
President Forrestal.
MR. FORRESTAL. I agree
policy conclusion, Mr. Chairman.
baseline forecast, and indeed at
result is not bad at all.
It is
argue perhaps that the inflation

with your analysis and with your
If one looks at the Greenbook's
our Bank's baseline forecast, the
fairly acceptable, although one could
rate looks a bit high. The problem

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with that forecast is that we have seriously underestimated the
strength of this economy for a long time, and the risk is that we will
continue to do so. So, I think it is wise for us to take out an
insurance policy, if I can put it that way, to make sure that we do
get the deceleration that is required in this economy. I would
support your funds rate recommendation and also your recommendation
about symmetry.
CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Mr. Chairman, I think there is urgency in the
need to tighten policy for many of the reasons that have been
mentioned here. Clearly, the analysis in the Greenbook and our
analysis in San Francisco support the need to tighten policy.
Therefore, I would favor a 50 basis point increase. Quite frankly,
the work we do--and I think it is implicit in the Greenbook as well-suggests that additional tightening probably will be needed in the
future. Consequently, I would prefer asymmetric language, but I
certainly could live with symmetry.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. Mr. Chairman, you and I have discussed this at
some length. As you know, I have become firmly convinced as a result
of those discussions that this would be a great time to wait for a few
weeks, and I want to explain why. The key question to me is implicit
in what we were talking about before. If we stop here, at 5.5 percent
on the funds rate, would we--by, say, the end of 1996 plus or minus-be back to a zero inflationary gap? I think we probably have overshot
and we need to get back. So that is the crucial question. It depends
on three things: how fast we think the economy is likely to grow over
the next two years; where we think the NAIRU is; and what we think the
potential growth rate is.
On the latter, I accept the staff's
analysis. On the forecast, I am very close to the staff's analysis,
and on the NAIRU I am pretty close also. I would shade the NAIRU a
tad to the low side of their estimate, but that is not a major
difference. As I weigh all those factors, plus the standard errors
around them, which are substantial in many cases, the odds seem to me
less than 50/50 that we will in fact eradicate the inflationary gap by
the end of 1996--less than 50 percent but better than, say, 20-25
percent. So, you might ask, doesn't that mean I should advocate an
increase in rates right now?
Three things tell me it would be better to wait. The first
is what I would characterize as a glimmer, or a whiff, of an imminent
slowdown. I want to emphasize both of those words. I don't think it
is more than a whiff. I think there is a very good chance--as you do
Mr. Chairman--that this is in fact a false negative; and when we have
some more data, we will see if that was the case. But the other word
I want to stress is that it is a whiff of an imminent slowdown; it is
not a whiff of a slowdown a year from now. If in fact the whiff is
accurate, it would be a mistake indeed to be still raising rates at
this point. That is a minor part of the problem; I do not think that
is the major possibility.
The reason I would like to wait, though I can see that that
is not going to be the outcome of this meeting, is that in just two
weeks we will have another employment report and inflation reports at

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both the wholesale and consumer levels. Also, and most important to
me at this juncture in time for exactly the reasons you said, Mr.
Chairman, though not usually that important to me, is that we will
have one more month of retail sales data. For me, that will convey a
lot of information about whether the data for November and December
were an aberration, a fluke in the data for the Christmas season, or
an indication of something real going on in the economy of which we
are just seeing the beginnings. That is the major factor.
Two other factors are international. One has to do with the
Why throw another match into
situation in Mexico, which says to me:
I felt that way much more firmly Monday than I
the oil at this point?
do now since something has actually happened on the Mexican front.
But I think it would be ludicrous to say, and nobody would, that the
Mexican situation has now settled down. That is very far from the
case. While it is true, as Peter said before, that 50 basis points is
nothing between friends if the friends live on opposite sides of the
Rio Grande, the direction is clear. It is not going to help.
Similarly, if we go north of the border, we have the Canadians
struggling to keep up with the Federal Reserve--and not very
successfully for a while. My guess, by the way, would be that they
will more than match our rate increase; but that increase certainly is
going to exacerbate the problems of our northern neighbor.
If the domestic factors alone were making an overwhelming
case to tighten now--that is, if I believed, for example, as Bob Parry
said, that there is an urgent need to tighten now--I would just say,
"I am sorry Canada; I am sorry Mexico; we work for the Americans, and
that is just too bad."
But I do not see the case as urgent. I see
the case as rather more finely balanced. We have just experienced a
good inflation surprise in the fourth quarter. Almost all the
inflation surprise of 1994 came in the fourth quarter. That says to
me, first of all, that things are more balanced and the inflationary
risks are less than I might otherwise think. In an atmosphere like
that, these international considerations push me further toward
waiting. I want to emphasize that I am not talking about waiting
until the next FOMC meeting necessarily. This is a case where in just
two weeks, we will have a significant quantum of new data. If those
data refute the hypothesis of an imminent slowdown--and I think the
probability is better than 50/50 that they will--I would be fully
ready to support an increase in interest rates. On the other hand if
they do not, I would be pushing very strongly for us to put our
pistols in our holsters for a while.
The only argument I can see for moving today, and you made
it, Mr. Chairman, is that the markets are strongly expecting it.
That
is true; I do not dispute that. The markets are indeed expecting it.
The only place I would differ is that I do not take that as an
important consideration governing what we actually do. That would
seem to me like being led around by the markets much too much. As you
know--we started talking about this, I guess, on Friday--I have been
wrestling a great deal over the question of whether this is an
important enough difference to merit a dissent.
I finally decided it
is not. The basic outlook that you just outlined, and the sort of
medium-term strategy you have in mind for the FOMC, is not very
different from mine. This is a tactical difference. I do feel very
strongly that it would be wiser, more prudent indeed, to wait a couple
of weeks. But, first of all, you might be right and I could be wrong.

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Nobody can be sure about that.
Furthermore, as I said, I do think the
odds are better than 50/50 that the outcome of the wait for two weeks
will be just to do two weeks later what you are proposing to do today.
So, I am willing to go along. I nonetheless would like to lay down
the marker that I think the chances may be one out of three, or
something like that, that we are now in the process of setting the
thermostat too low out of impatience that the room did not cool down
as fast as we wanted it to.
It is going to take some considerable
evidence to get me to support another interest rate increase again
anytime soon. Thank you.
CHAIRMAN GREENSPAN.
MR. LAWARE.

Governor LaWare.

I support your proposals.

CHAIRMAN GREENSPAN.

President Moskow.

MR. MOSKOW. Mr. Chairman, the preponderance of evidence that
we have reviewed confirms that the economy continues to grow faster
than its potential. We expect this will contribute to a perceptible
increase in inflation despite the unexpectedly low inflation rates
observed toward the end of last year. Some moderation of real growth
rates does appear likely by midyear as a result of our earlier
actions. Nonetheless, the adoption of a somewhat contractionary
monetary policy is warranted in order to prevent the anticipated
inflationary pressures from generating a permanent increase in the
inflation rate. With the real fed funds rate in the 2-1/2 to 3
percent range, consistent with a policy stance that is only mildly
contractionary, this suggests that further action is appropriate.
These considerations lead me to support your recommendation for a 50
basis point increase in the fed funds rate and also a symmetric
directive.
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. Mr. Chairman, strictly on the basis of domestic
considerations, I would associate myself with Governor Blinder for the
reasons he stated and for another one. We are going to be finding out
not only retail sales; we are going to have both the Administration's
budget and Mr. Gingrich's budget unveiled in the next two weeks. I
think the reactions to that will answer some of our questions about
fiscal policy. I do not know about the quality of the answers, but at
least that will light a match in an otherwise completely dark room. I
think your observations on the international side are well-taken. The
case against waiting--I am going to flip the nuances of the way
Governor Blinder said it--is that if we had a compelling reason to go
one way or the other domestically, we should do it.
If, however, we
wait and we have a crack in the dollar in the next two weeks, the
amount of tightening we would have to do in order to counteract that
crack would be a lot more than 50 basis points.
So, given that there
is some uncertainty about the domestic scene, I view a 50 basis point
increase as probably buying us some insurance that we will not have to
tighten further. And so, I can very much support your proposal.
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE. I think this decision really comes down to
assessing the risks and one's comfort level in dealing with those

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risks. Your analysis of the risks, Mr. Chairman, on the domestic
economy is about as good an assessment as one can get. The risks
still do favor, I think, the continuation of too much strength and,
given where we are in the cycle, greater risk on the inflation side.
Given that, I think we would be doing the right thing and my comfort
level would be increased by following your recommendation of going up
1/2 percentage point. I would like to join others, however, and say
that I think the way monetary policy has been conducted over the past
year is one of the high points in this Committee's history, at least
the part that I have been associated with. It has been that way
because we have been forward-looking, but we also have been willing to
be decisive when we needed to be. We need to continue to be forwardlooking in this part of the cycle. While I am sympathetic to the
notion that there are more data coming, that is always going to be the
case. More often than not we get into trouble by waiting for one more
piece of data. We tend to make the right decision when we take the
information that we have in hand, make the best judgment we can, and
then go for it.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. Mr. Chairman, I support your recommendations for
a 1/2 percentage point increase and a symmetrical directive. I would
like to say that whether or not we move now is based on whether we
think it is prudent on the basis of the evidence. The preponderance
of the evidence I heard today and your arguments suggest to me that
moving now is appropriate. I am sensitive, too, to whether we are
forward-looking or not, but there is one nuance in terms of what
Governor Blinder said that is important as well. That is, if we wait
because we have this whiff of a slowdown and if we are reasonably
convinced that there is increasing inflation in train, we will come
perhaps to the point where we get just another whiff with a little
increase in inflation and find ourselves asking what we should do now.
It will be harder to make the move then because we will have both
rising inflation and this whiff of a slowdown at the same time. So, I
think now is the prudent time to move. A move will help staunch
inflation going forward. I think buying the insurance now and heading
off further inflation and a larger move later, as Governor Lindsey
said, is the right thing to do. I support you.
CHAIRMAN GREENSPAN.
MR. STERN.

President Stern.

I support the recommendations.

CHAIRMAN GREENSPAN.

Governor Yellen.

MS. YELLEN. I would like to associate myself fully with
Governor Blinder's analysis and also with the conclusions that he drew
from it. As I indicated, I think the forecast risk is very high at
the moment, and I also agree that more data would be helpful in
deciding. On the other hand, if I absolutely had to decide today, I
would favor a further 50 basis point increase in the funds rate. If
we knew that we needed that increase in the funds rate, I do agree
that sooner is better than later. On the other hand, a short delay
I do not think we should feel
imposes only a very minimal cost.
compelled to raise the funds rate today, and I do see definite
benefits from waiting a little longer to decide. I fear that if we
act today, our move may turn out to be one we will regret. I realize,

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of course, that if we wait another few weeks as Governor Blinder
suggested, we will see further data that I would definitely like to
see: an additional retail sales reading, another employment report,
and some further CPI and PPI numbers. I would like to see another
housing starts number and some auto sales numbers as well. In my
mind, this would reduce my uncertainty about which of the scenarios is
the right one. That is why I favor waiting, not at all until the next
meeting but just for a few weeks, to look at those data.
I understand that there is an expectation on the part of the
market that we are going to move 50 basis points today, but I don't
think that should force us to move today. The market's expectation,
which I read as a further 150 basis points increase before we stop
tightening policy, does not coincide with my own. On the basis of
current information, I am envisioning only this 50 basis point
increase. Given what I know about the economy and the uncertainty
that I have about the natural rate, it would take a lot of new
information for me to contemplate going up 150 basis points. That is
part of the reason why I mentioned the Taylor rule, to give us a sense
of where we think the funds rate should be. I find that many people I
talk to reason as follows: As long as actual growth exceeds growth in
potential output--that is, as long as the economy is growing faster
than, say, 2.5 percent--the funds rate should be raised. Sometimes I
find myself falling into that pattern of thinking, too--that the
economy is growing too quickly and that means we should tighten some
more. But this is a crazy way of thinking, and it definitely runs the
risk of ending up with too much tightening. We can move 25 basis
points or 50 or 75 basis points each time, and that is the way we end
up with overkill. That is why I think we have to have a sensible
notion of the right level toward which we should be heading. And we
may have to stop before we see the slowdown under way. The Greenbook
has one way of coming at what that level should be--7 percent. I do
not disagree with the Greenbook strategy. But the Taylor rule and the
other rules that were distributed to you call for a rate in the 5
percent range, which is where we already are. Therefore, I am not
imagining another 150 basis points.
In spite of having said that my choice would be to wait, I
intend to vote for your proposal. The reason is that I think the
differences that we have largely concern tactics and not strategy. My
guess is that, while I would prefer to wait, the probability is high
that in three weeks I would want to go along, that I too would prefer
a 50 basis point increase. I also grant that my views on tactics
could be wrong and, therefore, I do not intend to dissent.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. Thank you, Mr. Chairman. I very
much agree with your conclusion, but I would like to state just
briefly some of the reasons. Every possible conjuncture that we have
been able to put together on the economy indicates that we need to
increase official rates by 50 basis points--possibly by more than
that, but certainly by 50 basis points. Therefore, just on the
economics, I think the time to raise those rates is today, and I do
not have to justify the increases in my own mind by the fact that
financial markets clearly are looking for a 50 basis point increase.
I do think that market expectations are a substantiating reason but
perhaps from a slightly different perspective. It is reasonably

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likely in my view that this will be the last interest rate increase.
It is important that we do it decisively and that we not gratuitously
create a problem in financial markets, especially at a time when I
think the dollar is extremely vulnerable and likely to fall. There
are going to be two times, possibly this year and maybe even probably
this year, when we will disappoint financial markets. The first will
be at the meeting at which they expect us to increase interest rates
and we do not, especially if we accompany the decision, going back to
our discussion at yesterday's meeting, with a statement that we have
decided not to increase interest rates. The financial markets won't
be ready for that. We will disappoint them even more when we decide
that it is appropriate to reduce interest rates at a time when
unemployment probably will be below anybody's notion of the NAIRU and
when we could be having some uptick in inflation. That forwardlooking move, which I think will take at least as much courage as any
of the moves that we made last year or contemplate for today, will
I would much rather
induce much confusion in financial markets.
confine the confusion to those two important times and not cause it
this time for, I think, no earthly benefit for us.
CHAIRMAN GREENSPAN.

President Jordan.

MR. JORDAN. If we currently enjoyed a situation where there
was no uncertainty on the outside about our intent to deliver a lower
inflation rate in the years ahead, regardless of what happens in 1995,
and to move toward ultimate price stability, then I would not move
today. Because we do not have that kind of credibility, because there
is uncertainty about our policy objectives, because our staff and
private forecasters have inflation going up--the last OECD forecast
that I saw had the United States with the highest inflation in the G-7
--and because of the dollar situation, I think that we are forced to
err on the side of tightness whether this is to be the last tightening
move or not. Without those things, I would not even do this today.
But with those things I think we are forced to continue marching in a
way that may turn out to be too much tightening.
CHAIRMAN GREENSPAN.
MR. KELLEY.

Governor Kelley.

I support your recommendation, Mr. Chairman.

CHAIRMAN GREENSPAN.

Governor Phillips.

MS. PHILLIPS. I also support the recommendation. I think
matters would actually be worse if we delayed in anticipation of a
resolution of Mexico's problems. In spite of the recent
announcements, that situation is likely to be uncertain for quite a
while. It is quite conceivable that this tightening move may be all
that is needed. But in view of the strength of the economy, it seems
to me that the risk of overshooting is minimal.
CHAIRMAN GREENSPAN.
MR. MCTEER.

I support your recommendation.

CHAIRMAN GREENSPAN.
MR. BROADDUS.
recommendation.

President McTeer.

President Broaddus.

I have already spoken.

I support your

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VICE CHAIRMAN MCDONOUGH.
CHAIRMAN GREENSPAN.
directive?

We have heard from everybody.

Shall we vote?

Would you read the

MR. BERNARD. I am reading from page 26 in the Bluebook:
"In
the implementation of policy for the immediate future, the Committee
seeks to increase somewhat the existing degree of pressure on reserve
positions, taking account of a possible increase in the discount rate.
In the context of the Committee's long-run objectives for price
stability and sustainable economic growth, and giving careful
consideration to economic, financial, and monetary developments,
somewhat greater reserve restraint or somewhat lesser reserve
restraint would be acceptable in the intermeeting period. The
contemplated reserve conditions are expected to be consistent with
moderate growth in M2 and M3 over coming months."
CHAIRMAN GREENSPAN.

Call the roll.

MR. BERNARD.
Chairman Greenspan
Vice Chairman McDonough
Governor Blinder
President Hoenig
Governor Kelley
Governor LaWare
Governor Lindsey
President Melzer
President Minehan
President Moskow
Governor Phillips
Governor Yellen

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

CHAIRMAN GREENSPAN. May I request a short recess while the
members of the Board of Governors go into the other room?
[Meeting recessed]
CHAIRMAN GREENSPAN. Before we go to lunch, I want to read,
in line with our discussion yesterday, the proposed press release on
the discount rate increase; the vote was 7 to zip. After the usual
listing of the Banks that already have proposed 50 basis point
increases, the operative language in this announcement would read as
follows: "Despite tentative signs of some moderation in growth,
economic activity has continued to advance at a substantial pace,
while resource utilization has risen further. In these circumstances,
the Federal Reserve views these actions as necessary to keep inflation
contained and thereby foster sustainable economic growth."
Unless
there are any objections to that, we will continue the meeting but
have lunch and turn the agenda over to Ted Truman to continue our
discussion of the Mexican situation.
[Meeting recessed]
CHAIRMAN GREENSPAN. With regard to our disclosure policies,
I believe I said yesterday, but I may not have, that we probably would
issue a short press release tommorrow or Friday. Did I say that--does
anybody remember?

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MR. COYNE.

No, you did not.

CHAIRMAN GREENSPAN. Does anybody have any objection to doing
that? The alternative would be to wait until the minutes are released
in about eight weeks.
MR. LAWARE.

I just object to doing it at all!

CHAIRMAN GREENSPAN. Your view is appropriately registered!
Ted Truman, whenever you are ready.
MR. TRUMAN. Mr. Chairman, I am very conscious of the fact
that the members have not had their lunch yet! Obviously, if any of
you have further questions about what we discussed yesterday
afternoon, I will be glad to try to answer them. Let me preface that
by saying that there probably will be some questions for which my
answers will have to be less than perfect. But I would like to try to
answer any that you have and either stop there, Mr. Chairman, or move
on to the two proposals that I mentioned yesterday. I am at your
disposal, including whether you want me to cover the proposals
individually or together.
CHAIRMAN GREENSPAN.

Governor Lindsey is first.

MR. LINDSEY. I have two questions. The first has to do with
the responsibility that we might have to monitor the agreement.
It is
widely believed on Capitol Hill that the reason to vote for this is
that the Federal Reserve will be monitoring Mexican monetary policy.
In addition, the IMF released a statement yesterday saying that the
Federal Reserve along with the IMF will monitor developments closely
during the next six months. Would you tell us what our responsibilities are to monitor an agreement that has not been reached yet and
whose terms we don't know?
MR. TRUMAN. I will do the best that I can! On the first
part of your question, the legislation that was going to be proposed
but which is now dead made reference to the Federal Reserve in several
respects. I skipped over that yesterday afternoon because those
provisions were no longer relevant, having been overtaken by events.
They related basically to Mexico's monetary policy and the widespread
view on Capitol Hill that it is the source of Mexico's problem. Some
would say it is the exclusive source of Mexico's problem. We were
mentioned in the legislation in terms of a requirement that the Bank
of Mexico provide us with data and information on their policies. We
also were mentioned in connection with the preparation of various
quarterly or semi-annual reports regarding the progress of the program
that the Secretary of the Treasury, in consultation with us and other
relevant government agencies, was to submit to Congress. Since there
is no longer any legislation, that in some sense is not relevant,
though I would imagine that we will have to provide some reports to
Congress, if not by formal mandate at least in connection with
oversight hearings.
As for the statement in the IMF Managing Director's press
release yesterday, I confess that it was somewhat of a surprise to me
since Bill McDonough and I had been consulted and we thought it had
been removed. When I got back to my office yesterday evening and saw
it in the materials that I had handed out to you, it was a surprise to

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me. I checked on this and apparently the reason it was in there is
not unrelated to the first question-MR. LINDSEY.

Right.

MR. TRUMAN. Our good friends at the Treasury apparently felt
that the statement was needed for two reasons. Now, I am interpreting
their motives or putting forth hypotheses about their motives because
I don't know for sure.
The first was to add to the credibility, if
that's the right word, of this revised proposal on Capitol Hill by
continuing to assure certain members of Congress that we would be
involved in the process. Secondly, they felt that the process would
be somewhat less formal than would have been the case under the
legislative approach, and therefore they apparently wanted to signal
in the IMF's press release that we--we the United States and we the
Federal Reserve in particular--would be involved in the normal
monitoring, if I can put it that way, and that the IMF would do the
managing.

MR. LINDSEY.
made for us?

Do we know what other commitments they have

MR. TRUMAN. I'm not sure what level of commitment this is,
but I am reasonably confident that there are no big surprises.
MR. LINDSEY.
surprises?

You are confident there are not a lot of big

MR. TRUMAN. One of the reasons why I held forth quite as
much as I did yesterday was to try to convey to the Committee in five
pages as much information about this process and the substance as I
could without going into every eddy and turn that this matter has
taken over the last four weeks. I tried to outline the thrust of the
policy issues and procedures as I understood them.

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-119-

MR. LINDSEY. There was supposed to be a letter to Senator
Dole, I believe today, outlining the conditions that we were going to
place on Mexican economic policy. Do you have any idea what those
conditions are at this point?
You will have a
MR. TRUMAN. The conditions essentially are:
tight fiscal policy; you will have a tight monetary policy; you will
avoid exchange restrictions and those type of "thou shalt not"
restrictions. There will be nothing quantitative in the conditions,
which is one of the frustrations, as the Chairman testified yesterday.
There is a desire on the part of some to say, for example, that the
objective of this policy is to drive the peso exchange rate back to
3.5 per dollar. There are a number of members of Congress, as you
probably are very much aware, who say that that should be the sole
objective of the policy. First of all, I don't think that is what the
United States Treasury has in mind. Although some people on this
Committee may think that, I do not believe that is a majority view
more generally. So, the lack of quantitative parameters in these
restrictions is one of the reasons why certain members of Congress are
concerned.
MR. LINDSEY.

MR. TRUMAN.

With great difficulty!

MR. LINDSEY. Okay. But, believe me, in the minds of the
members of Congress we are locked in; we are the ones who are to
uphold this agreement even though we have not agreed to it.
MR. TRUMAN. I would argue that we are locked in anyhow.
Even if we are not formally locked in, we would be in effect because,
for a variety of reasons we have been very much involved--especially
over the last couple of years and certainly in recent months--in the
particulars of monetary policy and the financial market operations of
the Bank of Mexico. It is not just the Federal Reserve Board and the
Federal Reserve Bank of New York; it is also the Federal Reserve Bank
of Dallas, for example, which has developed very detailed policy
analyses and pronouncements relating to policy. We are involved and
we cannot say that this is "they" and this is "we."
And we do have an
agenda. Bill McDonough will tell you that one of the agenda items--if
I may put it that way, Bill--is to get the Mexican authorities to
relax their restrictions on the functioning of financial markets so
they will have a functioning foreign exchange market. A particular
element of that, I think partly at Bill McDonough's insistence, was
written into the letter of intent, which specifies that they would
relax those restrictions.
That is something we have an interest in
because it is the judgment of the experts that, until they have more
normal features in their foreign exchange market and as long as they
do not have an absolutely pegged exchange rate, they will have sizable
gyrations in their exchange rate. Such gyrations are not good for
them and not good for us.
If the rate moves 5 percent a day, there is

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just no way for anybody to hedge or cover themselves.
That is one
example. We are already involved in that. We are trying to help
them, through what might be called technical assistance, execute a
floating exchange rate policy.
MR. LINDSEY. There is a difference between technical
assistance and the word "monitor."
MR. TRUMAN.

Right.

I can only tell you what I know.

MR. BLINDER. As a short follow-up question:
Does this
letter to Senator Dole or to whomever say anything about tightening?
MR. TRUMAN.

I have not seen the letter.

MR. BLINDER. Do we think it says anything about the value of
the peso or the Mexican current account?
MR. TRUMAN. With regard to the peso, I think at most it says
that one of the objectives of the program would be some strengthening
of the peso. That was the language that was in the legislation that
was set aside yesterday. It would not have tied them down to 3.5 or
4.5 or 5.0 to the dollar. But I have to say that I have not seen the
letter.
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE. Ted, it may be because it was the end of the day
when you explained them, but I am still trying to understand the
proposed series of transactions and the counterparties to the
transactions. At the present time we have a $4-1/2 billion swap line
directly with Mexico?
MR. TRUMAN.

With the Bank of Mexico, right.

MR. LAWARE. And we are being asked to increase that direct
participation to $6 billion--that is what it says here. Those
transactions will all be directly with the Bank of Mexico. Are they
included in the guarantee or the assurance of repayment from the
Treasury?
It is not actually from the Treasury but from the ESF?
MR. TRUMAN.

Yes, from the ESF.

MR. LAWARE. Okay. Is the ESF backed by the full faith and
credit of the U.S. government?
MR. TRUMAN. I can't give you a legal opinion. The ESF is an
entity of the United States government. If it made a commitment to us
that in some sense it could not cover out of its own funds, I do not
know whether it would have an automatic draw on other United States
government funds. What I can tell you is the following, and this may
be helpful:
The ESF will have $20 billion in the sense that it is
expected we will give it to them when or if we do the warehousing. So
that $20 billion program includes $6 billion covering our swaps and
$14 billion of their other funds.
MR. LAWARE. You are jumping ahead of me now. I am just
trying to understand the series of transactions here and who is behind

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what. One statement that was made yesterday was that if the ESF did
not have the cash or other exchange facilities to take us out of these
arrangements, they might give us a note. Would a note of the ESF be a
legal investment for the Federal Reserve?
MR. TRUMAN.

I don't think that is what is contemplated.

MR. LAWARE. I'm sure it is not contemplated; nobody
contemplates going broke, either.
MR. TRUMAN. But I don't think that's a realistic possibility
because the Treasury knows that it has to have $6 billion set aside to
take us out 12 months later.
MR. LAWARE. I am stress testing the system, a good risk
[Laughter]
The second part of this transaction
management technique!
is a warehousing arrangement that I think was characterized last
evening as technically a swap. We would take marks and yen out of the
ESF in return for dollars. The ESF would then use the dollars to
provide liquidity to the Mexicans. Is that correct? Does this
reassurance of payment include taking us out of whatever warehousing
we do for the ESF? And what is the time limit on that?
CHAIRMAN GREENSPAN. It is a swap with a fixed forward rate
so that there is no market risk.
MR. LAWARE. I understand that, but what I am trying to ask
is whether this same take-out applies to the warehousing arrangement
as it does to our swaps with Mexico?
MR. TRUMAN. Warehousing is a mechanism that removes the
foreign exchange from the ESF's balance sheet. As the ESF needs the
foreign exchange or as they acquire dollars or otherwise have dollars,
they would unwind the warehousing in the same manner they unwound the
$9 billion of foreign exchange that they warehoused with us in the
late '80s and early '90s.
MR. LAWARE. Then, if the length of this agreement could go
out 10 years, does that mean that this warehousing arrangement could
go 10 years?
MR. TRUMAN.

In principle, yes.

MR. LAWARE.

Thank you.

CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. In the material that was given to us last night
there are statements about--I don't know if they apply to the $20
billion--the issuance of guarantees. What are they?
MR. TRUMAN. An operation the ESF may engage in would be one
that the proposed legislation had contemplated authorizing. The ESF
may issue a guarantee to the Government of Mexico allowing it to float
securities backed by the U.S. government in the international capital
markets.

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-122-

MR. HOENIG.

Would that be constrained by the total of $20

MR. TRUMAN.

Yes.

MR. HOENIG.

So the ESF could only advance or guarantee that

billion?

amount?
MR. TRUMAN. Or $14 billion as I said in my answer to
Governor LaWare. The $20 billion includes $6 billion to take us out;
$14 billion is for them to do these other things.
MR. HOENIG. A follow-up to that:
Is it anticipated that we
would not have to advance the full amount--our $6 billion or the total
of $20 billion--but that that amount is the maximum we would make
available? In other words, are we announcing this amount so that the
markets will feel more comfortable and will come in, and hopefully
that will keep us from having to go in with the maximum of $20
billion?
Or is it assumed that we are going in for the full $20
billion?
MR. TRUMAN. Certainly, it is not assumed that we will go in
for the whole $20 billion. My personal judgment is that one also
should not assume that we would stop substantially shy of that.
I
would be misleading the Committee, at least in terms of my own thought
processes, if I left the impression that the amount would be only a
couple more billion dollars beyond where we and the Treasury are
today, collectively.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. A couple of questions, Ted. On the first page
on the swap arrangement, item number 5 says the Treasury would provide
assurance of repayment. That really should read the ESF if I
understood you correctly?
MR. TRUMAN.
MR. MELZER.
mean the ESF?

Well, Treasury is the ultimate-From a credit point of view it is not.

But you

MR. TRUMAN. Yes, but I think in fact what the Committee
wants--this has not been written because I didn't want to put it in
writing until after we had heard the Committee's discussion--is a
commitment from the Secretary of the Treasury to do whatever is
necessary in order to repay the Federal Reserve. I don't want to try
to prejudge or anticipate the way in which that could be done. The
ESF can get funds elsewhere. For example, one way the Treasury paid
us off in the 1960s--took us out of exactly this type of arrangement-was that the general fund of the Treasury drew deutschemarks on the
International Monetary Fund. It then advanced those deutschemarks to
the ESF which the ESF used in turn to pay us off. So, I do not want
to preclude the possibility that the Secretary of the Treasury in
exercising his responsibilities would include other ways of paying us
than just out of the $20 billion. This is notwithstanding my answer
to Governor LaWare's question that their current thinking is that
their budget of $20 billion includes $6 billion that is needed to take
us out.

1/31-2/1/95

CHAIRMAN GREENSPAN.
there is one, of the ESF?

-123-

Who's the chief executive officer, if

MR. TRUMAN. The Secretary of the Treasury--well, really the
President of the United States.
CHAIRMAN GREENSPAN.
the Chief Executive.

The President of the United States is

MR. TRUMAN. My reading of the statute is that the funds of
the ESF are to be used by the Secretary of the Treasury with the
approval of the President. The ESF is under the exclusive control of
the Secretary of the Treasury.
CHAIRMAN GREENSPAN. It is relevant to your question as to
where the legal authorities lie.
MR. MELZER. I endorse what you are saying. We should get as
much as we can in terms of assuring our sources of repayment. I would
think in a narrow legal sense the credit we are looking at probably is
the ESF and not the Treasury. Otherwise, we get into questions, if it
is a guaranteed obligation, about our extending credit to the
Treasury.
MR. TRUMAN. I agree, but either way, whether narrowly or
broadly construed, the commitment would come from the Secretary of the
Treasury because he has the authority, subject to the approval of the
President, to do this.
MR. MELZER. There is no mention in here of the oil payments
that you described yesterday.
MR. TRUMAN. My way of thinking about this, but that again is
something one could debate, is that in some sense our backstop is the
Treasury. How they backstop themselves is their business.
MR. MELZER. So, if this oil payments backup got set up, that
is not really an issue for us?
MR. TRUMAN. Right. The Treasury has said they will ask for
oil to back up their loans to Mexico, which would include the
operations that they may take over from us.
MR. MELZER. But under this arrangement that becomes their
business and not ours, and the swap is in effect an unsecured swap
with a put to the Treasury or a put to the ESF?
MR. TRUMAN. You could do it either way, but I think it is
probably cleaner to do it as I explained. If they take over our
obligation to the Bank of Mexico, the funds from the oil facility
would first come to them.
MR. FISHER. As fiscal agent it will be my problem to deal
with their oil accounts and all that, but that is changing our
participation entirely to that of just being the Treasury's agent.
The New York Fed will still be used, but it is not the System's
exposure.

1/31-2/1/95

MR. TRUMAN.

-124-

The oil proceeds would flow from that account.

MR. MELZER. Under that arrangement, what is locked up at the
New York Fed now in effect gets released?
So, for us that is not an
issue?
MR. TRUMAN. Let me be clear. Nothing can be locked up in
the New York Fed. The only point at which something can be taken from
the New York Fed is--.
Oh, do you mean locked up in the sense we were
discussing last night?
MR. MELZER.

Yes.

SPEAKER(?).

I think Tom meant locked up oil money.

MR. TRUMAN.

Yes.

MR. MELZER. Okay.
about the warehousing.
MR. TRUMAN.
going through this.

Let me ask a couple of quick questions

There are a couple of points I did want to make

MR. MELZER. Are we still on the first item?
was out of the room when you started.
VICE CHAIRMAN MCDONOUGH.

I'm sorry.

I

He was on background from last

night.
MR. TRUMAN. Yes, on general questions and now we are going
to go to the specifics. Mr. Chairman, do you want me to say something
about the specifics for both or for each separately?
CHAIRMAN GREENSPAN.

Go ahead on both.

MR. TRUMAN. I just want to amplify a few points on the swap
arrangement first. Basically, the first point on the piece of paper I
handed out says that we would have essentially two swap arrangements:
One would be the regular $3 billion swap arrangement; the other would
be a special swap arrangement. The Bank of Mexico would be able to
draw on those arrangements for 12 months as of yesterday. Each
drawing could be outstanding for 12 months.
The next point says that
the absolute outside time limit for final repayment either from the
As the Bank of
Mexicans or the Treasury would be January 31, 1997.
Mexico did repay, however, the size of the special line would be
reduced permanently. If after rising above $3 billion the drawings
got down below the $3 billion mark, they would go back into the
regular swap line, which would require a separate decision to be
activated.
We talked about the Treasury take-out. There are a number of
ways in which that could be done. One thing I did not mention--it's
something we would have to work out--is the question of how, going
forward, the drawings would be shared between the Federal Reserve and
the Treasury. Currently, we are operating under the December 30th
I would assume that going
framework where everything is done 50/50.
forward the sharing would be approximately two to one. Again,
however, I think one needs to be realistic. If the ESF were to get

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involved, for example, in making a $5 billion loan guarantee, which
would take some time to set up, there might be some adjustments as we
went along. But ultimately as the amount got toward the maximum level
we would be moving to that two-to-one proportion.
The warehousing proposal is probably somewhat clearer. The
proposal is to raise the amount from the existing $5 billion to $20
billion. This is clearly a rather exceptional operation, and the
rationale is to facilitate this program. The third point is that this
excludes the warehousing of pesos. That, it seems to me, is required
in terms of the overall logic of this arrangement. I would argue that
that is a matter we probably ought to keep internal rather than put in
the minutes at this stage. Finally, although I would say that this
arrangement should be subject to annual review, I think in answer to
Governor LaWare's question and someone else's is that in principle
some of this warehousing might be outstanding, in the limit, for 10
years.
MR. PARRY.

What is the size of the ESF?

MR. TRUMAN. The usable funds in the ESF today, counting the
foreign exchange as usable, amount to roughly $25 billion.
MR. PARRY.

Can you say how it is broken down?

MR. TRUMAN. About $5 billion is invested in Treasury
securities and the balance is roughly equally divided between marks
and yen. I think they have slightly more yen than marks.
MR. PARRY.

Thank you.

MR. BOEHNE. Is any of it obligated in any way beyond what we
are talking about with Mexico?
MR. TRUMAN. It is obligated only in the sense that they have
one other swap arrangement with the Bundesbank. So, in some sense if
they wanted to advance dollars to the Bundesbank they would use some
of the dollars for that. But nothing is obligated in a current
commitment. One of the Treasury's concerns is that this operation
does severely limit what the ESF could do over a fairly extended
period of time. It preserves the ability of the ESF to use its
foreign exchange holdings for exchange operations, but that is
probably about all it does.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. Ted, I have two questions. One has
a preamble. Since we are an independent central bank dealing with the
Executive Branch and because we are a bank, the analogy would be that
we are a bank dealing with an affiliated company--something that we
take very seriously as regards the way it is done by the banks we
supervise. Is it safe to assume that we will have very, very clear
documentation of both the warehousing facility and the take-out of the
swap line?
MR. TRUMAN. Certainly. We intend to have a letter from the
Secretary of the Treasury to the Chairman of the Federal Reserve on
that matter.

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VICE CHAIRMAN MCDONOUGH. The second question: If a bank says
to a customer, we are making a line of credit available to you but as
soon as you repay any of it, it goes away, that discourages the
customer from repaying until the last minute. So I am not sure that
that particular piece described on the first page, paragraph 4, is
really in our interest, and you might want to rethink that.
MR. TRUMAN. There are two sides to that. Peter and I
discussed it this morning. I decided that between the two choices the
Committee would be happier saying that once the drawings got repaid
the total would get subtracted and a separate decision would have to
be made about putting the funds out again. If I may piggyback a bit
on the question Governor Lindsey asked earlier and the fact that these
swap drawings roll over every three months, if one found Mexico's
reserves growing rapidly we would have the scope to encourage them to
repay. We could not require them to repay but we could use moral
suasion in the effort to secure early repayment. That might deal
partly with your problem.
SPEAKER(?). But in fact we have always structured each
rollover as subject to mutual consent.
MR. TRUMAN. We are committing ourselves in advance to
provide that consent.
SPEAKER(?). But to whom are we committing? Are we
committing to the Treasury or we are committing to the Mexicans? I
think the whole thing does hang on the difference there. We can agree
with the Treasury and within the Committee as to what the rules are,
but vis-a-vis our relations with the Mexicans and how we rewrite the
swap agreements, etc.-MR. TRUMAN. The rewrite probably would say the maturity is
three months with renewal-SPEAKER(?). Three months and we have to agree to renew.
that may be the discipline which squares the circle.

So,

MR. TRUMAN. However, I doubt that we'd want to get to the
situation where we use it. What we would end up doing is using moral
suasion at the end of three months rather than whatever the
alternative is-SPEAKER(?).

"Immoral" suasion!

MR. TRUMAN.

--actually calling the loan.

MS. MINEHAN. May I just ask a question on mechanics? They
have the right to draw for a period of up to 12 months. So let's say
they draw on January 30th of 1996; that drawing could be outstanding
three months and could be rolled over three times. Is the agreement
with the Treasury that no matter how new the drawing is we get taken
out a year from now or is the agreement with the Treasury that we get
taken out of any drawing that is 12 months or older?
MR. TRUMAN.

The latter.

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MS. MINEHAN. Then in this hypothetical case we would not be
repaid until January 31, 1997?
MR. TRUMAN.

By 1997, yes.

VICE CHAIRMAN MCDONOUGH.

Two years from now.

MS. MINEHAN. Okay. Second question:
On the monitoring
side, going back to March of last year--I think it was March when we
first expanded the swap line under the NAFTA-related agreement--at
that time Mexico had something like $25 billion in reserves and
everybody was pretty satisfied that repayment was not an issue. From
March to December most of those reserves were lost. What different
kinds of things will go on, going forward, to prevent that from
happening again?
MR. TRUMAN.

That is the other side of the monitoring

question.
MS. MINEHAN.
MR. TRUMAN.

Yes.

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MS. MINEHAN.
Treasury or the IMF?

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Would we have a firmer handle on this than the

MR. TRUMAN. We would have a responsibility, and the Treasury
certainly feels it has a responsibility, because the Treasury will
have a lot vested in the success of this. That is what I meant when I
said in answer to Governor Lindsey's question that I think we have no
choice but to be involved in the monitoring--whether our role is put
up in neon lights by the International Monetary Fund or not. If I may
make a personal statement on this matter, having lived through the
devaluations of 1976 and 1982 and now this one, I have a personal
stake in insuring that this does not happen this way again. That is
all I can say as far as I am concerned; that is a personal remark
rather than an institutional remark.
MS. MINEHAN. And one final question on the $40 billion in
guarantees:
I think I understood how those would be used--essentially
to lower the interest rate on new tesobono securities by replacing the
Mexican guarantee with that of the U.S. government.
MR. TRUMAN. It would not have been linked. Basically what
would have happened under the previous arrangement is that the Bank of
Mexico would have gone out with the U.S. government guarantee and
raised, for example, $5 billion in the international capital markets.
They would have used those funds to meet the pressure on the exchange
rate that would be associated with the holders of tesobonos, which are
paid off in pesos, not wanting to roll them over but rather wanting to
take the pesos and buy dollars.
MS. MINEHAN. Right. Are these drawings basically going to
be used in the same way except that the international capital markets
do not get involved? They just use the cash?
MR. TRUMAN. As long as they do not use the guarantee with
it. What would be necessary for the Treasury, and I would assume we'd
be somewhat involved in an advisory role, would be to require the
Mexicans, as under the contemplated legislation, to come up with a
financial plan. That financial plan presumably would say: These are
the sources of funds we are going to have over the coming short period
of time; for some longer period of time, this is going to be our
strategy, which includes what we do with monetary policy. I don't
know what Peter thinks, but I personally thought it was a mistake
yesterday for them essentially to cancel the tesobono auction because

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the rates were so high and they had just been bailed out by President
Clinton. I may be wrong about that.
MR. FISHER. I can add something that at least supports what
Ted is saying, and I am being quite candid about some of the problems
that Mexico has going forward, which you are both talking about.
Mexico has an independent central bank. But, going back to the issue
Ted raised about Bill's views and mine on the need to get their
markets functioning, they do not have much of a secondary market. The
signaling mechanism is through the control of the auction process by
the Treasury, and that is the bigger problem. In the long run, the
Bank of Mexico is controlling the monetary base. In any one week it
is the Hacienda that is controlling the signaling process. And that
was what happened in November; that is what happened yesterday; and
that is a real problem going forward. That is partly why I feel so
strongly that if they are going the route of the float, then they have
to take steps to liquify and get better intermediation in their
secondary market. It is one of the reasons.

MR. TRUMAN.

MS. MINEHAN. You mentioned the financial plan. I think you
tied it into the legislation. Is that going to be tied into this
agreement, too?
MR. TRUMAN. Yes. The Treasury will insist that in order to
implement this program, an agreement or a series of agreements will
have to be worked out with the Mexicans about what they are going to
do. And I am using the term "financial plan" to refer to that.
The
Ttreasury needs to think about these things before it dribbles $14
billion out the door.

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CHAIRMAN GREENSPAN. Can I ask for a short recess?
consult with our utility hitter.
MR. TRUMAN.

I have to

On another aspect of this problem!

CHAIRMAN GREENSPAN.

This will take just a couple of minutes.

[Meeting recessed]
CHAIRMAN GREENSPAN.

Mr. Truman.

MR. TRUMAN. My expectation is that we will get a commitment
from the Secretary of the Treasury to do what is required to take this
loan off our books after 12 months. Exactly how we are going to
specify that, I do not know. It is my personal view that having a 52page legal document between the Federal Reserve and the Treasury on
these types of matters is not in our interest.
MR. JORDAN. I'm not sure how many pages are appropriate.
Tom Melzer used the term "put," but is the Treasury committing to a
legal obligation to take us out of this?
You used the word "take-out"
and I know what a take-out is. Is this a take-out or is it not a
take-out?
CHAIRMAN GREENSPAN. Yes, it is a take-out. The issue of
precisely how it will be constructed is something which our General
Counsel and their General Counsel will work on. The principle of the
agreement is that it is a take-out. Basically, the agreement is that
the Federal Reserve has zero credit risk and zero market risk; that is
the principle. How that is formulated and what documents are
exchanged to implement that is up to the lawyers, but it won't be
smoke and mirrors. I have no idea what they are going to do, and I
suspect that they may in fact run into the same questions that have
been raised with Ted about the ESF's legal authority for this, or who
owns that, or what happens here. As Tom Melzer says, we can't make a
direct loan to the Treasury; it is illegal. All of that will, I
assume, be resolved. What I will say to you is that the nature of the
handshake, if I can put it that way, is that we have zero credit risk
and zero market risk. It is a take-out; that is unambiguous.
MR. TRUMAN. I would like to make one other point on this.
President Melzer asked a question earlier about the oil mechanism.
Even I, with a reputation for exuberance, if that's the right word,
would not go so far as to give up the current arrangement that lies
behind our $4-1/2 billion swap line before being satisfied that we
have appropriate arrangements in place to convert all this into some
other form. Even I would not be so imprudent.
CHAIRMAN GREENSPAN.

President Moskow.

MR. MOSKOW. Ted, I would like to ask you to sort of step
back from this for a second. We have talked a lot about the details,
and the Chairman has just said that the principle involved is for the
Federal Reserve to have zero credit risk and zero market risk. What
are the risks to the Federal Reserve here? What kind of scenario
could you envision that could cause significant problems for us?

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MR. TRUMAN. My answer to that question would be that the
problems we are likely to have with this are least likely to be
It seems to me that there are essentially two risks. One
financial.
lies with what might go on in Mexico if the overall program does not
work. If the Mexican situation spirals out of control and we are
involved--we already are involved with the existing swap line but our
involvement could increase--we would get caught up in that situation
economically. It seems to me that the other principal risk, which may
or may not be related, is that this set of arrangements could come
under intense political scrutiny in this country regardless of what
goes on in Mexico. And I can well imagine that that kind of scrutiny
is something that many people within the Federal Reserve would prefer
to do without. I can say from my own experience that there are a
number of people on Capitol Hill who are involved in oversight on
these arrangements and are reassured by the fact that we are involved
in the process.
CHAIRMAN GREENSPAN. Ted, can I go a little further than
that? The response to your question might be that, as best we can
judge, the risks from this new agreement to the Federal Reserve from a
financial point of view are reduced because of the take-out issue.
The real risks relate to the issue that Larry Lindsey is raising and
implicitly what Ted is raising. The problem is the fact that we have
managed to build up a high degree of credibility. The difficulty is
that the Federal Reserve has now become the honest broker.
I have
just been invited to speak, for example, before the Democratic Senate
Caucus, not on Mexico but more or less on the world at large. The
Federal Reserve is presumed to be an honest nonpartisan broker, which
therefore means that suddenly everyone wants to drag us into the
middle of big problems. This is not the last time this is going to
happen. We could very easily eliminate that by following a misguided
monetary policy and making us all very controversial! But, as crucial
players in the American government, I frankly don't know how to get
around accepting this responsibility when we are being asked by the
Congress and the Administration to somehow oversee this operation,
which is a very fuzzy deal.
I was out of the room when Larry was
asking his questions, but I could figure out exactly where he was
going. When he finished, I probably could have continued asking
similar types of questions. This is where we have a problem. We do
not have a choice, as I see it, of saying we are not going to be
involved in this, but we do have a choice in terms of figuring out how
we are going to get involved. At the moment, I have not been
approached officially on any of this. The only call I have received
was from Mr. Camdessus this morning. I could not return his call
yesterday. He wanted to ask me whether his remark in his release
published yesterday was acceptable to us. I assumed that it had been
cleared. I thought it had been cleared by you, Bill, because he said
he did speak to you.
VICE CHAIRMAN MCDONOUGH.
spoke with Ted.

That was earlier; yesterday he

CHAIRMAN GREENSPAN. So I heard what was involved, but I was
asked only after the fact--as if it could be pulled back after a
public release. That is the sole official request that I have gotten
from anybody. I have heard a lot of rumors about all of this. Ted
tells me about the different initiatives that are going on and what
pieces of paper are being circulated. But nobody has approached us

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and asked us to get involved in this.
It is a very vague thing; it is
like asking me to umpire the new game of zipswitch, and I would say,
what?
[Laughter]
I don't know what the rules are.
I don't know who
the players are.
I don't know what is going on, but am I to be the
umpire? And they say, sure, why not?
[Laughter]
MR. LINDSEY. Even though you have not been asked, it has
been reported that you have agreed!
CHAIRMAN GREENSPAN.
MR. LINDSEY.

Agreed to what?

To umpire zipswitch.

[Laughter]

CHAIRMAN GREENSPAN. Terrific! In answer to your question,
Ted is exactly right. The risk is not a financial risk that we have
here, but we do have a risk. The risk is essentially political--not
in the sense that we are subjected to political pressures. It is in
the fact that people are trying to get us to do things that I suspect
cannot possibly be done effectively, efficiently, or otherwise. That
is a problem that we are going to have to confront. I am not sure
exactly how we are going to come out of this, or how we will handle
it.
But there is where I think our problem is.
Anyone who has some
great ideas is welcome to throw them in, especially if he or she can
explain to me what the game of zipswitch is all about!
MR. MOSKOW. If I could just follow up on this for a second.
I do not know the game of zipswitch. I think there clearly is a very
significant risk. The other risk that Ted mentioned first is that the
overall program in Mexico will not work.
CHAIRMAN GREENSPAN.
economic problem.
MR. MOSKOW.

If it does not work, that is a major

Of course.

CHAIRMAN GREENSPAN.

But it does not create more credit risk

for us.
MR. MOSKOW. No, but it has the potential for drawing us in
further down the road.
CHAIRMAN GREENSPAN. It could conceivably. That would be
related to how we position ourselves with respect to this monitoring
issue. The crucial thing that we have to do, no matter how we get
involved in this, is to review Mexico's forthcoming plan. We were
fully aware when this began that we were dealing with a serious
problem. We knew that if we did not get involved, there were going to
be some very serious negative responses and I am not sure how this
whole thing would ultimately have come out. But we also knew that
there is a slippery slope here. The question is, did we realistically
have the option of saying, "this is a slippery-slope issue and we
The answer is that it would have
would prefer not to be involved."
been 'irresponsible for us not to get involved. The reason I went up
to the Hill at one point to speak on this issue to two-thirds of the
Senate and about one-third of the House, all in one room, is that if I
did not do it, it would not get done. That's because no one there had
any knowledge of this except people in Treasury who are not--

1/31-2/1/95

SPEAKER(?).
political party.

-133-

Have no standing or are from a different

CHAIRMAN GREENSPAN. It is not a question of their standing
or even being in a different political party;
As a consequence
of that, what happened was that the Congressional leadership and the
Secretary of the Treasury told me I had to go up to the Hill and talk
about this.
Was I going to say that I had to remain Simon-pure and
not be involved with this? That would have been utterly irresponsible
because in a certain respect we are the only institution in town that
can credibly be involved in this sort of thing. We were not certain
where it was all heading, but we knew that once we took the first
step, there would be a lot of other steps down the road. How we could
orchestrate that was not terribly clear, as indeed it is not clear
now. I think we are going to have some very tricky moments before
this gets resolved. If the Mexicans work this out, if the crisis gets
resolved and everything simmers down, all these conversations are
moot. The issue will just go away, the loans will be paid off, the
funding facilities will be shut down, and we will go back to square
one.
But there is a good probability that this financing
assistance will not work, which means that at some point it will be
cut off. I think the probability that Mexico will go through
everyone's money and then default is zero.
It is not going to happen
that way. The really tricky problems are going to be how to work our
way out of this if the program clearly is not working. We can't
discuss that because, if we did, then we can be sure that the program
would not work and we would have very serious problems. So, we have
all of these issues which are quite risky for this central bank.
Because of the take-out, the aspect I am least concerned about is the
financial risk. We are okay there. That was not the case earlier
when, as you all know, I was very much concerned about the amount of
collateral that was available from Mexican oil proceeds or--I am
sorry, Ted, about the choice of words--the "assured means of
repayment" that we had. After a certain point, I think the oil
guarantee is not a credible, or an assured, means of payment. But now
that issue is moot because we have a Treasury take-out. What we now
face is a very different set of problems that are going to be fairly
difficult to deal with.
VICE CHAIRMAN MCDONOUGH. Mr. Chairman, I think you have
described the situation very accurately. The credit risk to the
Federal Reserve, as I view it, has been removed. Certainly, Virgil
and our other legal colleagues can draft the documentation to be sure
that it is removed and stays removed. I believe very firmly that you
had no choice but to get involved. Since you got involved, the
Federal Reserve got involved, appropriately in my view, even though it
is uncomfortable for you and all the rest of us.
Essentially, we are
in a situation where our involvement has to be maintained and where we
have to do the best we can to ensure that the terms for our
involvement are done in the best possible way. This means some very
tough conditionality, but as for the two items for which we need
approval, I think we may have reached the point where a motion would
be appropriate for both of them.

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CHAIRMAN GREENSPAN.
still has a few questions.

Before we get there, I think Tom Melzer

MR. MELZER. Let me just ask a couple of quick questions on
the financial side because I think it could be helpful as you work out
these arrangements to be sure we all understand. As I understand it,
of the $20 billion in the warehouse facility, the most that would be
advanced to the Mexicans would be $14 billion. Then $6 billion-MR. TRUMAN.

That is one way of thinking about it.

MR. MELZER. And $6 billion would be retained in the ESF.
When it is time to take our swap out, we in effect warehouse that
remaining $6 billion and pay ourselves off.
MR. TRUMAN.

That would be one scenario.

MR. MELZER. It seems to me that we have to have some
requirement that the ESF retains good collateral of $6 billion so that
transaction can get effected and we can get taken out. I am sure you
will take care of that.
I don't know whether it makes any sense to
establish any expectations. I know we have annual reviews by this
Committee of the warehousing facility. Does it do any good to
establish any expectations up front that we would not expect this
warehousing to be outstanding longer than 10 years, for example? And
what sort of expectations should we set with respect to the
possibility of doing additional warehousing operations, say, unrelated
to Mexico?
I think you said it before, but from my point of view this
pretty much exhausts whatever flexibility the ESF has, or perhaps
whatever we perceive we might warehouse for them. Never say never,
but the expectation ought to be that there is not another $20 billion
behind this one if they want to intervene in exchange markets.
MR. TRUMAN.

That is one of the reasons why we are bringing

it up.
CHAIRMAN GREENSPAN. Can I just say something quickly?
If
they want to do that, they have to get authorization for new
appropriated funds from the Congress. That has nothing to do with us.
MR. MELZER. I was talking about expectations with respect to
our willingness to warehouse anything beyond this $20 billion.
CHAIRMAN GREENSPAN.
MR. MELZER.
used up its assets.

You mean in the future?

I see what you are saying; the ESF will have

CHAIRMAN GREENSPAN.

Yes, there would be nothing left.

MR. TRUMAN. Well, following up on yesterday's discussion, I
want to add two separate thoughts. One, as far as warehousing pesos,
we have said no. I think that is important to the consistency of this
operation. As a technical matter, the ESF will still have some
limited capacity to acquire foreign exchange, more yen or DM, in the
market. This is not a problem that I would worry about right now, but
conceivably they might do that at some point. They might say we have
bought another $5 billion worth of yen and want to warehouse those

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with the Federal Reserve, too. Whether the ESF can do that would
require a separate decision by the Federal Open Market Committee. One
of the reasons that I, at least, would favor putting in place the big
number, which is matched with other big numbers in terms of the
program itself and with their existing holdings of foreign exchange,
is that it would make what we are doing much clearer. The slippery
slope of doing things a billion here and a billion there is to some
extent avoided.
On the question of review, I would think it depends on the
appetite of the Committee. Peter will be regularly reviewing foreign
exchange market developments with the Committee, and Mexico for better
or for worse is inevitably going to be part of that for some months
and perhaps a couple of years. So, I think there will be a lot of
opportunity for the Committee to exercise its oversight of this. To
the extent that disbursements mount up quickly, there will be a chance
in March to find out what has been going on. The staff will make an
effort--as we have tried to do in the past though maybe not always
successfully--to keep the Committee as informed as we can about
ongoing events and to minimize the number of surprises. There
probably won't be any surprises because we have a perfect crystal
ball!
MR. MELZER. One last question and then I have just a couple
of comments that I would like to make. This has to with the excess
collateral in terms of backing U.S. currency. I recall that when we
warehoused a lot of foreign currencies for the ESF before, we got into
a problem with fairly narrow excess collateral.
If we do this $20
billion, we will then in effect substitute these foreign currency
holdings for domestic securities. And when we have to sell domestic
securities, we will have less of what is viewed as acceptable
collateral to back the currency. If we exceed those limits, we have
to announce to Congress that we are backing our Federal reserve notes
with other types of assets. What is the likelihood of having to make
that sort of announcement?
MR. KOHN. I do not know what the current situation is. My
guess is--and it is a wild guess--that if the warehousing got up to
$20 billion, we could be in that situation.
MR. TRUMAN.
to Congress. We have
once said to Congress
last to collateralize

I don't think we have an obligation to announce
an obligation in the sense that Governor Partee
that we would use our foreign exchange holdings
our Federal Reserve notes.

CHAIRMAN GREENSPAN. If we get to that point, we can always
do an off-market swap with the Japanese or the Germans.
MR. MELZER. I am just trying to understand all the
implications of this.
CHAIRMAN GREENSPAN. There are balance sheets implications.
The last time it happened was five years ago, as I recall.
MR. MELZER. Yes, it was a seasonal thing, but there was a
time of the year when we got very close to exhausting our regular note
collateral--I think when we had $9 billion of warehousing on our
balance sheet.

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MR. TRUMAN. What we do not know is whether the scale of
things has increased enough since then combined with the fact that
reserve requirements have come down so that we would have the room.
MR. KOHN. Brian Madigan said he thought the projection of
free collateral was $8 to $10 billion over some indefinite period.
MR. MELZER. In terms of my own feelings about this, Alan,
while I respect your point of view on this, I really have not heard
anyone make a case that what we are facing here is some sort of
financial crisis in the United States that has systemic implications.
I think what we are really talking about--when I say we, I am saying
that broadly--is providing long-term financing to
another country that has mismanaged its financial affairs. If
the Treasury wants to do that, that is their prerogative. But it is
not appropriate for a central bank to participate directly or
indirectly in such arrangements, and I think we are setting a very bad
precedent. Now, I know that technically the way this appears on the
surface is that the Treasury is doing it and we are facilitating it.
But I think the perception is going to be that we are very much a full
partner in this.
The other thing that concerns me is the use of warehousing
arrangements. As we all know, we have been criticized in the past
when warehousing arrangements were used to facilitate "normal"
transactions whose purpose was to stabilize dollar exchange markets.
What we are talking about here is a totally different type of
facilitation, much larger-sized. This gets back to the second risk
that came out in response to Michael Moskow's question. I suspect
that may subject us to even more criticism inasmuch as Congress and
the American people apparently strongly oppose extending credit to
Mexico. In effect, one could argue that we would be participating in
an effort to subvert that will of the public, if you will.
I do not
want to be too dramatic in stating that. This could cause a reevaluation of the institutional structure of the Fed in a very
fundamental and broad way.
CHAIRMAN GREENSPAN. I seriously doubt that, Tom. I am
really sensitive to the political system in this society. The dangers
politically at this stage and for the foreseeable future are not to
the Federal Reserve but to the Treasury. The Treasury, for political
reasons, is caught up in a lot of different things.
Republicans up on
the Hill look at the Federal Reserve as the good guy. I think this
issue of a majority on the Hill looking at us in another way is
missing the problem, which is exactly the opposite of what you are
saying. They look on us as the good guy and they are willing to be
supportive of the President and the Administration only if we are
involved. That is where our problem lies.
It is like the 800 pound
gorilla who loves you and grabs you. Thanks a lot!
[Laughter]
I
seriously doubt that the problem you are discussing is where our
vulnerability lies. I see that Larry Lindsey is shaking his head as I
am talking. I must say that I disagree with both of you.
MR. MELZER. I am not surprised to hear you say that because
obviously you would not have gotten involved if-CHAIRMAN GREENSPAN.
exactly.

I would not have gotten involved,

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MR. MELZER. I understand that and I think people can
disagree on these issues. I just felt it was important to say that.
CHAIRMAN GREENSPAN. I was just trying to say that, if I can
possibly talk you out of this concern, it is one that I think frankly
is really de minimis. If you want something to worry about, I have
lots of things that I would like you to worry about. This is not one
of them. President Hoenig.
MR. HOENIG. Mr. Chairman, I think my questions have been
answered. I have a general understanding of what is proposed here.
There are two aspects to this: One is to contain the immediate crisis
and the other is to assure that it does not recur in two years or
whenever. I am very unclear on the process to assure that it does not
recur, as you said that you are.
CHAIRMAN GREENSPAN.

You bet!

MR. HOENIG. In another sense, I think it is unprecedented
for us to come into this process with so much uncertainty. I will
defer to your judgment. This is important and must go forward. But I
have a lot of sympathy for what Tom is saying. I am uneasy about it.
If it weren't for the magnitude of this crisis and your involvement, I
would have grave reservations about doing this. I defer to your
judgment.
CHAIRMAN GREENSPAN. I am going to be the last to deny that
there are problems here. Let me say this, however. Those who
believed that the Mexican situation was containable, short of
something of this nature, did not have their fingers on the structure
of things as they were falling apart. One can argue quite credibly
that the fault is theirs. The problem is, to use another analogy,
that they are the house next door. If somebody there smokes, the
house catches on fire, and cinders going in our direction threaten to
burn our house down, can we say we are not going to help them put out
the fire? The answer is that we have no other choice. This crisis is
not of our making. I am fully convinced that if we had tried to stay
completely out of this and said that we would not get involved in any
way, this situation could not have been staunched; I am not sure that
it has been. From the point of view of the country as a whole, it
would have been irresponsible on our part not to be involved. When
your neighbor is lying in the street, screaming, you can just walk
over him and keep walking and not get involved, I grant you that. I
do not think we have that choice. Governor Blinder.
MR. BLINDER. I would like to endorse almost everything the
Chairman said and then ask two questions, one of which I think you
can't answer. And when you say you can't answer it, I am going to
have a very specific request, because I do agree with the Chairman.
First of all, I do not have any problem with what is on these two
pieces of paper. I don't think we should have any problem for many of
the reasons that were just stated. There is a third piece of paper
that is not here that says the Federal Reserve will monitor....and now
fill in the rest of the sentence. You can't answer right now what is
in that part of the sentence. My request is to get an answer to that
as soon as it is humanly possible.
CHAIRMAN GREENSPAN.

We are going to do that.

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MR. BLINDER. This is not a hostile question. I can imagine
your coming back with a list that I would be perfectly happy with and
not have the slightest bit of a problem. I can also imagine a list
that I would not be happy with.
CHAIRMAN GREENSPAN. We can have a situation where we are
required to oversee and enforce and where there is no way for us to
know what it is.
MR. BLINDER. Exactly. I would like to attach some urgency
to that request. Several of us were buzzing informally about that
around here. The longer it reverberates in the press--that the
Federal Reserve will do this or will do that--the worse it gets, if we
If we do want to do it, that is all perfectly
do not want to do it.
fine.
CHAIRMAN GREENSPAN.
MR. TRUMAN.

Let's find out what this is.

Let me give you a two-part answer.

MR. BLINDER. As a sidebar to the question, I would like to
know, and hopefully this could be known soon, when it says, "the
Federal Reserve will monitor" whether that means the Board of
Governors of the Federal Reserve, the Chairman of the Board of
Governors of the Federal Reserve, the Federal Open Market Committee,
or maybe some other choice. I can't imagine any other choice.
CHAIRMAN GREENSPAN. I think there are a lot of things we are
going to have to decide today or very quickly.
MR. BLINDER.

I really would like to know the answer to that.

CHAIRMAN GREENSPAN. The first thing I am planning to do
after this meeting is to address that question by talking to the
Treasury and others involved in the process.
MR. BLINDER. The second question--I guess this really is a
question--is just for information since we are at least peripherally
involved as an agent. Do we have any understanding of what the
putative strategy is?
Presumably, when someone goes into a deal like
this, there is some notion of a strategy. Of the $20 billion, $6
billion is our share and that is presumably usable by the Bank of
Mexico for exchange stabilization, if it so sees fit. Then there is
the $14 billion that could take the form of loan guarantees; it also
could also be used for exchange stabilization; it could be used for
long-term lending. Maybe I left something out, but those are the
three things on the Treasury sheet. The legislative plan was $40
billion and that was for loan guarantees.
MR. TRUMAN. On the legislative plan, there was still the
question of what the Mexicans were going to do with the money. I
think this is a question similar to the one that President Minehan was
asking earlier:
How are they going to use the money, whether the
funds are short-term or longer-term funds? That is where it seems to
me the financial plan that I referred to earlier comes in. And it is
related to the question about our involvement in the monitoring of the
economic policy side.
Indeed, the major rationale for our being
involved in the monitoring of the economic policy side is that without

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that involvement, we could advance them the money--whether it's for
the short term, medium term, or long term, and the money could easily
be frittered away. The two interact.
MR. BLINDER. That only bothers us directly if we pledge to
monitor something so that something does not happen. But the Treasury
is lending money, and for political reasons we are not. We have no
responsibility for monitoring; I don't think we have any business with
it. I can name eighty-seven things in U.S. trade policies that I
think are horrible, but those are political decisions that have
nothing to do with the Federal Reserve.
MR. TRUMAN.
MR. BLINDER.

Well, I can name eighty-seven, too.
You can name more than eighty-seven!

MR. TRUMAN. Still, even if those trade policies go wrong,
when they do go wrong, their impact on the Federal Reserve or the
If Mexico has economic and
financial system is relatively minor.
financial policies that go wrong for the next millenium, or more
immediately for the next two or three years, I think that will have a
major impact on the Federal Reserve, whether it is wearing its banksupervisory hat or its financial-system-stability hat, or its
macroeconomic-policy hat.
I think the Federal Reserve has to be
concerned about how the Mexican Treasury spends the money, one way or
the other. I would prefer that our concern not be put in neon lights,
but I think we have to be concerned.

CHAIRMAN GREENSPAN.
MR. TRUMAN.
I agree on your first
question that I do not have a answer. I will tell you one small
element of this, however--or give you my position. With respect to
the International Monetary Fund, we are in a somewhat similar
position, though on a slightly different scale, as we are relative to
the Congress. The International Monetary Fund got itself into this
situation essentially in December. They realized that they knew less
about what was going on in Mexico than we did. We knew a great deal
less than we wished we had known, even though we had devoted a
considerable amount of resources to this on a daily basis for at least
the last year. What the IMF does know is that Peter Fisher and his
colleagues as well as people here at the Board have much better
contacts and information about the day-to-day operations in Mexico
than the Fund has. That is for two reasons:
First of all, the Fund,
for better or worse, does not have a culture that is designed to
follow day-to-day developments in the individual economies of member
nations. Secondly, on the other side, the Mexicans are world
champions in terms of obfuscating about economic information while
simultaneously providing a lot of other information. Transparency of
the way economic policy is conducted in Mexico, including monetary
policy, is a very serious problem, and it is one that relates to the
comment earlier about the functioning of financial markets as well as
comments--what Governor Lindsey was asking about yesterday--concerning
the balance sheet of the Bank of Mexico from top to bottom.

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To extend Chairman Greenspan's analogy a step further--maybe
I am taking it a step back--once we have put the house fire out, we
want to build a more fire-proof house and we want to try to encourage
the resident of the house to stop smoking or at least to stop smoking
in bed. I think we have an interest in getting it done, not that we
are going to create a mistake-proof economic environment in Mexico any
more than we can create a mistake-proof economic environment in the
United States. We can hope that with some effort and a considerable
expenditure of Federal Reserve resources--I mean human resources and
budgetary resources in one sense--to fix things so that at least we
will not have these problems coming back.
Let me come back to another point on resources.
I share, for
all the reasons Governor Blinder has stated, the concerns about what
we will monitor and how we will monitor because this will have, among
other things, resource implications for the Federal Reserve System. I
want to know whether I am going to have to budget one man year or
forty-two man years to get this job done right. We need to know at
the minimum what we are going to be asked to do, and see whether it is
feasible to do it both in terms of resources and, as Governor Lindsey
and the Chairman have said, in terms of the intellectual feasibility.
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. Mr. Chairman, I had two points:
the big "P"
political point and the small "p" political point. First, I find
myself uncomfortable disagreeing with you. Pat Buchanan had a good
quote in The Wall Street Journal the other day. He was talking about
the collapse of the Mexican bailout bill. He said that this was the
first complete rout of the governing elite since the League of Nations
went down to defeat. Now, I was for the Mexican bailout.
If I had
been here in 1919, I probably would have been for the League of
Nations. So, I am on the side of the governing elite.
CHAIRMAN GREENSPAN. Pat Buchanan is with the governing
elite, too. What is he doing?
MR. LINDSEY. Well, he is running against us.
Our political
risk is not going to come from the chairmen and the senior members of
the current majority. Our political risk comes because people in the
country are damn mad. A bill that they opposed was defeated, and now
the governing elite, to use Pat Buchanan's phrase, has said in effect:
We are going to win anyway because we are going to go around all the
normal processes and pull money out of this little pot people never
knew even existed and use that money. Well, maybe everyone will
forget about it, but I don't think so.
I think that is where-CHAIRMAN GREENSPAN.
it does not work.

They will if it works and they won't if

MR. LINDSEY. If it does not work we--and I cannot imagine a
greater governing elite group than this institution--and all governing
elites are going to be under a microscope.
I very much agree with the
point made earlier that because we are so obviously an elite, if the
elites come under question, then our functions are going to be revised
by Congress. Our political risk in this is enormous.

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The second point I would make is that, frankly, given
examples such as the Camdessus memo, we have been treated--to borrow a
phrase--a lot like mushrooms. The only thing we can do about that, I
think, is to maximize what little bargaining power we have when we
have it. We happen to have the maximum bargaining power right now.
Once we approve these two documents, which I have no problem with in
themselves, we have no bargaining power left. So, I would modify the
pace at which Governor Blinder said we should do things and request
that we get answers to those questions before we ratify this. Now, we
could even make the motion that we approve these subject to getting
the "third page," to use your phrase. But once we approve these, we
have no more bargaining power, and the people who are committing us
without our consent have unlimited capacity to commit us to more
things.
I think our
CHAIRMAN GREENSPAN. I disagree with that.
bargaining power has not changed. I think our bargaining power is
essentially our ability to say that we will not engage in, we will not
accept, the monitoring of x, y, or z. We have a veto on what it is.
These documents are basically facilitating the United States Treasury
and the United States government. Our doing that in no way either
enhances or reduces our bargaining power. I think our bargaining
power is based solely on our ability to say no.
If we say no or say
we will not do such and such, our ultimate leverage against the
Treasury is that there is nothing they can do about that, because
starting with the original hypothesis, the reason we are involved is
because of our credibility. But I really don't think we get any
bargaining power from this because, from the point of view of the
Treasury, they are giving something to us in this deal, not the other
way around. They are removing the modest degree of credit risk that
we have under the existing arrangement. The only thing that they have
seen in this agreement is that they are acquiescing in removing all
financial risk from the central bank for this deal.
But if they think
by doing that we are going to acquiesce in all the individual items, I
would just commit to everyone here that I will say "no."
And I don't
see what they could do about it.
I would not hold the approval of
these proposals up; I am willing to go along; I agree. These two
documents are in our favor, not the other way around. I would be a
little concerned about holding these documents up because I do not
like the fact that we are sitting out there with a half billion dollar
exposure with alleged "collateral." Let us get that behind us.
President Broaddus.
MR. BROADDUS. Mr. Chairman, just very briefly, I certainly
respect your point of view, and I think I understand fully the very
difficult position that you and the System have been put in. I take
that in consideration. But I still just have to make a brief comment
in general support of Tom Melzer's position and Larry Lindsey's
position. I am just very uncomfortable with this.
I am sure that, as
a formal matter, what we are proposing to do is legal. But as I see
it, this action--the whole package--is by any reasonable definition in
substance a fiscal action, not a monetary policy action. It is
therefore the province of the Congress. The Congress did not have the
will to take what I think we all agree was the appropriate action, so
we are being left holding the bag. I guess I just see it as a raid on
our independence, and I regret it.
I agree with you that the risk to
us, while I think it is substantial, is probably remote, although I'm
not sure I think it is as remote as you do.

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CHAIRMAN GREENSPAN. I'm not sure I think it is as remote as
Governor Phillips.
[Laughter]
I think it is either!
MS. PHILLIPS. My question is not meant to reflect on these
two propositions because I actually agree with them. But what would
happen if the Fed did not go along either with the increase to $6
billion or the warehousing? Is the Treasury contemplating covering it
and going elsewhere for their warehousing? What would be the
mechanics?
MR. TRUMAN. As a technical matter, if we declined to do the
warehousing or pulled out of the existing swap agreement, leaving
aside for the moment just hypothetically that we are already involved
for $4.5 billion, the Treasury presumably would do it all alone! Our
collateral would be improved by this arrangement, but let's suppose we
were starting from square one, and square one probably has us going
back to about 1967, and we had never had any dealings with Mexico.
They are all going to be done via the State Department and the
Treasury Department. Then the Treasury would take $20 billion and do
it all directly without having us as a temporary junior partner on the
swap side of it.
On the warehousing side of it, in principle, the
Treasury could find other means to move that $20 billion in foreign
exchange off their balance sheet. It would be obvious that they did
But in principle they could do it.
that and that we had said "no."
As the Chairman suggested, perhaps they could do it by warehousing
with the Bank of Japan and the Bundesbank. I'm not quite sure how
they would do that, but in principle they could do it.
In principle,
they could warehouse it with the BIS, and the BIS could warehouse it
with the Street. All those options are, from some standpoint, maybe
preferable as far as we are concerned. I would even argue that they
illustrate the fact that this is a fairly straightforward set of
financial transactions. The very fact that it could be done in the
private sector suggests that it is perhaps more normal, or less
abnormal, than some people think it is.
But in principle if we walk
away from both sides of that, the Treasury would go ahead and do it
anyhow. That's my thought.
CHAIRMAN GREENSPAN.

Okay, Jerry Jordan, go ahead.

MR. JORDAN. Last March when we entered into the agreement on
the swaps, part of that agreement was that there would be a threecountry consultation process quarterly and so on.
I certainly do not
feel that I have had either the quantity or the quality of information
as feedback from whatever consultation was taking place to alert us to
the situation. So, as long as this is outstanding, I would hope we
get a lot better information. It does not have to come at the
Committee table, but whatever is being generated by the New York Bank
or the Board staff should be sent to us so that we are better
informed. Part of the reason I say that is because I live on the
south shore of Lake Erie. Maybe if I had Bob McTeer's southern
border, I would think differently about it.
But from where I sit, I
worry about the political and economic situation to the north of Lake
Erie very much. If we are not getting good feedback on developments
up there,

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MR. TRUMAN. I'm sorry you have not had sufficient
information. I think this upsets everybody; everybody feels that way.
We have made a very serious effort at the staff level to improve the
reports. You may not read the weekly reports from the Federal Reserve
Bank of New York but since shortly after last April, when this
consultation process was formalized, some 60 percent of Peter's words
in that report have dealt with his consultations with Canada and
Mexico. So we have put in extra resources to provide the Committee
with additional information on the current financial situation of both
Canada and Mexico. It may not be enough, but we have stepped up our
efforts.
The point about these consultations is absolutely true and I
regret that personally. I called the Treasury and asked about it and
recommended that we call a meeting of the North American Financial
Group in early September to discuss Mexico's exchange rate policy and
their strategy. They said "no." The next time, I would try to enlist
the Chairman of the Federal Reserve in doing that, which might be my
normal inclination anyhow. I just resisted it this time. I think we
should have used that mechanism beforehand because that in fact was
one of the reasons that we insisted it be set up. Having agreed to go
up to a $3 billion swap line from the previous $700 million swap line,
that was to be part of the quid pro quo.
So if we were going to be
more tightly bound because of the financing arrangements, we would
have a mechanism that we could be more comfortable about. You are
perfectly justified in feeling snookered. We all were snookered. I
apologize to the extent that we could have minimized that, but we will
try harder.
CHAIRMAN GREENSPAN. Okay, may I request the Vice Chairman to
make individual motions. We need two votes.
VICE CHAIRMAN. Mr. Chairman, I move that we approve the
increase in the Federal Reserve swap arrangement with the Bank of
Mexico as detailed in the document that Mr. Truman presented to the
Committee.
CHAIRMAN GREENSPAN.
MR. KELLEY.

Is there a second?

Second.

CHAIRMAN GREENSPAN.

We need a recorded vote.

MR. BERNARD.
Chairman Greenspan
Vice Chairman McDonough
Governor Blinder
President Hoenig
Governor Kelley
Governor LaWare

Yes
Yes
Yes
Yes
Yes
May I ask a question?

MR. LAWARE. Why are we voting? Aren't we already committed
to this program? This document says that we are committed to this
program, and Mr. Camdessus says we are committed to this program and
that we are going to do certain things.
The vote is a kind of
formality, isn't it?
CHAIRMAN GREENSPAN.

No, it's a legal requirement.

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1/31-2/1/95

at
it
at
to

MR. TRUMAN. If the Committee decides to keep
$4-1/2 billion, the Treasury understands that. The
very clear in his conversation at the Treasury that
$4-1/2 billion. If the $4-1/2 billion is where the
draw the line, that is where it can draw the line.

the swap line
Chairman made
we might stay
Committee wants

CHAIRMAN GREENSPAN. Let me just say that when the issue was
raised with me, I said that I did not have an FOMC vote and that I did
not know how the FOMC was going to come out.
I indicated that one
possibility was that the FOMC would keep the swap line at $4-1/2
billion. I said I would request an increase, because I thought that
was the right thing to do. But I in no way suggested that I knew how
the vote was going to come out.
GOVERNOR LAWARE.
I will vote "yes," but only because we
improve our credit position as a result of doing so.
CHAIRMAN GREENSPAN.
make the recommendation.
MR. BERNARD.
Governor Lindsey
President Melzer
President Minehan
President Moskow
Governor Phillips
Governor Yellen
CHAIRMAN GREENSPAN.

That is the reason why I said I would
I feel committed; I'm going to vote No.
No
Yes
Yes
Yes
Yes
Can we get a second motion?

VICE CHAIRMAN MCDONOUGH. Mr. Chairman, I further move that
the Committee approve the expansion of the warehousing agreement to
$20 billion as established and set forth on the second page of Mr.
Truman's submission to the Committee.
CHAIRMAN GREENSPAN.
MR. KELLEY.

Do we have a second?

Second.

MR. BERNARD.
Chairman Greenspan
Vice Chairman McDonough
Governor Blinder
President Hoenig
Governor Kelley
Governor LaWare
Governor Lindsey
President Melzer
President Minehan
President Moskow
Governor Phillips
Governor Yellen
CHAIRMAN GREENSPAN.
MR. BERNARD.

Yes
Yes
Yes
Yes
Yes
Yes
No
No
Yes
Yes
Yes
Yes

When is our next meeting?

March 28.

CHAIRMAN GREENSPAN. Since the next meeting is such a long
time from now, I think it would be worthwhile to have periodic

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telephone conferences on Mexico to keep everybody up to date as best
we can. See you all next time.
END OF MEETING