Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, July 5-6, 1994 : Transcript

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Meeting of the Federal Open Market Committee Meeting
July 5-6, 1994
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., beginning on Tuesday, July 5, 1994, at 2:30 p.m. and
continuing on Wednesday, July 6, 1994, at 9:00 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.

Greenspan, Chairman
McDonough, Vice Chairman
Blinder
Broaddus
Forrestal

Mr.
Mr.
Mr.
Mr.
Mr.
Ms.

Jordan
Kelley
LaWare
Lindsey
Parry
Phillips

Messrs. Hoenig, Keehn, and Melzer, Alternate
Members of the Federal Open Market Committee
Messrs. Boehne, McTeer, and Stern, Presidents of
the Federal Reserve Banks of Philadelphia,
Dallas, and Minneapolis respectively
Mr. Conrad and Ms. Minehan, First Vice Presidents,
Federal Reserve Banks of Chicago and Boston
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. Beebe, Goodfriend, Lindsey, Promisel,
Siegman, Simpson, and Ms. Tschinkel, Associate
Economists
Ms. Lovett, Manager for Domestic Operations, System
Open Market Account
Mr. Fisher, Manager for Foreign Operations, System
Open Market Account

-2-

Mr. Winn, Assistant to the Board, Office of Board
Members, Board of Governors
Mr. Ettin, Deputy Director, Division of Research
and Statistics, Board of Governors
Mr. Madigan, Associate Director, Division of
Monetary Affairs, Board of Governors
Mr. Struckmeyer and Ms. Zickler, Assistant
Directors, Division of Research and Statistics,
Board of Governors
Ms. Edwards 1/ and Mr. Oliner 1/, Economists,
Divisions of Monetary Affairs and Research and
Statistics respectively, Board of Governors
Ms. Low, Open Market Secretariat Assistant,
Division of Monetary Affairs, Board of
Governors
Mr. Bennett, Ms. Browne, Messrs. Davis, Dewald,
Lang, Rolnick, Rosenblum, and Scheld, Senior
Vice Presidents, Federal Reserve Banks of New
York, Boston, Kansas City, St. Louis,
Philadelphia, Minneapolis, Dallas, and Chicago
respectively
Messrs. Guentner and Sniderman, Vice Presidents,
Federal Reserve Banks of New York and Cleveland
respectively

Transcript of Federal Open Market Committee Meeting of
July 5-6, 1994
July 5, 1994--Afternoon Session
CHAIRMAN GREENSPAN. Before we get started on our formal
proceedings, I have several announcements. First, we'd like to
welcome the new Vice Chairman of the Federal Reserve Board to his
first Federal Open Market Committee meeting.
MR. BLINDER.

Thank you very much.

CHAIRMAN GREENSPAN. And my next news--the unwelcome news--is
that Si Keehn is leaving and this is his final meeting. It says here
that his first meeting was on July 6, 1981. Si, of course, will
return for the retirement luncheon following the August 16 meeting.
This is also First Vice President Bill Conrad's first meeting. Bill
is an observer at this meeting, but he will represent the Chicago Bank
at future meetings until a new president is selected. Finally, Karl
Scheld will be attending his last meeting. He has been attending FOMC
meetings regularly for nearly 25 years. I'd like to say a few remarks
about Karl at the luncheon tomorrow.
Getting on to formal business, would somebody like to move
approval of the minutes of the May 17 meeting?
VICE CHAIRMAN MCDONOUGH.
CHAIRMAN GREENSPAN.
MR. KELLEY.

So move.

Is there a second?

Second.

CHAIRMAN GREENSPAN. Without objection. I'd now like to turn
to Peter Fisher for the report on foreign currency operations. Peter.
MR. FISHER.

Thank you.

CHAIRMAN GREENSPAN.

[Statement--see Appendix.]

Questions for Peter?

Ed.

MR. BOEHNE. How much discretion did you have here working
with the Treasury in terms of the timing of the intervention?
MR. FISHER. Well, the events of the morning gave me precious
little time. The final decision to intervene was not made until
sometime between 9:15 and 9:30 a.m. There had been an uptick in the
dollar shortly after 9:00 a.m. I must tell you I fear that was the
result of some leakage out of European central banks. I was very
nervous about trying to enter the market as the dollar was coming down
and thus I was in rather a hurry to try to get into the market before
it came off that brief high. So, when I did get approval from the
Treasury to operate in that market, I jumped right in.
MR. BOEHNE. And the immediate response of market
participants was to sell dollars?
MR. FISHER. No, I don't think that was the immediate
response. The morning operation had a more beneficial effect.
dollar moved up--I don't remember the exact figures right now.

The
It

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moved up appreciably over the course of an hour or so. It then began
to come off when we pulled out of the market and in the afternoon when
we tried to reinforce the dollar we really met a wall of dollar/marks.
MR. TRUMAN. President Boehne, just one comment on your first
question from an historical perspective, which I think is the
perspective you are coming from: The decision to intervene on that
day was a joint decision, so in that sense Peter had no discretion.
That is no different than it has been. But once the decision was
taken, it was then largely in the Desk's hands as to how they would
handle the intervention. That was in contrast to some instances of
micro-management over the course of recent years. I think Peter had
been given quite a large amount of resources for his potential use,
and although he consulted about his change of tactics, the tactics
were decided by the Desk rather than by the Treasury.
MR. BOEHNE.

Thank you.

CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. Reading the transcript from the last meeting-unfortunately these transcripts will come back to haunt us all--but I
am going to haunt you for a moment, if I may. [Laughter] The reason
given for the previous intervention in late April and early May was
that it was to underline a change in policy. Was there any change in
policy that this intervention underlined?
MR. FISHER. No, and I think that may have been one of its
problems. I think when I spoke previously we were referring to both
Treasury and Federal Reserve policy.
MR. LINDSEY.

Right.

MR. FISHER. Looking back at last week, I think there was a
change in Treasury policy. The clarity with which it was expressed
evolved over the course of the week in which we operated and only
became clear, I would say, toward the end of the day and subsequently.
There was a change in the statements Treasury officials were making.
They were now looking for the dollar to go higher rather than lower.
MR. LINDSEY. The market's reaction to that increased
clarity, as I recall, was to send the dollar down.
MR. FISHER. I don't think the increased clarity was sending
the dollar down. I really don't view it that way. Late Friday
afternoon an unnamed Treasury official finally said they would rather
have the dollar go up than down, not in so many words but that was the
gist of it. I don't think that caused the dollar to go down rather
than up. We did have a very regrettable series of headlines as a
result of the President's interview on the radio. I think the overall
remarks the President made were something any rational person could
agree with. They map rather well with remarks I have made here to the
effect that there are fundamental reasons for the mark and yen to be
strong but that their appreciation is getting a little overdone, and
we think it is prudent to intervene. This came out in a series of
headlines. The first said "Clinton thinks exchange rates are
puzzling." And subsequent headlines were "Clinton sees reasons for
mark to rise versus dollar; Clinton sees reasons for yen to rise

7/5-6/94

versus dollar." Our afternoon operations had to face these headlines
literally head-on. That, I think, was an important cause of the
dollar's weakening that afternoon.
MR. LINDSEY. Did the Treasury know about the President's
forthcoming statements?
MR. FISHER. I was not aware of the President's interview
prior to seeing it come across the wire.
MR. LINDSEY.
intervene?

Was the President aware that we were going to

MR. FISHER. I don't know that for a fact. I think he had
been briefed on the Treasury's views on Thursday. But as I said, the
final decision to intervene was made by Secretary Bentsen between 9:15
and 9:30 a.m. on Friday morning for their part.
MR. LINDSEY. I have a follow-up question. The transcript
for the last meeting reads that I was asking you "How long do you
expect the latest intervention to hold? I suppose the intervention
last August bought us 9 or 10 months. I assume the second
intervention"--which we had just had in late April and early May-"will buy us something less than 9 or 10 months." It bought us four
weeks.
"Do we have any ammunition left?" You said at the May meeting
"I think the operation and the action of the Bundesbank last week and
whatever the Committee does in the realm of the expected, if I can put
it that way, will tend to stabilize the dollar/mark rate." Well, we
didn't stabilize it. How much time has this intervention bought us?
With the last, we went from nine to ten months down to four weeks.
Will this intervention buy us four hours or four minutes? It bought
us about twenty minutes, I think.
MR. FISHER. I think it has bought us more than twenty
minutes. I wouldn't tell you it would buy us any great amount of time
in terms of weeks or months. As I said, I do think the relative
stability of dollar/yen in a trading level below 100 is very different
from what all of us were expecting. The risk of a drop through the
floor at that point, I think, was very real; dollar/yen sentiment was
extraordinarily negative and there was very little indication that
there would be buyers there. Although there is a risk of a big drop
now, I can't, of course, prove that to you scientifically. But I
don't think it buys us more than a few weeks--I'll be honest with you,
I don't like to admit to that--unless there is some other change in
market dynamics. I think the market views itself as being a little
oversold now. The reaction of the dollar/mark last week was
frequently to tick up as nervous people covered shorts. That was not
the case--we had not gotten that far--after the April-May operation.
MR. LINDSEY. Given the interest rate differential--this is
the last question, I promise--what is your expectation of the yen or
DM exchange rate or both a year from now?
MR. FISHER. You're trying to make me enjoy the transcripts
even less! [Laughter]
I don't have any forecast that far out myself.
MR. LINDSEY.

Higher or lower, how does that sound?

7/5-6/94

-4-

MR. FISHER.

I haven't a clue.

MR. TRUMAN. Governor Lindsey, just on your first question,
it is correct to say that one of the purposes of the May 4 operation
was to send a message. That doesn't necessarily mean that the purpose
of every intervention should be to correct a policy misperception.
MR. LINDSEY. Well, Ted, I don't want to dig it out of the
transcript, but I can swear that Chairman Greenspan, who I guess is
authoritative in these matters, said that if one were to list the
reasons for intervening, underlining policy was about the only reason.
I will find the quote for you. It may be in one of our Board meeting
minutes, but if I am substantively wrong, Mr. Chairman, please correct
me.
CHAIRMAN GREENSPAN.
accused me of.
[Laughter]

I am not quite certain what you've

MR. LINDSEY. I was accusing you of being quite correct
actually in making the very wise statement that, if one looks to
reasons for intervening, the most legitimate reason one can think of
is to underline a change in policy.
CHAIRMAN GREENSPAN. There actually is another that is
important, and I think we have intervened for that reason on occasion.
It is to break a psychology that is building up irrationally in the
market. And if the intervention can accomplish that, maybe it can
have a constructive effect. That's the only meaningful use of
intervention in the context of unstable markets because the question
essentially is whether the intervention will accomplish something.
The only way it can do something is to catch the market short and
break the back of a cumulative psychological downtrend. We have
accomplished that on occasion when we tried it and sometimes it has
failed.
MR. LINDSEY.

And would you view our last attempt as success

or failure?

CHAIRMAN GREENSPAN. I would say that for the last attempt we
did not have the benefit of a net short position in the market. We
knew that at the time, but we were at a point where there were no easy
solutions.
MR. LINDSEY.

So, the intervention last time didn't meet your

second criterion?
CHAIRMAN GREENSPAN. I would think not, but I was one of
those who supported it, so I can tell you that I had my fingers
crossed; I was hoping.

MR. LINDSEY.

Okay.

CHAIRMAN GREENSPAN.
MR. LAWARE.

Governor LaWare.

You implied in your comments that you thought

there was a significant risk that if we had not intervened, the bottom
would have dropped out of the dollar/yen relationship. Was there

7/5-6/94

anything going on in the market that morning that indicated a
disorderly market?
MR. FISHER. Well, disorderly is different in one context
from the risk of dropping through a trap door.
MR. LAWARE. I understand that. But an estimate of risk is
absent or is just speculation in a disorderly market or at the
beginning of a disorderly market.
MR. FISHER. Well, on Thursday afternoon and Friday morning
of that week I was looking at an options position, which I included in
my written material but did not include in the charts circulated
today. I am referring to risk reversals which are two equally "out of
the money" options--one dollar put and one dollar call. The pricing
is expressed as the difference between the implied volatility of the
two positions. Now, when the put is over the call in "vols." we
express it as a minus number; when the call is bid over the put, we
express it as a plus number. From my entire observation of this
pricing, we have always talked about a range between -1 and +1.
Thursday afternoon and then Friday morning, the dollar put was offered
at 2 "vols." over the call. People who had never discussed options
prices with me were calling me up on the phone to make sure I was
aware of this pricing development that suggested that the market was
about to step back and would not want to touch dollar/yen as the rate
dropped down. So, that's as precise an indicator as I had; it is not
the only one that I rely on in assessing market sentiment, which
obviously was extraordinarily bearish.
CHAIRMAN GREENSPAN.

President Broaddus.

MR. BROADDUS. I had a comment rather than a question if that
is in order, Mr. Chairman. I just have to say that this intervention,
particularly its outcome or lack of outcome, really bothered me a lot.
I think just about everybody saw it as a generally unsuccessful
operation--maybe not everybody but most people. It got a lot of
attention even in the Richmond papers. The headline on the front page
the next day was about the failure of this operation. What concerns
me is that our involvement in such a conspicuously unsuccessful
operation is bound to raise questions in the public's mind about our
general effectiveness as an institution, about our ability to do what
we set out to do. In that sense, it could tend over time to undermine
or at least weaken the credibility of our longer-term monetary policy
objectives. As I see it--I think most people would agree on this--the
basic problem with sterilized intervention operations like this one is
that the short-term objectives of a particular operation may be
perceived as inconsistent with, or at least not fully consistent with,
the broader objectives of monetary policy at a point in time. I think
this shows pretty conclusively that sterilized intervention operations
only have lasting effects if the markets believe they are going to be
backed up strongly by basic monetary policy actions. Clearly, on
June 24 that expectation or that conviction was not there. Given this
experience and others like it in the past, Mr. Chairman, I would
respectfully recommend that to the best of our ability we avoid
getting involved in these operations unless there is pretty general
agreement within this Committee in a particular instance that we will
back up the intervention with whatever monetary policy actions are
necessary. To get that kind of agreement in any particular case would

7/5-6/94

imply that at that time we would be giving short-term exchange rate
objectives a dominant role or at least a lot of weight in monetary
policy. With that in mind I think that we probably would not want to
undertake these kinds of operations very often, which would be a good
thing from my standpoint. I think the longer-term cost of operations
like the one on June 24 is significant.
CHAIRMAN GREENSPAN. You know, it depends really on whether
we expect markets to be wholly efficient and not run periodically into
some significant abnormalities that an intervention could rebalance.
This is the key question. You are telling me that we should not
respond to this market at all; it's the Treasury which has to be
convinced of that, which they were not. If we are put in a position
where we opt out of coordinating with the Treasury, I think that would
do the financial system more damage. In all of these actions it has
been we who have fended off recommended interventions which we thought
were superfluous and potentially counterproductive. We have only gone
forward when we thought there was at least a reasonable shot. Our
choice is not, in my judgment, to withdraw from these discussions
because the damage it could do to the financial system if we are
perceived to be at loggerheads with the Treasury in this sort of
arrangement, I think, would be very substantial. If you are asking me
whether I personally disagree with the underlying philosophy that you
were outlining, the answer is, no, I do not; I do agree. The question
is what do we do about it. What we are trying to do is to make the
financial system, in the context of the structure in which we have to
operate, as sensible as we can make it or less nonsensible, if I can
put it in double negatives.
MR. BROADDUS. Well, I certainly respect your view, Mr.
Chairman. I just hope that what I perceive as a significant cost of
an outcome like this one gets factored into the equation.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. Could I just go back to the discussion we were
having a few moments ago about the more generic exchange rate policy?
This may be a rookie question, but I am highly uninformed. I thought
the generic policy was that we did not intervene very much but that we
did intervene to correct "disorderly markets."
This might be
translated as saying we sometimes try to prick speculative bubbles;
different people would translate it different ways. That is to say,
it is not that we intervene only when there is a change in policy to
be signaled. This basically has been the policy of the United States
Treasury for a long time, and I would have thought we viewed the last
operation as a continuation of that long-term policy. There was a
change in rhetoric, I would admit-MR. LINDSEY. As the Chairman said, there were no shorts in
the market; we weren't pricking anything speculative.
MR. BLINDER. You could argue that implicit in what you just
said is an argument that the operation was doomed to fail. I don't
think that was quite so obvious before the fact. But it seems to me
the effort was predicated on the belief that there was a downward
speculative bubble and that it was at least possible to prick it or to
prevent it from getting worse. Peter suggested, contrary to the
evaluation that it was a failure, which I tend to share myself, that

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-7-

you could look at it as a success in that the floor has not dropped
out of the yen. But the main point I wanted to make was not about the
specifics of the tactics but that I didn't really see that the longterm generic exchange rate policy of the United States government was
as you described it.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. I'd like to make some comments in
two areas: One is on the operation itself because, like the Chairman,
I was involved in the decision to do it. The previous Friday at about
midday, as Peter mentioned in his prepared statement, there had been a
very significant weakening of the dollar on no volume. We had what is
technically the worst of all worlds:
a price correction with no
position correction. So we had all the people who didn't feel good
about the dollar sitting there with exactly or essentially the same
positions that they had at the start of the day. On the particular
Friday morning when we intervened, the market had very much the same
feel about it. The question, which always plagues one after an
intervention as it should whether it is successful or not, is what
would have happened if we had not intervened. The answer is we don't
know. But the likelihood of the dollar having been considerably
weaker is significant in my view. I would agree with Peter's comment
that the ability of the dollar to stay in the 98ish area against the
yen since that time had a relationship, perhaps the main beneficial
one, with the intervention itself. Secondly, I think we should
realize that the dollar's weakness is essentially against the yen.
The dollar/deutschemark is about in the middle of a range within which
it has been floating for some considerable number of months. So,
having made the policy statement to accompany the intervention, I
think people are now correctly thinking that the main thing going on
in the exchange market is that we have a very strong Japanese yen and
that's a very big problem for the macro economy in Japan.
On the policy issue, I very strongly support the Chairman's
view that it would be unwise, I think in the extreme, for the Federal
Reserve to distance itself from active involvement in the
decisionmaking in this area. First, as a purely technical matter, the
world does not know until the next quarterly publication of our
exchange market activity by Peter as the Manager for Foreign
Operations whether the intervention by the U.S. monetary authorities
has involved both the Treasury and the Fed or just one or just the
other. So, in order to establish that we were not involved in the
operation, since the Federal Reserve Bank of New York carries out
intervention operations as the fiscal agent of the Treasury, we would
have to make a public statement that we did not sympathize with an
action by our own government. That is something which I do not think
any of us would wish to do, at least I certainly would not. The
ability of those of us involved in these discussions to have a very
positive influence on the Treasury is considerable. They pay
attention to us. I think they believe that both our knowledge of
economics and of markets is considerable; we hope that belief is wellfounded but the important thing is that that is what they appear to
think. Therefore, we do have a considerable amount of influence on
what happens. The Chairman and I have both stated that we supported
the operation on that day. It does not appear to have been a success,
but again we do not have a clue as to what would have happened had we
not intervened.

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7/5-6/94

CHAIRMAN GREENSPAN.

President Jordan.

MR. JORDAN. I can agree with everything the Vice Chairman
and the Chairman just said and still feel uncomfortable with this
particular operation. Let me first ask Peter a follow-up question to
the response he gave to Governor Lindsey about the 100 level on the
yen and a floor and so on. Now, the rate is something under 99 and
the market is still functioning. Is there another number that's
magic?
MR. FISHER. I don't think there is one that has anything
approaching the magic quality or aura of the 100 level. I think that
the market looks to 95.50--actually 95--as a sort of floor; this is
the view of the chartists of the world. That level would represent
the bottom of the dollar/yen rate going back to the early 1960s,
taking the troughs over that period; people with their rulers can draw
a line to there. That level has some significance for the market, but
nothing approaching the significance of 100.
MR. JORDAN. Part of the reason I asked the question was that
one of the things that troubles me is taking action because of a
psychological barrier. The market participants now say, well okay,
that level is not going to come back again, so as far as magic
numbers--

CHAIRMAN GREENSPAN. Jerry, could I just say--I think the
Treasury was acutely aware that what they did not want to do was to
protect the 100 level. In fact, they have often made statements to
the effect that if we could close our eyes and all of a sudden
readjust the number to under 100 they would feel a lot more
comfortable than trying to defend that number.
MR. JORDAN. But Peter argued it wasn't our view or even the
Treasury's. Rather this was in the minds of the participants in the
market.
CHAIRMAN GREENSPAN.

hand.

That's right.

MR. JORDAN. That was creating this situation that forced our
And if it was, we might call it irrational.
MR. TRUMAN.

Well, the dollar had traded below 100 earlier in

the week and that was indeed one of the reasons why we didn't operate
then and why we felt somewhat more comfortable--though I think it's
fair to say not greatly so--about operating at that point, having
approached the 100 level for the third or fourth time. First, the
rate went through that level and then it came back. And so some of
the psychological aspects of operating close to 100, but above it,
were removed. That does not remove the point that Peter made about
possible consequences of a large adjustment below that in the absence
of any actions by the monetary authorities.

MR. FISHER. The dollar had traded briefly below 100 in
rather discrete increments and we had all seen 99 on the screen
several times; it did not stay there very long. So, it was a sort of
episodic venturing below 100.

7/5-6/94

-9-

MR. JORDAN. Focusing on your reference to market
participants, the magic number, and psychological aspects, I want to
follow-up on something that Al Broaddus was referring to--the
perception of success or failure. In a technical sense, it doesn't
matter to me whether you sell $800 million of assets denominated in
yen and deutschemarks and Joan Lovett rather mechanically buys assets
denominated in U.S. dollars of the same amount in order to maintain
the funds rate. So, what happens is that the Fed is just going to
make the portfolio substitution. But people don't see Joan's actions;
they see your actions. Suppose the perception is that our objective
was to influence the rate--that we had a price objective and were
trying to prevent the dollar from falling further or to cause it to
rise, not trying to do something as Governor Blinder mentioned about
disorderly markets. But the dollar now is not consistent with the
objective. If we have a repetition of those, it makes the Federal
Reserve look impotent because markets see what Peter does but they do
not see what Joan does. And if we have several of those over a
period, our image of being able to influence markets will be
tarnished.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. This is a question for either Peter or Ted. The
question is whether you are concerned about the extent to which our
current account deficit has been financed recently through central
bank intervention and, as a practical matter, how closely we can
monitor that.
MR. TRUMAN. Well, I have some words in the Chart Show on
this point. The extent to which our deficit has been financed
recently by official sources is exaggerated because basically all that
counts is the intervention by the major industrial countries. More
than half of the financing last year, say, was by nonindustrial
countries whose motives are the same as those of any other private
sector investor; they don't have an exchange rate motive though they
may be speculating on the exchange rate. It is not easy to track this
accurately because, this is the second leading point, we don't really
know why what gets recorded as official inflows are official inflows.
For example, if a country moves its dollar holdings from the Euromarket to the New York market, it would show up as official financing
of our current account deficit even though in some sense in a
portfolio preference way and a currency dimension way, it would not be
any change. So, it is very difficult to interpret all those numbers.
We have lots of countries around the world that have different
motivations for where they hold their assets and why they hold them
there. That's about all I have to offer.
CHAIRMAN GREENSPAN. If one argues that the exchange rate is
affected by the proportion of the current account deficit that is
financed on official account, the implication is that sterilized
intervention affects the exchange rate. I would argue strongly about
that because a goodly part of our official support is coming from the
Japanese; they are in the market every day, just picking up $100
million, $200 million, $500 million, and I think the evidence that
they are affecting the exchange rate is very dubious. It's showing up
in our accounts because, to the extent that they are picking up
Treasury bills and the like directly, the issue that Ted is raising is
not a problem. But to the extent that they are picking up dollars in

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-10-

the Euro-dollar market--I don't think there is much evidence that
there are a lot of Euro-dollar holdings in Japanese reserve accounts-then it appears basically in the private account, not in the
government account. So, my main concern about that argument is that
it gives credence to sterilized intervention as an important tool in
stabilizing the exchange rate. I don't think the evidence is there.
Governor Lindsey has another question.
MR. LINDSEY. This is really for Don Kohn, but it is related
to the foreign exchange operations and I wanted to pick up on a point
that Bill McDonough mentioned. Suppose we had a change in price
without any change in position. Let us just imagine something
catastrophic--and for the recording of this meeting this is just
hypothetical--suppose we had a drop to 85 in the yen, to pick a nice
low round number, what would be the reaction?
MR. KOHN. Joan can comment on this as well, but I think the
experience of the last month or so is that the bond markets would tend
to react negatively. That is, they would be concerned about one of
two things: One, that the decline in the dollar/yen relationship was
itself indicative of inflation expectations, and that might end up
affecting the bond markets. Or, two, that in fact a very rapidly
sinking dollar, given where the economy is and the strength of
aggregate demand, would have inflationary implications via direct
price and indirect aggregate demand channels. So, I think at least
over the recent period, the decline in the dollar has had an adverse
effect on bond markets. We have had periods in which the dollar has
fallen and there has been no effect on bond markets, but that has
occurred in the context of much more slack in the economy.
CHAIRMAN GREENSPAN. There is also the implication that the
dollar will continue to decline. If we get a sharp reduction and
everyone thinks it is overdone, the bond market will rally.
MR. LINDSEY. That would be my reaction, and that shows why I
am not on Wall Street, Mr. Chairman.
CHAIRMAN GREENSPAN.

I think that has happened.

MR. LINDSEY. I would think we'd have a big rally in the bond
market if the dollar/yen rate suddenly went to 85.
MS. LOVETT. How the bond market is going to respond will
depend on the circumstances that caused such an abrupt change and what
that does to the expectations and how long it persists.
MR. FISHER. I think you would have to have a sense of how
confident the market was that it would stay at 85 or whether the next
stop was 75. Now, if you were confident that it was stopping there, I
would agree with your hypothesis for a rally in the bond market; that
would be a plausible reaction. But if the market did not have
confidence it was going to stop at 85, I don't think we would get much
of a rally in the bond market.
MR. KOHN.

But that's a problem in itself.

MR. LINDSEY. But if we have any confidence that markets can
be stabilizing factors--I picked 85 because I was trying to take a

-11-

7/5-6/94

worst case scenario of the dollar/yen fall and I thought 85 was so low
that the rate would not get there--wouldn't we view a fall to such a
level as the foundation for a rally in the bond market?
I would think
the answer is yes. So, I would say that if the markets want to
overstep themselves and they are going to overstep themselves
irrationally, why not let them?
MR. FISHER. I haven't said anything about irrationality.
I'd like the meeting tape to be very clear on that because I don't
think people betting millions and billions of dollars are doing
anything irrational. They are trying to serve their interests as they
see them in the short run. That's very important to me. That's the
question, though. I look at asset prices and I see that as prices go
up, demand goes up in the short run and as prices go down, demand goes
down in the short run. And whether the markets are stabilizing or not
depends on where the short run ends and the long run begins.
MR. LINDSEY.

Thank you.

CHAIRMAN GREENSPAN. Would somebody like to move to ratify
the transactions in the foreign exchange markets?
SPEAKER(?).

Thank you!

SPEAKER(?).

So move.
Is there a second?

CHAIRMAN GREENSPAN.
MS. MINEHAN.

Second.

CHAIRMAN GREENSPAN.
SEVERAL.

All in favor say "aye."

Aye.

CHAIRMAN GREENSPAN.
MR. LINDSEY.

Opposed?

No.

CHAIRMAN GREENSPAN.

One opposed.

Mr. Jordan also voted "no" and so
[Secretary's note:
informed the Chairman immediately after the end of the afternoon
session. His voice vote was not heard by the Chairman or members of
the Secretariat.]
CHAIRMAN GREENSPAN. Shall we now move to Joan Lovett who, I
hope, will be treated with slightly more upbeat questions!
[Laughter]
MS. LOVETT. I feel I am starting on an uneventful note here,
and I am. I was going to comment that reserve management was
[Laughter]
And I
relatively uneventful over the intermeeting period.
was going to go on to say that that occurred notwithstanding the huge
flows in reserve markets.
[Statement--see Appendix.]
CHAIRMAN GREENSPAN.
somebody--Governor Blinder.

Questions for Joan?

If not, would

7/5-6/94

-12-

MR. BLINDER. Since there weren't any questions about the
immediate strategy, could I ask a longer-run question about the
maturity structure strategy?
MS. LOVETT.

Of the System's portfolio?

MR. BLINDER. Yes. As I look at the report, since the last
meeting I see that the System added about $5 billion in bills. And
when I look at the notes and bonds, it's a sort of swap.
That's the
outcome for the whole six-week period as was described in the table in
your report.
Should I read anything into that? Or could you just
talk for my benefit, as a newcomer, about the maturity structure of
the System's portfolio and the Committee's policy regarding it?
MS. LOVETT. Let me start out by saying that when we make
additions to the portfolio on a permanent basis, we usually do so when
we see a protracted need to supply reserves. If we really don't see
that, if it looks as if there are going to be short-term swings, we
will address most of that reserve need with repurchase agreements and
the like.
I don't know what page of the report you have in front of
you, but during the intermeeting-MR. BLINDER.

I was looking at Roman numeral IV of your

report.
MS. LOVETT.
MR. BLINDER.

The New York Desk report?
Yes.

MS. LOVETT. Okay. On an outright basis, the portfolio went
up by $4-1/4 billion during the period. That increase reflected
$3-3/4 billion of bill purchases in the market and securities
purchased directly from foreign accounts that were essentially all
bills. The data you see in the middle of that table partly reflect
the exchange that took place at the end of last week when the
refunding settled, so it's a wash; it doesn't count as an increase.
It's just an exchange of notes and bonds that matured in May, not new
purchases. Most of the increase in the portfolio over the
intermeeting period came in Treasury bills, virtually all of it. For
the year to date our holdings are up $16 billion and that has been, in
some sense, almost evenly distributed between coupons and bills. We
have been looking to keep the average maturity of the portfolio pretty
close to the level where it was last year. We are not aiming to
shorten it or to lengthen it very much. There was a view in earlier
years that the portfolio should be somewhat shorter, but we reached a
conclusion about a year or so ago that the amount of liquidity in the
portfolio is probably appropriate for current circumstances.
Basically, we try to keep it pretty much at about the 38-month average
reached last year. The reason for doing the acquisitions in the bill
market during this particular six-week intermeeting period was that we
already had made some additions on the coupon side earlier.
CHAIRMAN GREENSPAN. Would somebody like to move to ratify
the transactions of the Domestic Desk?
SPEAKER(?).

So move.

SPEAKER(?).

Second.

-13-

7/5-6/94

CHAIRMAN GREENSPAN. Without objection.
to the Chart Show with Messrs. Prell and Truman.

Let us now move on

MR. PRELL. Thank you, Mr. Chairman. I'll give you all a
second to locate the Chart package that was distributed to you.
[Statement--see Appendix.]
MR. TRUMAN.

[Statement--see Appendix.]

CHAIRMAN GREENSPAN. Revisions of individual member forecasts
may be submitted to you, Mike, through when?
MR. PRELL. We have tentatively indicated that next Monday,
July 11, might give us ample time for completing the report and
reassessing the members' forecasts.
CHAIRMAN GREENSPAN.

Questions for Messrs. Prell or Truman?

MS. PHILLIPS.
I have one. I'm not sure this is quite the
right place.
In the Greenbook, there was a discussion or intimation
that we are starting to see more inflows into bond funds and stock
funds. Could you comment a little more on that? Maybe that should be
addressed to you, Don, I don't know.
MR. KOHN. We had outflows from bond funds mostly in March.
That situation stabilized and subsequently we had some small net
inflows.
Inflows to the stock mutual funds actually were quite
strong. However, the data received as the Bluebook was going to press
or perhaps shortly thereafter showed that in the most recent week both
stock and bond funds were weaker. There were outflows in all of those
accounts.
But our assessment is that the initial shock of the upward
movement in long-term rates and the downward movement of the stock
market had their major effects--driving people out of those funds who
were surprised--in the ensuing four to six weeks. Looking forward, we
would expect continued flows to those funds, but at much lower levels
than in 1992 and 1993 on the presumption that people have learned
their lesson; they now are recognizing those are riskier assets than
perhaps they thought before.
MS. PHILLIPS.

What about money market mutual funds?

MR. KOHN.
Initially, they had very large inflows in the
period in which the bond funds had the outflows. But since then, they
have cooled down quite substantially; their pluses match bond fund
minuses reasonably well.
MS. PHILLIPS.

Thank you.

CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. A question for Mike and one for Ted:
Mike,
regarding the growth of potential output, when you look at labor force
growth, is there no longer a decline in hours worked?
MR. PRELL.
workweek?
MR.

PARRY.

Do you mean in the longer-term trend in the
Yes.

7/5-6/94

-14-

MR. PRELL. It's not apparently obvious in the very recent
data, but our presumption is that eventually we will see that occur.
In the forecast, we have the workweek shortening in the near term from
its very high recent level and not changing a great deal thereafter
through the forecast period. Our assumption is that perhaps there has
been some interruption of the prior trend as companies may tend,
particularly with fringe benefit costs being as considerable as they
are and with the possibility of incurring costs to fire someone and so
on, to keep the workweek a bit longer than we certainly were
anticipating at the beginning of this year.
MR. PARRY. So, it's not a major factor in the calculation of
potential output growth?
MR. PRELL. It's a small factor. There are a number of small
factors we have taken account of in getting from the nonfarm business
sector to GDP.
MR. PARRY. Ted, this isn't directly affecting the United
States all that much, but I refer to your table on Chart 7 with regard
to China. One of the issues, of course, for those who follow China is
whether or not they are going to be successful in dealing with their
economic overheating problem. I am trying to figure out from your
forecast whether they in fact will succeed in controlling it.
It
looks to me as though they have not had great success thus far.
MR.
they need to
of the bloom
double-digit

TRUMAN. I think that's right. It's not clear how much
do in order to have great success. They have taken some
off but not a lot. Their expansion is running close to
rates.

MR. PARRY. It would be interesting, maybe not so much for
this Committee, to look at the implications.
MR. TRUMAN. I think that's one of the factors--a good point.
If China were more successful, or if the cost of that success were 5
percent growth rather than 10 percent growth, the implications for
Japan and the other Asian countries might not be entirely negative.
There would be a risk. Definitely the Japanese will tell you, as I
think I have commented in other briefings, that they consider slower
growth in China to be one of the uncertainties and risks in their
forecasts. So bad news for China is good news for Japan.
MR. PARRY.

Right.

CHAIRMAN GREENSPAN.

Thank you.
President Jordan.

MR. JORDAN. I have a couple of questions for Mike. In your
initial oral presentation, you remarked on the role of long-term
interest rates at current levels in maintaining growth of real
economic activity in line with the economy's potential. You might
recall that we had a discussion at the May meeting about the linkages
in the model of short rates to long rates to residential and
nonresidential investment, measures of aggregate demand, inflation and
inflation expectations. In this month's Greenbook, on page I-2 of
part I relating to key assumptions, that same idea is back again. I
want to see if I understand what this says. The sentence I want to
focus on says that "maintenance of adequate overall financial

7/5-6/94

-15-

restraint," and I take that to mean long-term interest rates, "thus
seems likely to require at least some further tightening of money
market conditions."
That says that the fed funds rate is the target
and long-term bond yields are the indicator of the thrust of policy
actions. Am I correct in interpreting this to mean that if we were to
maintain the current funds rate, long-term bond yields would fall,
possibly significantly?
MR. PRELL. The reference to financial restraint was intended
to have a broader meaning, encompassing all interest rates and also
the nonrate terms of lending. As I noted in my presentation, we think
that one ingredient in the current situation is a pretty substantial
shift in credit availability from banks and, to some extent, other
intermediaries. That, in effect, has provided perhaps over the past
year some significant incremental stimulus. I wouldn't want to try to
quantify it, but it has been in an expansive direction. To your
specific point, there are several things one needs to consider in
thinking about the long-term path. One that I referred to
specifically in my remarks was the notion that there is a considerable
liquidity premium, probably larger recently than it was earlier, in
the term structure and that, under calmer conditions in the markets,
one might expect that to diminish somewhat. It's that in particular
that I was referring to as a rationale for thinking that some rise in
short-term rates would be necessary. Now, getting to the broader
cyclical dynamics of this, if the Fed did not tighten as assumed here
under the conditions that we have perceived to be prevailing in the
economy, at least two things I can think of might happen. One is that
so-called credibility might be diminished if there is a broadening
perception that we are behind the curve at some point and that we are
not exerting anti-inflationary restraint. The inflation premium in
rates might rise. The other possibility is that it comes about more
automatically in that we are too stimulative, aggregate demand is
stronger, pressures arise ultimately in the economy which tend to push
up rates, and if we didn't tighten at that phase, then we would be
getting this inflation premium generated in the rates. It's a complex
issue.

MR. JORDAN.

Well, I guess I am more puzzled than before!

MR. PRELL. That might qualify me for elevation to a higher
level position! [Laughter]
MR. JORDAN. But a liquidity premium can come out from either
end of the yield curve, and you're trying to stay away from saying
that if we don't raise the funds rate, long-term rates will fall or
that the yield curve flattened from the long end because of the short
rate. But at the May meeting, there was a lot of discussion about a
4-1/4 versus 4-1/2 percent funds rate, policy neutrality and all of
this, and some uncertainty about that. Now, we have a much stronger
statement in both the Greenbook and Bluebook that policy neutrality is
5-1/4 percent. What changed between May and now that it went from
some uncertainty as to whether it is 4-1/4 or 4-1/2, and now it is
5-1/4 percent?
MR. PRELL. Well, there is no greater certainty attached to
the relationships in this forecast as we perceive them than there was
in the prior forecast. The major changes were a result, I think, of
changes primarily in so-called exogenous factors. We have a higher

7/5-6/94

-16-

oil price; we have a lower dollar, with the likelihood of there being
some greater pressure coming through import price channels and so on.
We also have a somewhat lower unemployment rate with all the
adjustments we care to make that suggest that the economy is at a
somewhat higher level of resource utilization and has more of a
tendency to pass these kinds of shocks through to the general
inflation rate. We also had a stronger sense about this liquidity
premium effect after we saw what happened when we announced our policy
decision in May and the bond market rallied. We took that as
confirming what we had thought was going on. All of these things led
us to raise the short-term rate assumption, I'd say moderately,
certainly relative to what seems to be built in in terms of market
expectations, at least after 1994. We have rates peaking out at the
end of this year, leveling out, whereas the market seems to anticipate
further tightening. Our judgment is that this will be enough to bring
about the moderation in aggregate demand that we forecast.
CHAIRMAN GREENSPAN.
acting president recently?
MS. MINEHAN.

Cathy Minehan, weren't you appointed

No.

CHAIRMAN GREENSPAN.

When did I dream that?

MS. MINEHAN. I think that was a reading by some newspapers
of the wording in the Federal Reserve Act--in the absence of the
president, the first vice president is the acting chief executive
officer.
CHAIRMAN GREENSPAN.

I call on First Vice President Minehan.

MS. MINEHAN. My question is very much the same, and I know
there's a risk in comparing a range of forecasts arrived at in very
different ways with a particular or specific forecast. But just
comparing the central tendency to the staff's projections next year,
the staff seems to be on the low side vis-a-vis real GDP and on the

high side vis-a-vis unemployment. That leads me to the question of
what happened and what do we get by not tightening the full 100 basis
points that you talk about in your Greenbook. Does that simply work
on the inflation side or does it work elsewhere?
MR. PRELL. There are two questions that you've raised.
You're certainly correct that there's a symmetry here. We have a
slower growth rate in 1995 than the central tendency, and we have a
higher unemployment rate. I might note that we're sort of at the low
end of the overall range for growth, and at the high end of the
overall range for unemployment. So there's certainly a consistency
here. We come out with an inflation rate well within the range. I
didn't think there was a great deal here fundamentally to make a point
about--

MS. MINEHAN.
don't tighten?

It's sort of a lead-in to what do we get if we

MR. PRELL. If you don't tighten, the effects are likely to
be very modest on inflation even through 1995. A difference of 100
basis points would have a fractional effect on the level of real GDP
over that forecast period and a very small, almost imperceptible,

-17-

7/5-6/94

effect on inflation unless we get out of this some distinctly
different kind of path for long rates than we have talked about. That
could throw in some additional variation in the outcome. But
basically, the 100 basis point increase in the funds rate would have a
rather moderate effect on inflation.
MR. TRUMAN. I think it depends, as I indicated in my
comments, on what you assume about the dollar, the reaction of other
rates, and what else is going on at the same time. If the 100 basis
points were to cause a several percent lower dollar, then because of
the direct price effects you would get the price effects much sooner.
And, of course, you'd have much stronger economic activity. On the
other hand, the dollar could--for lack of a better word--"levitate."
MR. PRELL. I think the prospect would be an only slightly
perceptible upward tilt to the inflation rate rather than this flat
path that we have, if you simply isolated in the standard way that 100
basis point difference in the funds rate. But we also have been
sensitive to these expectational considerations.
MR. KOHN. The other point I would make, President Minehan,
is that the Bluebook had tighter alternatives, a no change
alternative, and no easier alternative.
MS. MINEHAN.

Right.

MR. KOHN. We ran simulations with the funds rate flat, and
as Mike said, we didn't get much effect on inflation by the end of
1995, but the unemployment rate was significantly lower. Given our
assumption about where the NAIRU was, we started getting an uptick in
inflation by 1995 and more noticeably in 1996 and 1997. We assumed
that the Committee had a strong presumption against that increase in
inflation occurring, so we didn't include this alternative.
Obviously, aggregate demand is also a consideration; if aggregate
demand is weaker than in the staff forecast, the funds rate can stay
the same. Actually, that simulation indicates lower inflation. But
given the staff's aggregate demand projection and its assessment of
potential, we had some significant effects in 1996 and 1997.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. I have two questions. I had one when I put my
hand up, and now I have two.
The first was for Ted about the forecast
for central Europe. As you well know, there was a notable feature of
the OECD forecast that went out yesterday--the question of to what
extent was Germany especially, and Europe generally, relying on
selling to the United States to get the growth that the OECD forecast.
I can't remember if yours is higher or lower because one is Q4-to-Q4
and the other is year-over-year, but this forecast has a weaker U.S.
economy than the OECD forecast and it also has a lower dollar. Could
you say something about to what extent the growth in Germany and
central Europe is export-led in the staff's forecast?
The answer is that it is
MR. TRUMAN. Well, two points:
export-led in the sense that our assumption about Germany is that net
exports will be a positive factor in their growth. I think we have a
little less growth overall, and a little less growth in net exports
for Germany than the OECD. I know that we do for the OECD countries

7/5-6/94

-18-

other than Germany. So that's the answer for the second half of that
question.
We are a little less optimistic than they are in that
regard. They are all in the same ballpark, but they show a little
more growth this year and a little more next year. And that's
somewhat consistent with the fact that we have somewhat lower U.S.
growth so there is less impetus coming from outside than in their
forecast.
MR. BLINDER. Secondly, I'd just like to pick up on the
question that Cathy Minehan was addressing to Mike Prell. Quantifying
the difference between 100 basis points on the funds rate between now
and December, and say 0 or 25 or 50 basis points or something--say 0-would I be wrong to think that the effect on the 1995 fourth-to-fourth
quarter growth rate would be in the range of 1/2 percentage point?
MR. PRELL. I think our model, which is reasonably interest
sensitive, and with the normal rather sluggish adjustment of long
rates, which would be questionable, would show less than that over the
course of 1995.
But your order of magnitude would not be far off.
MR. BLINDER.

Thank you.

CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. Mike, I may have misunderstood you, but when
Jerry Jordan asked you why there was this 100 basis point shift in
your assumption, you said that exogenous factors had changed
including, for example, the price of oil. Now, this could just be
another experiment.
If a Mideast war broke out tomorrow and the price
of oil went up $20 a barrel, would you recommend that we raise
interest rates?
MR. PRELL. It would depend on your objectives, short run and
longer run. I think there would be a significant inflation jolt in
the short run. Your policy dilemma would be to prevent that from
tending to flow through into an ongoing inflation process where it had
its initial price level impact but then perhaps got built into wage
increases and broader inflationary expectations. You would need to
raise the unemployment rate substantially above the prior level that
you thought acceptable in order to get you back on what you thought
was an appropriate inflation path. I think we would lay out the
options in that way.
I think we'd have a hard time deciding exactly
what forecast design to present to you. We would probably work toward
a compromise scenario that you could then assess to decide whether you
wanted to be tighter or easier.
MR. LINDSEY. Nominal GDP is unchanged in the forecast-essentially unchanged. In order to get that result--to have virtually
the same nominal GDP as we had before--you are telling us we have to
raise interest rates 100 basis points, and that's because of exogenous
factors?
MR. PRELL. The nominal GDP forecast is
higher in 1994 and .2 percent higher in 1995.
MR. LINDSEY.
MR. PRELL.

.3 of a percent

I was looking at Chart 16 in the Chart Show.
So, you are going back to the January forecast?

7/5-6/94

-19-

MR. LINDSEY.

I see; the previous estimate is the January

forecast?
Yes, I am sorry; we tried to make this

MR. PRELL.
comparable.
MR. LINDSEY.

But going back to these exogenous factors--

MR. PRELL. Right. The change in our assumption from the
last Greenbook is 3/4 percentage point. I regard all of this almost
on the order of hair splitting given the uncertainties, but certainly
we wrestled with it and it gives some meaningful indication of where
we think things need to go.
MR. LINDSEY. But it would be your view or the model's view
that an exogenous shock, such as leaving monetary conditions
unchanged, would raise nominal GDP?
MR. PRELL.

Yes.

MR. LINDSEY. If the price of oil went up, you'd have a
higher nominal GDP level?
Certainly, if you
If policy accommodated it.
MR. PRELL.
held the funds rate, which is in an extremely accommodative posture in
the face of that kind of shock, you would have astronomical GDP
growth. But let me note, for example, that there was a footnote in
the Greenbook reporting on a partial simulation of an exchange rate
shock. I think it was about three times what we have in terms of the
forecast change, but that's a reference point for you. I think you
would see it is in general terms consistent with the kind of
adjustment that we have incorporated in this forecast.
MR. LINDSEY.

Thank you.

MR. PRELL. I would also note
in my presentation, we emphasized that
it was going to take higher rates than
lower rates. So in a sense, mentally,
the 3/4 percent that we made.

that in the last Greenbook, and
we thought the risks were that
our assumption rather than
the adjustment isn't even quite

MR. TRUMAN. To come back to Governor Blinder's question
about the forecast for Germany, I just now recall that our outlook for
year-over-year growth in Germany is almost exactly the same for 1995
as the OECD's, though in general we tend to be a smidgen weaker.
However, OECD put their outlook together before they had the firstquarter numbers.
My guess is they would probably have a stronger
outlook, everything else being equal, just the way one averages. Now,
that may be made up from the fact that they do have a bit stronger
growth next year, so they average out. But it's about the same for
Germany.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. I need to ask Don and Mike for a clarification.
When you were answering questions earlier about the fact that you
assumed a higher short-term rate, Don, you said that in terms of
aggregate demand you had different alternatives including maintaining

7/5-6/94

-20-

the same rate or changing the rate. What were some of the factors
that went into the picture? As you have it here, the staff forecast
must presume a fairly strong growth rate without this increase in
short-term rates. What were the factors in terms of your aggregate
demand forecast that you considered in making this assumption of a
higher rate?
MR. PRELL. Are you talking about the alternative simulation
in the Bluebook or simply why we raised the assumption in the
Greenbook forecast?
MR. HOENIG.

Why you raised the assumption.

MR. PRELL. Well, as I said, I think the major consideration
was how we could in essence cap the inflation rate close to where it
has been in the face of these shocks. Implicitly, also, I think we
probably have incorporated a sense of a little stronger underlying
aggregate demand. We're not talking about a vast difference, but the
real GDP path in this forecast is little changed from that in the last
forecast.
MR. HOENIG. And that's taking into account in your model the
effects of the moves to this point?
MR. PRELL.

That's right.

MR. HOENIG.

And so you still see continued stronger growth?

MR. PRELL.
depreciation and the
through the external
higher interest rate
version of the story

Basically what we have here with the dollar
stronger growth abroad is more impetus coming
sector, which we have essentially offset through
effects on domestic demand. That's the simple
here.

MR. HOENIG.

Thank you.

CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. I have a question for Mike as well.
In preparing for this meeting, we had the research staff at New York
play the game of what would be the result of various tightenings. In
the model that we used, which is partially in our heads, we got about
the same result from a 50 basis point tightening that you get from the
100 basis point tightening, and a fair bit more, i.e., a much weaker
economy from 100 basis points. Do I assume correctly that the policy
point is not so much that policy will have to be firmed by 100 basis
points, but that policy will definitely have to be, to pick an adverb,
substantially firmed in order to avoid the inflationary result that
you are convinced the Committee would not wish to see?
MR. PRELL. You've served up such a softball here, I hate to
reject it at all, but I am not sure whether in the greater cyclical
scheme of things, I'd call 50 basis points or even a 100 basis points
substantial. Now, we're not talking about throwing the economy into
recession, but looking back over time, I think, we have seen that it
has frequently taken very large movements in short-term rates to
achieve a major change in the direction of aggregate demand. The
other point I'd make is that, yes, the signal we hoped to convey was

7/5-6/94

-21-

some degree of conviction. I wouldn't say definitely we're going to
need to tighten, but we have some conviction that a significant
movement in that direction was probably going to be needed to achieve
the kind of outcome that we're talking about. I must say I am a
little surprised and quite interested in the results that you
described from your staff's work because the numbers that we have been
citing come from a model that tends to be one of the most highly
interest-sensitive that we can find. And so to get the result that
you characterize is a bit surprising to me. There may be a lot of
other add factors and so on that are going on in this exercise.
CHAIRMAN GREENSPAN. Who would like to start our Committee
discussion? President Keehn.
MR. KEEHN. Thank you, Mr. Chairman. Our 1994 forecast is so
close to that of the staff that it's hardly worth mentioning the
difference here. In some respects, we get there in a different way.
Nonetheless, the 1994 results are the same. For 1995, though, there
is a greater discrepancy. Our outlook is somewhat stronger for GDP
and just a bit lower for inflation. Therefore, we have not built into
our forecast the policy tightening that we have just been talking
about. I think fundamentally these differences perhaps reflect our
view that potential growth is a little higher than the Board staff's.
With regard to the District, overall conditions are largely
unchanged from the past meeting or two. The Midwest economy is
continuing to operate at what I think is a comparatively strong pace.
The auto business continues to be good, and I think the recent
reductions in sales in April and May had more to do with capacity
constraints than any significant change in consumer attitudes. The
auto industry sales expectations for the third quarter are
comparatively strong, with domestic production schedules set at some
18 percent over last year. Since retail inventories are very low, I
think at this point the downside risk in this production schedule is
very limited. Of course, all the industries that are serving the auto
sector such as steel continue to experience very strong operations.
What's true for the auto sector, I think, is true for manufacturing in
general; there are not many soft spots in our District in that sector.
The forecasts of sales for heavy trucks have not increased since the
last meeting. At this point, the manufacturers are dealing with
capacity constraints, and lead times for delivery of the large, heavy
trucks have been stretched out. The delivery times for heavy trucks
in general have stretched out even more out--to July 1995. In the
home appliance business in April shipments were at record levels; and
sales of agricultural equipment, another part of our economy that's
important, are likewise at high levels.
Despite the strong results in the manufacturing sector, I
think there are some signs of moderation and slower growth in other
parts of the District economy.
who runs the
trucking company reports that there has
been a downward shift in the rate of increase in shipments. But this
downward shift is from the very, very high levels the trucking
industry has been experiencing. He says it is particularly apparent
in shipments to retailers in general and for paper products. Also,
the retailers I talked to are seeing signs of moderation. In looking
back over the last few months, there seems to have been some kind of a
shift. People I talk to are not sure whether it is because of the

7/5-6/94

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higher interest rates or the result of high income tax payments.
Nonetheless, I think there clearly has been some moderation in the
retail sector from the high levels earlier in the year.
On the price front, I do sense some pressures, though nothing
dramatic. But after a protracted period when manufacturers were able
to push their suppliers to reduce prices, they are, as one company put
it, approaching payback time, and we hear of more price increases.
There are also some upward pressures on wages. The trucker that I
just mentioned has reported an extreme shortage of truck drivers. To
deal with that,
has granted an 8
percent increase in wages. Another manufacturer I talked to who has a
multiplicity of contracts they are renewing says the terms are a
little higher, at least, than in the past. With tight labor
conditions, we have to worry that at some point these are going to be
translate into higher labor costs. So our outlook for inflation,
while still positive--indeed it is a little lower than the staff
forecast--suggests that there are some worrisome signs out there that
we need to keep our eye on.
Finally, in the ag sector, growing conditions for the grain
crops continue to be favorable. Planted acreage in the District this
year is 3 percent higher than last year. As of the end of June, the
corn crop was described as excellent. That obviously is a very
significant improvement over what we were experiencing last year.
There is, of course, a long, long time from now to harvest, and we're
at a critical point in the growing cycle. But with a reasonable break
in the weather the crop production should be pretty good. And grain
prices, which certainly have been terribly weak over the last several
weeks, are likely to be restrained and ought not to be a significant
cause of inflation.
CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Mr. Chairman, the economy in the Twelfth District
is continuing the trends noted in the last few meetings with weakness
persisting in California and Hawaii and strength elsewhere. The
situation in California has changed very little. Employment growth
has been weak through May, rising at an average annual rate of about
0.4 percent since employment hit its trough in December. Most
forecasters expect this very weak recovery to continue, with service
employment gains slightly outpacing losses in the manufacturing area
through the remainder of 1994.
Turning to the rest of the District, conditions range from
good to very good. Washington and Alaska have reported employment
gains of 1.6 and 2.4 percent respectively over the last year.
Moreover, Boeing's announced layoffs are nearing completion, which
will help the Seattle economy since a major negative for a long period
will no longer be present. However, Alaska is facing an uncertain
future largely because of a long-term decline in oil production. The
rest of the District is very strong. Nevada, Utah, and Idaho are the
three fastest growing states in the nation in terms of employment.
Arizona and Oregon also report rapid employment growth. Construction
remains at a high level in these states, although activity has leveled
off a bit in both Idaho and Nevada.

7/5-6/94

-23-

Turning to the national economy, my outlook differs somewhat
from that of the Greenbook in a couple of respects. First, I would
not be surprised to see the economy slow somewhat more in the latter
half of this year than shown in the Greenbook forecast as a result of
the tightening moves that have been made so far. I would then expect
a little more strength than the Greenbook implies for 1995, although
the outcome clearly depends on future policy actions. Second, I have
been impressed pleasantly by recent inflation results and certainly
impressed by recent data on employee compensation costs. Even after
considering the lower dollar and higher oil prices, I think it's
possible that CPI inflation will come in at or even a little below 3
percent for the next year and a half. I do, however, think that most
if not all of the slack in the economy probably has been used up and
that the longer-term inflation outlook is a significant concern.
Thank you, Mr. Chairman.
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE. The Philadelphia District economy is growing at
a moderate pace, although still less than the nation as a whole. The
expansion is generally broad-based, geographically and across sectors.
Some slowing, however, is occurring in the pace of growth. Consumer
spending is still leading the way, particularly in areas of home
furnishings and autos. Retailers remain guardedly optimistic about
the outlook, but a number have trimmed their projections for the rest
of the year. Much the same can be said for manufacturing. Orders and
shipments are positive, but a number of manufacturers see less growth
during the second half. Realtors generally report that home sales
remain good, especially for low- and mid-priced homes. Some builders,
however, report slowing in the pace of new construction. Concern
about rising mortgage rates has damped their enthusiasm somewhat.
Commercial real estate markets remain soft; the prospects are better
in suburban areas for next year and beyond. In Philadelphia, there is
still a markdown of some less than top-grade space.
Sentiment in the District overall is positive, but a little
less so than when we met six weeks ago. Most business people believe
the pace of growth will be positive, but slower during the months
ahead. It's the "but slower" part that makes them a bit uneasy. How
much slower and the impact on the bottom line make them just a touch
nervous. Consumer sentiment is positive as the job market improves.
With few exceptions, however, wage pressures are well contained in the
District. High visibility layoffs still cast a cautioning note on
people's feelings, though, about the job market.
Price pressures appear to be contained. There is more talk
of rising input prices, but most people still feel it's quite
difficult to pass on those increases, although I am certain businesses
would if they could.
Turning to the national economy, there is clear evidence from
the consumer sector, labor markets, and the industrial sector that
points toward a slowing from the rapid pace earlier in the year. The
Greenbook forecasts are reasonable estimates in my judgment of how
things will turn out. Nonetheless, we should be naturally skeptical
of any forecast. We are in a transition from a higher growth rate to
a lower growth rate. And we have to monitor incoming data closely as
a reality check on the magnitude of this adjustment. We could easily

7/5-6/94

-24-

underestimate or overestimate the extent and smoothness of the
adjustment for a whole range of reasons. Likewise, we are in an
especially sensitive period on the inflation front. We have come too
far in the disinflationary process to reverse course at this point.
At the same time, we do need a lengthy period of sustainable growth.
These objectives are compatible, but the margin of error for policy is
sufficiently narrow as to require a close reality check on incoming
information about capacity constraints and demand pressures.
CHAIRMAN GREENSPAN.

President Forrestal.

MR. FORRESTAL. Mr. Chairman, growth in the Atlanta District
continues to be quite positive, although we are seeing some
moderation, and I think our growth rate is now moving closer to that
in the nation as a whole. The exception to this is the State of
Georgia where strong in-migration and the beginning of preparations
for the Olympics are having a very noticeable spurring effect on the
expansion.
We are seeing some price pressures, but they are concentrated
primarily in the construction area, although manufacturers are also
experiencing pressures in the cost of commodity inputs and they expect
these to continue. But they tell us at the same time that they are
not able to pass these price pressures through to the final consumer.
We are seeing some wage pressures also in the construction area, and
that pressure comes from the shortage of skilled workers in that
industry.
Retailers in the District were disappointed by their
performance in May, and they experienced some undesirable buildup in
inventories. Activity apparently picked up in June, but they are
indicating downward revisions to expectations of sales in the future.
Trucking firms are also reporting that shipments to retailers have
slowed by more than they had expected. Automobile sales are a little
difficult to interpret. They have remained fairly slow during the
second quarter, but low inventories of popular models seem to be cited
as the reason for this slowness. But unlike the expectations of
retailers generally, car and truck dealers expect 1994 to be better
than 1993. Tourism and business travel are mixed around the District.
We don't yet have the results of our manufacturing survey for June.
We did see a pickup in production in May, and the share of firms
expecting increases over the next six months also rose. In the area
of capital spending, I think it's interesting to note that a number of
industries in the District have recently announced plans to expand or
to upgrade their facilities. In the energy area, the rig count in
Louisiana declined a bit in May, but it's still well above the level
that we saw a year ago. Spot and futures prices for natural gas
remain above the level needed to encourage additional activity.
In the housing sector, rising mortgage rates are having an
impact on the residential market. Demand for new homes is described
as strong, but here again the pace is moderating and permits have
tapered off from the very high levels that we had earlier in the year.
Multifamily building, as Mike reported for the nation and it's also
reported in the Greenbook, is strong in many areas of the District and
this is expected to continue. Commercial real estate markets are
beginning to improve; slow and steady gains are expected in the future
in this area as well. Financing is not particularly easy to obtain in

7/5-6/94

-25-

this area, but it is more available than it has been in the last few
years. With respect to overall loan demand, it's about flat in the
District. Of course, as in most parts of the country, residential
mortgage refinancings have pretty much dried up.
The general sentiment, I think, among people in the District
is very positive in the context of the good growth that we are
experiencing. There is very little apprehension about inflation,
notwithstanding the price pressures in construction and the wage
pressures. But interestingly, I have had no complaints from business
people about our policy actions over the last four months.
Looking at the national economy, our forecast follows a
pattern that's similar to the one in the Greenbook. On balance, I
think we see somewhat stronger growth, although we have a smaller rise
in the federal funds rate than is assumed in the Greenbook. Our
outlook for inflation is a little less sanguine than the Greenbook's.
We see some deterioration in inflation toward the end of the forecast
horizon, but it gets a little better as we look further out into 1996.
The principal uncertainty that I have is the outlook for consumer
spending. Are we going to see it sustained? It seems to me that the
consumer is building up a good deal of debt, and there is a question
of how long people can continue to spend, given this deterioration in
their balance sheets. I think we have an interesting period ahead of
us, Mr. Chairman, and I see the risks as evenly balanced between the
up side and the down side, although I think the inflation outlook is
not terribly good as I look further out over the forecast horizon.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. Thank you, Mr. Chairman. The Tenth District
continues to grow at a very good pace. Some early signs of price
pressures have emerged and we have reports of high prices and short
supplies of some construction materials and scattered reports of labor
shortages in the District. Also, we continue to hear of some
increases in land prices; right now our land prices seem to be rising
year-over-year at about twice the CPI rate of inflation. At least to
date, we do not see any upward pressure on consumer prices in the
region. Construction activity and especially residential construction
are vigorous. Manufacturing continues to rebound and we see growth
shifting from nondurables to durables manufacturing with emphasis on
autos and airplanes. Higher oil prices have boosted drilling activity
only a little in the District. District crops are generally in good
shape. Of course, we have seen a sharp drop in cattle prices, and
that has triggered some significant losses to some of our producers in
the cattle industry.
Looking ahead, we think the District economy should remain
strong on the whole. A rise in construction activity is anticipated,
although residential construction is expected to level off during the
remainder of the year. We also think a strong national economy should
maintain a rebound in manufacturing. The outlook for firmer oil
prices still points to only modest gains for the energy industry in
the District. As one of our directors pointed out, that industry is
affected by so many different factors that they are very cautious in
terms of going ahead with energy exploration. Losses in the cattle
industry, we think, will drag down our farm incomes this year despite
the good outlook for crops.

7/5-6/94

-26-

On the national outlook, incorporating the latest firstquarter revisions, we expect that real GDP will be just slightly over
3 percent for 1994, assuming an unchanged monetary policy. Economic
growth is projected to slow in the second half of the year as past
increases in interest rates begin to affect, or continue to affect,
interest-sensitive spending. Nevertheless, we think growth should
remain slightly above potential in the second half, and as a result
we expect overall CPI inflation to rise to around 3 percent on the
year for 1994 and to continue at that rate in 1995. Thank you.
MR. PRELL. Mr. Chairman, may I just follow-up on something I
said to Governor Lindsey earlier, which may not have been the
perfectly good answer, as President Hoenig's remark about oil prices
and production reminds me. Obviously, with the higher oil price, we
could get some stimulus to domestic production that could be positive.
The other side is that to the extent that we are importing all of this
oil, we have the so-called tax plus the shift in income, even to
domestic owners of oil, from consumers which leaves a damping effect.
How we come out on nominal GDP, I think, is a very tricky empirical
issue here. But our simulations would still suggest that, if you
wanted to avoid the blip in inflation, you would have to add restraint
even beyond what you would get just automatically from this oil tax as
it were, in order to have enough slack to even out all of that impulse
on the price side.
MR. LINDSEY.

The inflation blip but not the nominal GDP

blip?
MR. PRELL. On nominal GDP, it could be a wash and certainly
we have simulations that could produce that result.
CHAIRMAN GREENSPAN.

First Vice President Minehan.

MS. MINEHAN. Mr. Chairman, New England continues to recover,
with employment about 1/3 the way back to pre-recession levels.
Nonfarm payroll jobs have expanded over a year ago in all six New
England states, with the regional total growing only slightly below
the rate for the nation as a whole. May unemployment rates in all six
states were below year-earlier levels, disregarding the measurement
change. Jobless rates in four of the six states were below the
national rate. Among the six, Massachusetts and New Hampshire were
better, and Connecticut is bumping along the bottom in employment
growth over the year. Business sentiment is generally positive,
according to several local indices as well as anecdotal reports. The
region's job growth is concentrated in services. Employment in
manufacturing has leveled out in recent months, following almost a
decade of shrinkage. Producers of automotive parts, computer
components, residential construction materials, industrial machinery,
and replacement parts report strong sales. The price picture is
reasonably favorable. Manufacturers continue to say they are unable
to raise prices except in the area of consumer nondurables. While
some of their own costs of materials are rising, businesses have been
able to reduce other costs by pruning workforces or introducing other
efficiencies.
With respect to the national outlook, our current view is
generally consistent with the Greenbook's for 1994. We were glad to
see the staff's reassessment of the NAIRU, since it brings them much

7/5-6/94

-27-

closer to our own assessment. However, we continue to be a little
more optimistic about potential GDP. In 1995, we see growth rates a
little stronger with the same levels of inflation and slightly lower
levels of unemployment. All of this, of course, depends on the
definition of the appropriate monetary policy, and ours is slightly
less restrictive than the Greenbook's.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. With respect to our projections for 1994, we
have somewhat higher rates of nominal GDP growth and inflation than
the central tendency, but for 1995 we have significant further
acceleration in inflation--considerably more than other members'
forecasts that I have seen. Basically, I would attribute that to our
view of the lagged effects of an increasingly accommodative monetary
policy, roughly in the period 1991 to 1993. That degree of
accommodation has been manifested in a number of ways. One way I
would cite is--I have mentioned this before--that base money over that
period was up approximately $100 billion, and that in turn provided
the basis for growth in the stock of M1 by more than 1/3 over that
period of time. I thought it was quite interesting in Joan's report
that she indicated that, even though we perceive that we have
tightened, we have purchased $16 billion of securities this year, so
in 1994 we are essentially on the same $100 billion per 3-year pace of
additions to base money.
With respect to national economic conditions, conceptually I
think what has been going on is that we have seen the more rapid
growth in nominal GDP reflected in strong growth in output and
employment rather than rising prices and wages. Even though there has
been some slowing in output and employment, in my view the economy is
still growing at an unsustainably high rate. In that regard I would
cite just two examples. Industrial production, which has slowed down,
has still been growing at a 3.9 percent annual rate since February,
and payroll employment has been growing at about a 3.4 percent annual
rate over the same period. I find that information particularly
troubling against the backdrop of capacity utilization at a relatively
high level of 83-1/2 percent, which is up 3 percentage points in the
last year. The civilian unemployment rate is down 1-1/2 percentage
points over the same period to a relatively low 6 percent.

I might

also note that the level of unfilled orders as indicated in Part II of
the Greenbook has risen quite substantially over the last year. So my
view would be that our focus should be on the prospect of rising
inflation at this juncture, not on growth which is slowing from
unsustainably high levels.
With respect to the District, economic activity in the Eighth
District also has expanded rapidly in recent months. We have had many
firms report expansions, additions to payroll, and increases to sales.
Major auto producers in the District plan to boost production
significantly in the third quarter, in line with announcements for
national production increases. Loan demand continues to grow rapidly,
and favorable crop conditions are reported. We hear more frequent
reports of difficulties in finding labor. Two of the examples that I
have heard in the District would be skilled construction workers,
which Bob Forrestal also mentioned, and truck drivers, which has been
mentioned by someone else. There are also reports of growing delays
in deliveries of materials. District civilian employment growth has

7/5-6/94

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outpaced that of the nation in recent months. As a result, our
measure of the District's unemployment rate, which we base on a proxy
of four principal states in our region, has fallen to 4.8 percent in
April from an earlier high of 6.9 percent in October 1991. This is
the lowest level registered in almost 20 years. The District's real
estate sector remains very strong, with robust home sales. The
inventory of houses for sale is unusually low in many areas, and this
is adding to price pressures.
Finally, let me make a couple of comments about inflation. I
was certainly more comfortable last year when the broad measures of
prices were showing annual rates of increase of 1 to 2 percent. But
even then, as I think I expressed at the time, I was worried about the
stance of policy and its likely implications for future inflation. In
the meantime, most inflation measures, as we all know, have
accelerated, including broad inflation measures. Just to cite an
example, since September the CPI has risen at a 2.7 percent annual
rate, up from the 1.8 percent registered from April to September 1993,
and similar patterns obtain for other broad measures of prices. In
addition, some narrower price measures are moving up even more
sharply. For example, in the latest four months, both the PCE
deflator and the capital equipment component of producer prices were
up at about 3.8 percent annual rates. This information, taken
together with recent data on sensitive industrial materials prices and
oil prices, makes me very uneasy about the possible path of future
inflation. I think the risks are very clearly in that direction.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. I want to add my own two cents worth to the
Lindsey question about the spike in oil prices and to what extent it
should lead to an increase in the fed funds rate. To me that points
out the need for a good reliable monetary aggregate. Then we could
say we would not change it; we would stick with it and let the market
answer that question.
On the national economy, our expectations are very consistent
with the staff's forecast both for 1994 and for 1995.
In the Dallas District, we have seen some slowing in the pace
of economic growth over the past two months compared to the two months
before that. Much of the slowing was concentrated in the interestsensitive sectors such as construction and construction-related
manufacturing. Interestingly, many of the same sectors were suffering
from capacity constraints, so monetary policy does seem to be exerting
some impact where that impact is most needed. Sentiment has shifted
slightly from accelerating economic activity to continued moderate
growth. In our recent surveys, fewer firms than previously are
reporting a pickup in price and wage pressures and an increasing
number of firms are reporting that they do not expect prices to
increase in the short run. Competition remains pretty fierce,
particularly at the retail level. Capacity constraints are limiting
output gains in brick, cement, glass, and structural steel in spite of
efforts to boost capacity over the past year. Semiconductor and
computer equipment manufacturers are building large, new factories in
Texas, but they still have growing backlogs. A truck manufacturer
outside Dallas reported that he was operating at full capacity and
expecting to continue doing so for at least another year given his

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7/5-6/94

orders flow. These industries experiencing capacity limitations
represent about 23 percent of our District's manufacturing output but
only about 4 percent of total output.
On the trade with Mexico and NAFTA, the situation is a little
confusing. If you visit our border cities, you get the impression
that the favorable impact NAFTA previously had on retail sales in
those cities is somewhat weaker. But what they can see involving
trade between the two countries is much more positive.
The anecdotal
evidence suggests that the backup in truck traffic is longer going
south than it is going north, but that doesn't accord with the
figures, which I believe show that imports have gone up 20 percent in
the first quarter compared to a year ago, while exports have gone up
only about 13 percent.
CHAIRMAN GREENSPAN.

President Broaddus.

MR. BROADDUS. Mr. Chairman, for some time I have been
talking about strength in our District.
Perhaps I am too sensitive to
reports I hear of economic strength, but the recent reports we have
gotten from our business contacts and the surveys we conduct suggest
to me that, overall, the District economy is still strong. A couple
of examples: shipments of manufactured goods and new orders at
factories are still rising; tourism, especially at the Carolina
coastal resorts--places like Myrtle Beach--is exceptionally robust; we
have reports of record bookings at a lot of these places. With
respect to commercial construction, both retail and office vacancy
rates have been declining, and as a result we are seeing for the first
time in some time some speculative commercial construction. We also
have seen some scattered reports of labor shortages in parts of the
District--not a whole lot, but a few. We do see some signs of
moderation in our District, as has been reported for other Districts.
Car sales seem to be slower and residential construction activity may
have moderated a little recently. In explaining that slowing, our
contacts cite demand factors and to some extent higher interest rates
and higher income taxes. But they also cite supply factors as has
been the case in some other reports--low car dealer inventories and
shortages of skilled housing subcontractors, something mentioned by a
couple of people. Men are working seven days a week in places like
Raleigh-Durham, and they are getting a $1,000 bonus if they move to
new jobs.
With respect to the national economy, our projections are
very close to the Greenbook for both 1994 and 1995.
Like the staff's,
they are predicated on the assumption that this Committee will take
additional near-term policy actions necessary to contain inflation.
Even with that assumption, our view is that the risks in the
projection are on the up side--pretty clearly so from our standpoint
for the remainder of 1994. My view would be, and I think my staff's
view would be, that policy was pretty accommodative and stimulative at
least through the first quarter of this year. We think that will tend
to bolster aggregate demand, at least through the end of 1994. It
would not surprise me at all if we got a nominal GDP growth rate for
the second half of the year that is a good deal higher than the 5
percent annual rate projected in the Greenbook.
In any case, what is key in my mind is not so much the
exactness of our projections quarter-by-quarter for the next several

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7/5-6/94

quarters but rather the accuracy of our assumption that we will take
necessary action to keep the inflation rate from trending upward in
1995 and thereafter. The unemployment rate has already fallen to the
bottom of the range of current estimates of the natural rate, which is
a situation that concerns me. I have a lot of sympathy with Tom
Melzer's comments on this. I am certainly concerned about the
possibility that inflation pressures will now begin to intensify. We
are hearing more comments, more concern about price pressures,
especially supply prices in our District. And as far as I am
concerned, these pressure showed up pretty dramatically in the latest
purchasing managers' report. That report showed the percentage of
respondents reporting higher prices as 48 percent, which was about
double what it was three months ago.
CHAIRMAN GREENSPAN.
price increase?

Wasn't it higher because of the oil

MR. BROADDUS. That could be. In any case, it was a
significant jump, and I think that's something we need to keep in
mind.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. Thank you, Mr. Chairman. The District economy
remains in very good shape, and most of the indicators suggest that
that may continue for some time, perhaps for an extended period of
time. Employment gains have remained sizable; job availability is
good. There are some shortages of labor--in construction trades
clearly--as has been mentioned. Despite this healthy economy having
been in place for quite some time, there really are no widespread
signs of building wage and price pressures. Interestingly enough, the
one place one can find wage pressures without looking too hard is in
the entry-level jobs. Firms have said they have had to raise starting
wages in order to attract and retain people; otherwise, they move on
pretty quickly as soon as there is an opening at the next wage level
across the street. Much of the agricultural sector of the District is
in good shape, although the livestock and dairy industries are having
a very difficult year because prices have declined. We recently had a
meeting of our Advisory Council on Small Business, Agriculture, and
Labor. The members were generally upbeat along the lines I have been
describing, although they did suggest that there was a note of caution
in the air as a consequence of the increase in interest rates. But it
didn't seem to have translated into any changes in plans or intentions
or in what they were seeing in their businesses as yet.
With regard to the national economy, my own view is that we
might get a little more real growth and a little more inflation than
is depicted in the Greenbook, but I don't view those differences as
significant. If I take a step back, my sense of things is--and maybe
I am a little too sanguine or am overly influenced by what has been
happening in the District for a long time--that we are on a path that
we may well stay on for some period of time, that is, moderate growth
and moderate inflation. I personally have been surprised, given the
performance of the economy over the last couple of years and given the
diminution of unemployed workers and of unused capacity in
manufacturing and elsewhere, that we have not seen more wage and price
pressures. I have asked myself about that development or lack of that
development as it were, and I have tentatively concluded that perhaps

7/5-6/94

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the economy is a little less inflation prone than I thought earlier.
In any event, my sense is that we may remain on the path we are on for
some time.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. Mr. Chairman, the economy in the
New York District continued to advance at a moderate pace in late
spring. Unemployment rates fell and payroll employment rose. State
tax collections for retail sales, personal income, and corporate
franchises have risen moderately so far this year, suggesting growth
in the underlying streams of personal income, corporate income, and
retail sales. Vacancy rates for commercial office space continue to
decline in most metropolitan areas, while permits for residential
construction of new, single-family homes have snapped back from the
weather-reduced lows of the first quarter. For New York City,
however, several recent economic indicators, including establishment
employment, city government payrolls, and initial claims for
unemployment insurance suggest that an economic pause may be
developing. The financial sector, needless to say, is not having
quite the happy experience that it had in the first half of 1993. On
an overall basis, the District economy maintains a reasonable pace,
although we still compare rather poorly with most areas of the
country.
Our forecast on the national level is that, even given an
unchanged monetary policy, real GDP growth will gradually taper off
from the roughly 3-1/4 percent rate in the first half of this year to
around 3 percent in the second half and about 2-1/2 percent in 1995.
We think that slowing growth is likely the lagged result of the run-up
in long-term interest rates. The forecast is a bit softer on growth
than the one we prepared for the last meeting and it reflects the 50
basis point increase in the funds rate at that time and a slightly
higher path of long-term interest rates than we had anticipated. We
think this increase in long-term interest rates will particularly
affect housing and related elements of consumer spending, such as
furniture and appliances. Indeed, available evidence suggests that
single-family housing starts may have begun to slow, although how
convincing those data are remains to be seen. We think that higher
rates should also affect motor vehicle sales and perhaps slow down
capital spending. That forecast would put us rather along the lines
that Gary Stern suggests. Our problem is that we think the risks to
our forecast are asymmetric. There is not much risk of the economy
being less strong, but there is a major risk that we are
underestimating the upward momentum in both real output and inflation.
The housing market could recover later this year when households
adjust to higher interest rates, while export demand could pick up
strongly with a decline in the dollar and overseas recoveries.
Therefore, we think it is very important at the present time to watch
very carefully the real economic data coming through to see whether
the rather benign path that is possible is in fact taking place or
whether the stronger growth, which we think is the likely alternative,
would indicate that rather strong policy moves will be required.
CHAIRMAN GREENSPAN.

President Jordan.

MR. JORDAN. I can comment on a number of things in the
District that might add to what has been said so far. Generally,

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people feel that the District economy is stronger than before and
better than some people were projecting earlier. I have no conviction
at all as to whether this is even a coincident indicator, let alone a
leading indicator. A regular recently completed quarterly survey of
almost 500 businesses in the District indicated that 42 percent of the
companies expect to hire full-time permanent workers this year versus
33 percent when that survey was previously taken; 43 percent now said
they are going to increase capital outlays; 37 percent said that
earlier.
Energy used by the industrial sector is said to be booming by
one of our companies, up very sharply in the first half. Some
segments like cement are up 35 percent, while nonresidential
construction is flat. Overall, residential activity is up in the
District, and we continue to hear anecdotal comments about shortages
of skilled workers and certain kinds of supplies. My contacts tell me
that lumber prices appeared to have stabilized, but copper is so
volatile that builders can't get firm bids on electrical work for
future projects. Various aspects of communications are quite strong.
Firms in the Pittsburgh, Cincinnati, and Lexington areas claim to be
operating at capacity levels and increasing employment. One director
referred to explosive growth in the high-tech area. Throughout the
District, though, medical care is down, and that's a big segment of
the Pittsburgh area economy; it's large but relatively not as large in
Cincinnati, Columbus, and Cleveland. Our contacts in medical care all
say that they are shrinking their payrolls. That was really the only
sector that was cited as being weak. Interestingly, contacts in
eastern and central Kentucky say that conditions are the best in over
a decade, and they're talking about planning to do away with coal
dependency and produce other things, especially wood products given
the problems in the Northwest, and interestingly poultry. Western
Ohio and Indiana have done so well on poultry that Kentucky people
have decided to enter into the glut of chickens, eggs, and turkeys.
We visited a Toyota plant outside Lexington, in the
Georgetown area. They are going to add a new model to their
production line. They employ 5,200 workers now and are going to add
another 800 by year-end. They say their biggest problem is that the
workers have to commute 1-1/2 to 2 hours to the plant because there
simply is no housing and no schooling in and around the Lexington area
close to where they work. Also in the Lexington area, people say that
apparel is booming, that it's easy to raise prices, and that several
thousand workers have been recalled.
There were a lot of reports of price increases in the
District. I don't have any sense that they have anything to do with
inflation, but still people talk about prices going up. The coating
business people said that their backlog is at an all-time high and
getting even longer. They have seven-day, 24-hour operations for the
first time ever, and they put through chemical price increases on
intermediate products of up to 9 percent on July 1. The strike at
Allegheny Ludlum that I reported on before has ended. They settled on
a package of four years with a total increase increase in compensation
of 11 percent plus profit sharing. The manager said he is running his
operations quickly back almost to capacity. Demand for his products,
both domestic and foreign, is very strong. He said exports of
specialty steel to China, India, and Poland are growing very rapidly.
He was looking for price increases of anywhere from 5 to 9 percent for

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the balance of this year. He complains about the rules that give the
government veto power over his business. Plastics also are reported
to be the strongest in six to seven years, with record orders
especially for equipment for plastic manufacturing. That applies
mostly to plastics used for medical supplies and appliances. They
also are talking about their ability to raise prices later on. I got
contrasting reports from auto parts suppliers. One supplier,
representing a huge company that operates worldwide, was berating me
because he said that I didn't understand that it was global capacity
that was preventing increases in the prices of their products.
Another almost as large company said it was very easy to raise prices
sharply because of the level of the dollar and the related fact that
domestic auto companies and transplants were regaining domestic market
share. He was talking about his need to pass through higher input
prices--chemicals, metals, etc. He thought he could do it; other
contacts thought he couldn't.
On the national outlook and the Greenbook, I had a lot of
problems with the inflation projection--I guess this spills over into
the Bluebook discussion for tomorrow--that the 3 or 3.1 percent
inflation rate in the staff forecast continues into the next
millennium because it seems to me that the basic model is consistent
with a constant rate of inflation. That sort of analysis says that
whatever the rate of inflation is at the time the economy hits the
NAIRU, that is then the inflation rate we live with forever unless we
are willing to cause unemployment by raising interest rates. To me
the projected inflation numbers that we are looking at--whether or not
they reflect reliable model results--should be unacceptable to this
Committee if we are going to maintain the wording in the directive
that our objective is to move toward price stability. When I
submitted my projections for 1994 and 1995, I took literally the
instruction that they should be based on what would be an appropriate
monetary policy. It seems to me that an appropriate monetary policy
objective should be one that leads to a lower rate of inflation. And
so that's what I submitted.
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. Mr. Chairman, this economy sounds as good as it
gets. But before we all start feeling too good, I thought I would
report on something that I have not mentioned for a little over a
year--it won't make us feel good--and that's health care. There are
four Congressional committees considering the health care bill, and I
thought I would share with you some of the economics that are implicit
in that legislation. It looks like the direction in which it is
moving has some kind of subsidy for moderate income families. If we
think about it, that's a very natural path that we should applaud.
The catch is that when the subsidy is phased down as family income
rises, it is no different than imposing a tax, at least in terms of
the side effects. The numbers involved are impressive. The CBO has
scored the Clinton plan for a family as worth $7,000. So, say we
phase down the $7,000 subsidy over a range of $20,000 or something
like that; that is a 35 percent marginal tax rate. The chances are
that something that generous will not pass. So, I scaled back the
Clinton plan by about 30 percent to a 1994 cost of $4,800. For a
family, these numbers are very much in line with what Senator Cooper
has proposed and what Senator Moynihan got through his Committee. For
a family of three, the health care bill would add 27 percent to the

7/5-6/94

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marginal tax rate. So on top of a 15 percent federal income tax, 7.65
percent social security and FICA taxes, state and local income taxes,
plus the phaseout of the earned income tax credit, a single mother
supporting two kids would be in a 75.7 percent marginal tax rate
bracket for income from about $14,000 to about $34,000. I know our
staff's model doesn't take marginal tax rates into account directly,
even 75 percent ones, but that would seem to have some serious
effects, especially to me. For larger families, the phasedown range
is wider and the effects are more modest. Assuming the earned income
tax credit is already phased out, families of four earning between
$20,000 and $50,000 would have marginal tax rates of around 49
percent. So we are now in the situation of having the great bulk of
moderate-income America facing marginal tax rates of between 50 and 75
percent. And that's with a moderate health care bill! We speculated
earlier about possible supply shocks that might come from the Middle
East but the actual shock might come from Capitol Hill. Things are as
sweet as they get, but we always manage to shoot ourselves in the foot
somehow. Thank you.
CHAIRMAN GREENSPAN.

Governor Laware.

MR. LAWARE. It may be a habit, but as has been usual in
recent months, I am going to play the role of Cassandra and I would
encourage you to worry with me about the economic environment. I am
convinced that the moderation in housing, autos, and retail sales is
not as much a function of higher interest rates as it is a function of
anxieties endemic in the public. This would seem to be borne out by
recent marginal changes in consumer attitudes. When members of
Congress cannot make up their minds about health care and how it will
be paid for and by whom, the public becomes confused and uncertain.
Add to that the continued reengineering of corporate America and it is
easy to understand why people worry about the security of their
employment. That all adds up to a reluctance on the part of both
consumers and the corporate sector to take on long-term commitments.
Certainly, the pattern of business investment spending in recent
months is for replacement, not expansion, of capacity. While many of
the market measures of capacity utilization and unemployment levels
are at the threshold of exerting upward pressure on inflation, it
seems to me that the tea leaves are still very hard to read. This
might be an appropriate time to take a breather until it is clear what
the direction and magnitude of economic activity turn out to be.
You're welcome. [Laughter]
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. Mr. Chairman, I have been comfortable with all
of the policy moves we have made this year. The primary reason is
that it certainly has seemed to me that we needed to remove the
stimulus from policy that was there for a long time and was no longer
appropriate. But I have had questions throughout the spring as to
what the real economy might require after we eliminated that stimulus.
The questions were primarily in two related areas. It's clear that we
are approaching full utilization of resources in the economy, but it
has been unclear to me just how close we really are. More important
than that, as we move into that zone, what sort of momentum will the
economy have that might push us into an overheating-type situation?
Related to that, over the time horizons that the FOMC can usually and
reliably work with, how likely are we to set off some type of

7/5-6/94

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inflationary episode? In support of that line of questioning, I have
been reciting a litany of factors and I am not going to repeat those,
but it does seem to me that the recent information, on balance, has
been stronger than I would have expected. The first quarter of 1994
has proven to be stronger than it first looked to us and the second
quarter looks stronger than I expected earlier. We have talked about
the decline in the dollar and the foreign economies beginning to
strengthen. The hours numbers recently have been remarkably strong,
and employment looks as if it might be as well. I am not prepared to
say that all my questions have gone away, but it does seem to me that
so far events seem to be more on the side of strength in the economy.
Momentum is certainly greater so far than I would have anticipated.
We have been getting reports today from around the Districts that some
slowing is beginning to become evident; we will see how much of that
takes hold and how quickly. But from where we apparently have been
recently and appear to be today, if that momentum is clearly still in
effect very much longer, I am going to have to move in the direction
of thinking that we may need to do considerably more in the area of
policy changes.
CHAIRMAN GREENSPAN.

Governor Phillips.

MS. PHILLIPS. Thank you, Mr. Chairman. While the expansion
appears to be continuing, the question is at what pace, and we all
seem to be struggling with this question as to whether we are below,
at, or above capacity. On the supply side, how much slack is left in
the labor and product markets? Even if we had good historical
measurements of aggregate capacity and slack, I wonder to what extent
we could use these to estimate the future. In the area of labor
markets, I felt more uncertainty around the table than usual. The
staff estimate for the current quarter is 6.3 percent unemployment
when the current rate is at 6 percent, and Mike Prell suggested that
we were uncomfortably close to being analytically blind at this point.
I thought he gave a pretty good description of some of the concerns
with the labor market information. A number of folks are reestimating the NAIRU, and the announced values that they're coming up
with vary all over the lot. I think we are experiencing significantly
different labor conditions in different parts of the country. At
least for me, that's one of the explanations as to why there is so
much uncertainty. This raises questions about labor mobility between
regions or perhaps labor mobility just with respect to certain
professions. We are hearing certainly of spot labor shortages, and a
couple areas were mentioned. I do think that this re-engineering that
we have talked about over the last several months may be changing the
equation and causing a bit more churning. And just because somebody
has a job, they may well be looking for a better job. So I think that
that is fogging the numbers somewhat.
On the price side, the most consistent story, it seems to me,
is that while there are pressures in the basic commodities,
competition is constraining final goods prices. But even this story
may not hold up for too long if capacity utilization continues to be
strained. For me, it's very hard to ignore the sustained price
increases in 1994 for many of the basic commodities. Certainly, there
are ways to deal with price increases in commodities that continue for
a short period of time. If these increases are sustained for a longer
period of time, that's going to be more of a problem. On the demand
side, we have heard and are seeing evidence of some slowing in

7/5-6/94

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spending, but the question again is whether we will overshoot,
achieve, or undershoot that elusive soft landing.
I haven't heard quite as much discussion of the financial
markets today; maybe everybody was exhausted after the exchange rate
discussion. I think that the markets have survived significant
turmoil beginning with the Fed tightening in February. After that
tightening, markets have been hit with international uncertainties,
foreign exchange crises, and domestic political crises. But overall,
the market performance, I think, has been quite good. We have had no
major U.S. casualties; money has moved; we do not have gridlock.
The
market capacity improvements and the safety nets that have been put
into place in the last couple of years seem to have worked. Bank
internal risk management models appear to have worked. The
contraction of exposure has been fairly orderly as we have gone
through significant market moves. Bank credit has expanded. I think
we have weathered that road quite well. I didn't want a fair amount
of this turmoil to go unnoticed just because we are not seeing
headlines about problems in financial markets and institutions. The
markets seem to be a bit more settled.
I question the strength of
inflows to mutual funds, but at least we are not seeing massive
outflows from some of these markets.
The stock market is certainly
down for the year but it has moved sideways for the last three months.
We may still have some volatility concerns about the bond market,
although this is less likely to cause political concerns because the
bond markets affect individuals less directly.
In sum, this is what Ed Boehne called a transition period and
whenever we are at a change in a business cycle, we are likely to get
a fair amount of conflicting data and mixed views. And since we seem
to have more than the usual amount of conflicting data and opinions, I
am going to assume that we have found the turning point. At best, we
have the soft landing and maybe this is as good as it gets as Larry
Lindsey mentioned. The key at this point is not to make a mistake and
end up with too much inflation or in a recession. I do think that the
tough part is going to be to hold on to the gains that we have made
against inflation and, in fact, to make some progress toward achieving
price stability. Unfortunately, I think that the going will get
tougher, with more tightening from this point on. We may well be
going onto slick pavement as we travel forward.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. Thank you, Mr. Chairman. As all of you know, I
wasn't here when this tightening started, and I was trying to imagine,
if I had been here on February 4th, what I would have wished for July.
I think I would have wished for almost exactly what we have gotten in
terms of the real and nominal economy. I wouldn't have wished the
dollar down, obviously, and I think I would have expected and
certainly wished that the run-up in long rates was less than it has
been. But in terms of the evolution of real spending and the signs of
inflation, I think what we have today is very, very close to what I
would have wished for back in February--which is to say better than
anyone reasonably should have hoped for, because wishes don't usually
come true. I judge the risks now to be pretty balanced under current
policy, as Bob Forrestal said; and I would add something to that: "and
they are small."
It's very hard for me to put much probability on a
scenario that has a very large overshoot capacity. And it's very hard

7/5-6/94

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for me to put much weight on a scenario of the economy's growth rate-never mind a recession--going down to growth of 1 percent or 1-1/2
percent in 1995; that seems quite unlikely. So the risks are
balanced, I think, and small. It looks to me like a three bears
economy: not too hot, not too cold, it's just about right. It seems
that the Committee was very, very lucky--[laughter]--skillfully lucky!
Let me say for the record that you can do the right thing and be
unlucky and come out in terrible shape.
CHAIRMAN GREENSPAN.

You can do the right thing and turn out

right.
MR. BLINDER. And you can do the right thing and turn out
right, which is the way it looks for now. The staff's forecast looks
about correct to me, given the further tightening of monetary policy
that's assumed in that forecast. I call attention to something that I
felt very much and that Mike Prell pointed to himself, that the 3-1/2
percent growth rate for the quarter just ended was predicated on some
good numbers coming in that we haven't seen yet. Mike characterized
it as a stretch, and it looks like a stretch to me; we might get it,
but it does look like a stretch. The staff's 2.2 percent real growth
forecast for 1995 is weaker than the Committee consensus; but I think,
given the additional 100 basis point fed funds rate increase presumed
in that forecast, it's not unreasonable. I would point out that,
given the lags in monetary policy, we should expect that tightening to
carry over into 1996, and that would say to me--the forecast horizon
ends at the fourth quarter of 1995--that we may see a slower growth
rate than 2.2 percent, perhaps a slower growth rate than 2 percent, in
1996 under the assumed policy of another 100 basis point increase in
short rates with some sympathetic movement in long rates, not with a
zero change in long rates. I want to talk some more about this when
we talk about policy tomorrow. To me, 2 percent growth starting in
late 1995 and into 1996 looks a bit on the low side, if you believe
that we are fairly balanced right now, and I'll come back to that.
I wanted to raise one more question. Susan and a number of
others talked a lot about capacity. Mike Prell was quite right, I
think, to say the light's a little bit out on the extent of pressures
on capacity right now. As I listened to the reports from the twelve
Districts, which echo more or less the Beigebook, I thought there were
fewer reports of tight labor markets than one would expect if we are
sitting exactly at the natural rate right now. I think the anecdotes
are consistent with the view that we have, not a lot, but a little bit
further to go and, of course, we can never know that for sure. In the
same vein, on capacity utilization: I think we want to remember that
after an investment boom of the length and magnitude that we have had
and are still having, it is very likely that there is more industrial
capacity out there than we are actually picking up in the
measurements. This just reinforces my view that the risks are twosided. There is a risk of coming up short as well as the risk of
going beyond. Thank you, Mr. Chairman.
CHAIRMAN GREENSPAN. Thank you. We meet at the British
Embassy at 7:30 p.m. for cocktails, and I assume dinner around 8:00
p.m. Transportation for the presidents will be at the Watergate from
7:10 to 7:15 p.m. and here for Board members also at 7:10 to 7:15 p.m.
[Meeting recessed]

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July 6, 1994--Morning Session
CHAIRMAN GREENSPAN.
MR. KOHN.

I call on Mr. Kohn.

[Statement--See Appendix.]

CHAIRMAN GREENSPAN. Don, let me sort of interpolate on what
you ended up saying with respect to providing 1996 projections to
Congress. I think our public policy posture always has to be in favor
of either low or declining unemployment rates or low or declining
inflation. The truth of the matter is that while monetary policy
matters, it obviously can't encompass as much as the committees up on
the Hill would like to require us to accomplish. I think we have to
indicate that we will accommodate as strong a growth as comes out of a
noninflationary environment. Indeed, we would foster such growth but
argue strenuously that long-term stability and the sustainability of
employment require that inflation be held in check. While we
acknowledge the short-term Phillips curve, we can't acknowledge,
because I think it doesn't exist, anything beyond the very short-term
posture. Once we get into that, I think we are letting ourselves be
led down a road of public policy perceptions that we can't meet and
shouldn't meet. If Congress wants to impose certain requirements on
us, that's their prerogative, but for us to get out there and make a
projection, which we all do, we also have to recognize that
projections are not goals. I will make a projection that I think the
inflation rate will be "x" and I think "x" is unacceptable. That
doesn't mean that I say "x" is unacceptable, therefore I will change
it. A goal and a projection are two fundamentally different things.
We don't make the distinction in our request for your projections. We
merely ask what individual members are projecting. Some are thinking
of them as goals and some are making them as forecasts. And that's
fine; it's fine in the sense that it seems to be working. But once we
get out beyond the intermediate period, I think we're in for some
serious questions.
I might just say on the monetary growth ranges that I am
inclined to do nothing on M2. The reason is that I think the 1 to 5
percent range is where we want to be when eventually we get velocity
in M2 coming back, and I wouldn't want to touch it. But I am
intrigued by the notion of taking the debt aggregate down as a symbol.
The question is how relevant it is to the outlook. Indeed, I have a
suspicion that it may be more relevant than the M2 numbers. What type
of perception do you think that would create, if any, in the
marketplace?
MR. KOHN. There might be a reaction that the Fed is paying a
little more attention to debt, that is, you bothered to change the
range instead of leaving it. But I think it would depend crucially on
the rhetoric that was associated with the change. If it was explained
that slower debt growth has been occurring over recent years and
should continue to be associated with slower nominal GDP and damped
inflation, I don't see us creating a new feeding frenzy around debt,
if that's what you are concerned about. I think it is perfectly
explainable. It is a very high range, especially compared to the M2
and M3 numbers.
CHAIRMAN GREENSPAN.

Governor Lindsey.

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MR. LINDSEY. Thank you, Mr. Chairman. Don, I was surprised
by Chart 1, particularly in light of what the Chairman just said about
our eclectic views of the Phillips curve, which is that one probably
exists in the short run but not in the long run. That Chart 1, if I
believed it--and I believe everything you tell me, Don--would convert
me into being a wild dove because what we could do with easier money
is to reduce the rate of unemployment permanently below what it would
otherwise be without ever paying any cost for that. Now look at the
bottom of the chart.
It means, as I understand it, that simply by
printing money we can increase the long-run aggregate amount of output
in the economy.
MR. KOHN.
I think the models embody a vertical long-run
Phillips curve; it takes a while for it to come out here.
MR. LINDSEY.

Into the next millennium!

If you had not noticed that the inflation
MR. KOHN. Yes.
rate is up at 4 percent and the only reason it's not continuing on the
upward trajectory is that we bent the unemployment rate up and so you
have-CHAIRMAN GREENSPAN.
MR. KOHN.

But never backwards?

No.

Only the coefficient is unchanged even
CHAIRMAN GREENSPAN.
though it gets smaller. What Governor Lindsey's saying is
arithmetically irrefutable.
MR. KOHN.
stretched out--

In this time period, that's right.

CHAIRMAN GREENSPAN.

But if you

Then the interesting question--I am

sorry.
MR. LINDSEY.

No, go ahead, please finish.

CHAIRMAN GREENSPAN. It strikes me that if we're postulating
that there is no evidence of long-term Phillips curve tradeoffs, but
that there is one in the short run, it therefore follows that
somewhere between the short run and the longer run, it is backward
sloping.
MR. LINDSEY.

Right.

MR. KOHN. If the unemployment rate had not come back up
toward the natural rate, inflation would have continued to accelerate
on a straight upward line.
If you believe that there are some costs
to inflation, those are not embodied here; that is, the uncertainties
and costs of higher inflation rates are not in here. I think it is
very strongly the Committee's view that they are not indifferent to
creating a 4 percent inflation rate versus a 3 percent inflation rate.
MR. LINDSEY. What does this cost?
I assume the civilian
unemployment rate is not a bad proxy for real GDP, so we never pay a
real output cost. The only time the unemployment rate even starts to
go up under this chart is when we eventually raise the fed funds rate.

7/5-6/94

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MR. KOHN. But if you didn't do that, the inflation rate
would continue to accelerate forever.
MR. LINDSEY. But if I were going to vote just on this chart
or if Mr. Gonzalez or any member of Congress asked me to vote on this
chart for a term that exceeds a senator's term, we now can vote to
have an interval, which is really what we want to look at on the CPI,
that would--let us see it looks like, I am just going to ballpark it
and say 3/4 percent for 6 years. So 4 million extra job years can be
bought by this Committee by voting for the easier money path at
virtually no inflation cost.
MR. KOHN. You have a percentage point of inflation cost.
There is, as you say, an interval if you go from 3 percent inflation
forever to 4 percent inflation--without taking account of the
feedbacks on economic growth but just in Phillips curve terms--in
which you will realize some extra output in the meantime because you
can drive the unemployment rate below the natural rate for a short
time before bringing it back up to the natural rate. But you will end
up with 4 percent inflation, not 3 percent inflation.
MR. LINDSEY.

And when will we ever pay the price?

MR. KOHN. When you tried to bring inflation back from 4
percent if there were a cost associated with 4 percent rather than 3
percent in terms of the efficiency with which the economy operates.
MR. LINDSEY.

But there's no cost in terms of output?

MR. KOHN. Unless there is a feedback from the 4 percent to 3
percent on productivity and on efficiency.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. I just want to make a comment, but first a
technical question. Do these results come out of the MPS econometric
model?
MR. KOHN. The baseline is judgmental; the deviations from
the baseline come out of the MPS model.
MR. BLINDER. That thing will cycle as you let it run; so
that's one part of the answer. I am a little surprised that it
actually hasn't crossed zero by 1999, but it's going to cross zero and
actually get, I think, to fairly exciting numbers on the other side
before it cycles back down again. But the main point is that this
really shouldn't be a surprise. Larry, you just described what
happened in 1988-89. We had an interval of extra jobs as we overshot
the natural rate; the inflation rate rose by almost exactly 1
percentage point. Then this Committee reacted to that, and we had a
recession, and that's where you pay the cost. You're looking at a
picture of 1988-89 here, basically.
MR. LINDSEY. If you extended that to 2006 or 2008 or
something like that, you do believe I think that we would actually be
starting--

7/5-6/94

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MR. BLINDER. I think this would probably cross in the year
2000, if you just let the MPS model run.
CHAIRMAN GREENSPAN. Yes, but the fact that the base case is
a judgmental model tells you something about the add factors that we
have to deal with in this broad MPS model. If we allow the MPS model
to run with no add-factor changes, the results we'd get--I will
stipulate without knowing it and Mike can take a shot at me if he
wants to--would be garbage.
It would be unacceptable. If the un-addfactored model engenders results that do not seem to capture what is
going on in the real world, why do we assume that a simulation coming
from that model, which is supposed to capture what's going on in the
real world, captures the actual scenario?
I think we have this
problem that is always involved in any of these simulations. I think
Don is merely doing what we want in putting something together to get
us focused. But what may be wrong with all this is that instead of
putting down a literal timeframe, I think we should put down T, T+1,
T+2, because I am not sure we know what the timeframe of this whole
process is, and I am sure we don't know what the reduced form of this
whole system is because it doesn't fit the real world in a way that
makes any of us comfortable at this stage. If it did, we wouldn't be
using so much judgmental evaluation in working off the MPS model to
get a set of relationships, which I think is the right way to
forecast. That model forces you to make certain key judgments for
consistency. But it doesn't force you when certain elements within
the system are very difficult to measure and are really highly
important to the end result. We can argue this as much as we want,
but the truth of the matter is that we would have to fall back on our
own judgments of the impact of this sort of thing because we are
pressing the limits of our technical capabilities to get anything more
than illustrative types of scenarios, which is what Don has been
trying to do.
MR. KOHN. I was going to suggest not only removing the dates
from the horizontal line but also removing the scale from the vertical
I agree with what you said, Mr. Chairman; it is
line.
[Laughter]
supposed to illustrate tendencies.
MR. PRELL.
I have no quarrel with anything you said, Mr.
Chairman.
Indeed, it's a point that I have made many times, and I
have convinced myself that I should be very leery about presenting
these kinds of simulations.
If I don't buy the model in the baseline
forecast, why should I buy the differentials literally? Now they are
probably the best we can do systematically at this point because it's
very hard to juggle all of these variables in a judgmental fashion and
come up with a whole array of alternative simulations. And we are
trying to improve the model so we can have greater confidence. I
think the key question the Committee has to ask is whether it believes
the baseline. For example, those who feel that the NAIRU is much
lower or that the true unemployment rate is lower relative to the
NAIRU would have a different baseline path so that the most
stimulative policy wouldn't necessarily yield higher inflation than we
forecast. It might be comparable to what we forecast. Still, the
point, I think, is that you only get a short-run benefit, and not a
long-run benefit, if you feel that over time higher inflation has a
negative implication for economic efficiency and productivity in the
economy. That, I think, is the key judgment you folks have to make.

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CHAIRMAN GREENSPAN. I just want to make one response to
Governor Blinder. It is true that when the inflation rate went to 4
percent, we responded. But if we believed the MPS model with its
linearities and the very long-term implications for tradeoffs, we
basically would have said, well, 4 percent is acceptable. That's
because I found, looking at the MPS model in 1989 that simulating 4
percent or the type of inflation rates that existed using nominal add
factors, the case that could be made for the type of policy we
initiated to tighten up was very weak. The model that we were

effectively using as a policy instrument did not coincide with this.
I think one of the things we are learning is that we are forced to fit
linear models to structures that don't stay stable long enough to get
a fix. I think intuitively, if I want to use that word, we try to
adjust to that. I am sure because we were here, at least I was in
1988-1989. It's not as though we have an irrational sense that 4
percent inflation is sinful or that it is inappropriate for society
for a whole series of non-economic points of view. The reason we
moved as we did was because we thought inflation was truly undermining
the fundamental growth and stability of the economic system. You
could not have inferred that then, I would wager, by running
projections off the MPS model. In fact, I remember them. I looked at
some of the ones in which we tolerated just mildly higher inflation,
and I had the same impression as Larry did. You know, why not, if you
believe it. The question is do we? I don't want to speak for the
Committee, but listening to the way this thing evolved over the years,
I would say that there's very great skepticism with respect to this
type of linearity. My own guess is that the MPS model isn't simple.
It's complex, very sophisticated--the best econometric model I have
ever seen. But the world is far more complex than that, and I think
we have a tough task in trying to figure our how to play against that
world, which always does things we insist it shouldn't be doing.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. I just want to comment on what we have been
discussing. I think one of the problems with an exercise using this
approach is that there are no explicit costs associated with
inflation. That was implicit in Governor Lindsey's comments. But if
we continue to look at it this way, we are always going to say, at
least at first glance, why not avoid a tighter policy or why not
indeed go to an easier policy. One of the things we have to try to
find is a way of considering explicitly the costs of inflation in all
this. My impression is that there are some models around that do
that. But until we do that, it seems to me that these exercises are
really of very limited value, because it always looks as if the best
thing to do is either nothing or ease.
CHAIRMAN GREENSPAN. That basically is built into any
Keynesian structure that does not have a feedback mechanism that
overwhelms the Phillips curve and turns it around. None of the models
of which I am aware, including the one in which you draw a vertical
Phillips curve in the long run, which is correct for the long run,
answers the question whether or not the path going there is quite
different. I don't think we have adequate data to capture that.
That's why we have trouble with this sort of stuff. We have to ask
ourselves whether we should forget monetary policy and focus on the
budget deficit. I would venture to say, because I had some tests run
on this, that if you just allow the budget deficit to expand by 20

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percent a year indefinitely, it's remarkable how long it takes for
something wrong to happen. President Broaddus.
MR. BROADDUS. Mike, along the same lines, as I remember, a
couple of years ago you were experimenting with a model that had a
forward-looking expectations formulation mechanism in it. As I
recall, you actually ran some simulations on that model at one point
and included those in the Bluebook or at least a description in the
Bluebook that give very different pictures with respect to alternative
policy postures. Have you dropped that or are you still doing that?
MR. TRUMAN. They weren't used in the Bluebook; they were
based on the experimental model. This was done in the International
Finance Division. We did it for the special presentation that was
made for the FOMC on costs of inflation. But I think the
characteristics of those models were not different fundamentally--at
least what I took away from those models--from what the Chairman just
described in terms of these models. It's a question of what you put
in. You do not get a better tradeoff unless you impose on the model,
which we did at that time, that you have a credibility gain. Rational
expectations models don't give you that unless you build in that view.
But that's ex cathedra--not something that you can derive from
statistical estimations.
MR. PRELL. Mr. Chairman, I think it's important to mention
that if people anticipated this higher rate of inflation, we might not
get this short-run output gain.
MR. BROADDUS. To be explicit, under the tighter alternative
on Chart 1, I think something like that model would show that the cost
--in terms of unemployment--of moving toward price stability in this
timeframe would be lower. I am not suggesting that you substitute
that kind of model for this model. I am only suggesting that it was
helpful for me to have that as another benchmark to establish a range
of possible outcomes.
MR. TRUMAN. As Mike explained, there are two projects under
way this year in which the staff is trying to produce a richer set of
models for you to draw on, which will probably confuse matters
further. But our objective is to try to improve these models and to
be able to capture, if I can put it that way, a richer mix of the
expectations process in the presentations we put forward to you. You
may end up having so many branches on the tree that you get lost in
the forest from it.
CHAIRMAN GREENSPAN. Ted, it strikes me that what you are
basically saying is that we are missing a few variables in the system,
such as a statistic for inflation expectations as a key operative
variable. If you want to look at the feedback effect, one would
presume that the actual mechanism through which it would work
basically would be through something that is measurable, which we
can't very well observe at the moment. If you look back through the
'60s and the '70s and the '80s, the crucial missing variable in the
models was a number for inflation expectations. If one could have
forecast that with any degree of accuracy, a lot of what evolved over
the period would have been readily captured in the models.

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7/5-6/94

MR. PRELL. At least that expectations might be shaped by
something other than the experience of the past several years-CHAIRMAN GREENSPAN. Yes. I am not saying what that is a
function of. We know it's a very difficult issue, but that is the key
variable. It's important, but just because we can't make a judgment
as to what these driving forces are in an econometric sense doesn't
mean that it's not real. President Boehne.
MR. BOEHNE. I just wanted to make an additional point in
this discussion about whether one believes the model or not. If you
believe that you can go from 3 percent to 4 percent inflation and
permanently buy some increases in output and jobs, when you get to 4
percent you will also find the model will show that you can go from 4
to 5 percent and also buy some more output. The same applies from 5
to 6 percent. So you tend to get on that kind of slope, and it's much
easier to draw the line at lower rates of inflation than it is at
intermediate or higher rates. I think we have 20 years of experience
which indicate the validity of that.
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. I'd like to take President Boehne's point and
just reduce it to a single question.
If we ran the model out, do we

believe that if we applied some social rate of discount, the losses in
output later on would be more than, less than, or equal to the gains
in output in the short run?
MR. KOHN. The model itself doesn't have, I don't believe,
losses in output from higher inflation rates.
MR. LINDSEY.
MR. KOHN.
MR. PRELL.

Ever?

I don't believe so.
Well, it might, though, in tax terms.

The fact

is that our tax system isn't fully indexed; the effective corporate

tax rate rises as inflation goes up, and that would raise the cost of
capital, reduce investment, and lower productivity over the very long
run. That, I think, is probably embodied in our current model. And
it's one of the things one would point to in estimating the losses

over the long run with higher inflation. There are other
possibilities in terms of inefficiencies in the price mechanism's
operation and so on that are not captured.
MR. LINDSEY. But if I heard you right, we never have a net
loss in output resulting from a choice to go for inflation?
MR. PRELL. It does not take, in terms of a normal simple
cost of capital calculation, a very big inflation differential to get
you a net loss in the present value in the long run.
CHAIRMAN GREENSPAN. The argument as to why we get a net loss
is "the Federal Reserve will react--do something."
But the question
is, we are the Federal Reserve and why should we react if that's true?
MR. LINDSEY. If we don't believe that the present value of
output in this economy will be lower by letting inflation alone, then

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-45-

we should let inflation go up.
It's as
anyone around the table who thinks that
value of output of this economy will go
them in voting to cut the discount rate
CHAIRMAN GREENSPAN.
you said it!
MR. LINDSEY.

simple as that.
Is there
by printing money, the present
up?
If there is, I will join
to zero.

Oh, no, you don't mean that statement as

Why not?

MR. BLINDER. Because the Federal Reserve Act directs us to
maintain stable prices. We are created to do that.
MR. LINDSEY.

If we can prove--

CHAIRMAN GREENSPAN. What you said was:
If anyone around
here believes that, I will vote to lower the discount rate.
MR. LINDSEY.

Yes.

CHAIRMAN GREENSPAN.

I was surprised that Alan bought that.
If anyone convinces you--

MR. LINDSEY. That's true. Do we believe that printing money
will increase the present value of output?
MR. BLINDER. Yes, I think we would. I believe that printing
money will give the economy a temporary high that will not last and
therefore in the integral sense that you said, yes, you get a larger
integral of output over an historical period, if you never decided to
end it--if you never said, when you got to 10 percent inflation,
whoops, that wasn't very good, and you went back to lower inflation.
CHAIRMAN GREENSPAN. Yes, but why would you conclude that at
that point when, because as Ed Boehne says, 11 percent is still
better?
MR. BLINDER. If 11 percent is better than 10 percent, if
there's no cost to inflation--I am a little bit surprised at the tenor
of this conversation around here!
[Laughter]
There is some academic
content that is-CHAIRMAN GREENSPAN. In all seriousness, the question really
gets to the models. Why would you believe that there is a cost of
increased inflation from the models?
MR. KOHN. Isn't there a lot of cross-country and cross-time
evidence that once you get past very low rates of inflation, there are
costs in terms of growth and efficiency at higher levels of inflation?
Higher levels of inflation tend to be more variable; you get a lot
more uncertainty; people have to interact with the tax system and
other things that aren't indexed to inflation rates. So, there are
substantial costs. Now if the System had confidence-CHAIRMAN GREENSPAN. I am guilty of this whole operation and
the clock is running, and I request your forgiveness for opening this
issue up. But sometimes we have to have a little fun, I guess. Bob
Parry, do you have a question?

7/5-6/94

-46-

MR. PARRY. Yes, I have a somewhat different question. I
want to ask about an earlier comment that you made that you had a
preference for not changing the ranges except for perhaps the debt
range in 1995. I think we're all well aware of the problems in terms
of the significance of the growth in the aggregates. But as I read
the Bluebook, I certainly associated alternative I with the baseline
forecast, which I feel is an unacceptable outcome as one goes out to
the next millennium. Would you talk very briefly about whether you
think, if we were to leave the targets alone, that we would be
constraining ourselves to follow the baseline? Or would you say that
those targets are sufficiently broad and the uncertainties
sufficiently great that we could still be confident that we could
follow a path where inflation would get no higher and would begin to
come down?
CHAIRMAN GREENSPAN. I think with respect to M2 and M3 that
the deviations from different versions of P* are such that we have
correctly abandoned those aggregates, but hopefully they will come
back and be useful. If they come back and are useful, we would assume
M2 would go back to a zero trend in velocity, which essentially would
suggest that the 1 to 5 percent that we have in here is where we want
to be ultimately. It took us a long time to bring the ranges down to
what we perceived to be a noninflationary base if there is stable M2
velocity. My view, and I suspect yours and others, has been
essentially to leave that alone and just wait for M2 to come back in
the range rather than to try to adjust the range continuously to these
variations. We can just sit and wait for M2 to come back to us, as
distinct from trying to chase it.
The question that I am raising, however, is that I am not
sure that the debt aggregate is all that irrelevant at this stage.
I've raised the issue before. I can't prove it and I don't know if we
can prove it after the fact. But I would say that there have been
many, many episodes in American history where, if we had had the data
then, they would have shown an unemployment rate under the NAIRU and
capacity slack very rigidly constrained and yet we had very modest
price changes. The reason basically, of course, is that we had a
structure in which credit expansion was restrained--institutions did
not allow it--and we had the convention of a balanced budget. Under
those conditions, one can argue that it was the lack of credit that
created the stability of prices. There is the alternative inflation
expectations view in terms of the gold standard theoretically, which
might be the ultimate explanation. But what I am saying is that it's
worthy of at least thinking about one important element here. That
is, how much credit is actually made available out there because the
credit aggregates may be working. That hypothesis raises all sorts of
problems including how derivatives affect all of this. But I am
unsure of the credit aggregates question. I don't feel strongly about
bringing its range down, but if we were to do something, that's what I
think we could do.
MR. PARRY. Just a follow-up question: It seems to me that
in your testimony you could make the point that you just made about M2
and M3, saying that, if velocity returns to normal, those ranges would
be consistent with our long-term objectives with regard to inflation.
You could then make a similar argument with regard to debt, indicating
that the change in the range was being made to make it consistent with
our long-term objectives for inflation. I would certainly find that

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preferable to saying the range is being changed for technical reasons
because we expect debt growth to come in lower.
I think there is a
critical difference in the two interpretations.
CHAIRMAN GREENSPAN.

I agree with that.

Tom Hoenig.

MR. HOENIG. Mr. Chairman, thank you. I have two comments.
First, on the debt aggregate, I tend to agree with your suggestion for
bringing that range down. As Bob Parry was saying, a lower debt range
would make it more consistent with the monetary figures.
If that
could be done, as Don described, without raising other issues or
having other things read into it-CHAIRMAN GREENSPAN.
sleeping dog alone?

Do we want to leave the so-called

MR. HOENIG. That is the other option, yes.
The second thing
I want to comment on, though, is your reference to the 1996
projections. I very much agree with you there. It is, I think,
unwise for us to be presenting specific projections into 1996 because
they are often looked at as goals and also lead to the presumption
that we know more than what we are really able to predict into 1996.
If we do it, we would be well served in the long run to do so as Don
suggested, by your making general statements about the 1996 outlook
and not committing us to specific numbers.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. I have just two comments. The
first is on whether we should change the debt range.
I have a very
strong feeling that that is a good thing to do but that the likelihood
is that it would take on a life far greater than it has any reason to
have. You will recall, Mr. Chairman, that when you presented your
Humphrey-Hawkins testimony, it included the concept of the real fed
funds rate as one of a variety of things we look at.
The press
reacted to it as if it were the new "North Star" for our policy, which
you never intended it to be.
CHAIRMAN GREENSPAN.

That's a good point.

VICE CHAIRMAN MCDONOUGH. I think a change in the debt range
would almost certainly have the same fate.
Secondly, just briefly on
my pet theory on the problems of inflation, we tend to think--and we
should because our job is economic policy and the economic results--in
terms of the economic effects of inflation. But inflation also has
socio-political effects.
There is a traditional economic view that an
increase in inflation transfers wealth from lenders to borrowers; I
think that is probably valid. But there is a whole segment of our
society, most of whom live in inner cities, who don't borrow for all
practical purposes. I think any increase in inflation makes their lot
worse, and since their lot is already very seriously bad, it risks
sufficient social imbalance that society would have to react with a
very heavy allocation of resources to solve that problem. That can
lead to very serious economic difficulties, which we ought to think
about when we decide how we feel about the overall effects of
inflation. That is very, very hard to put into an economic model.
But I think that if some day we come back to a general discussion of

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7/5-6/94

how we really feel about inflation, we ought to try to crank that
reality, if others agree that it is one, into our considerations.
CHAIRMAN GREENSPAN. I must say that the objection you made
with respect to the debt range goes to the point, and I think you are
probably right. President Jordan.
MR. JORDAN. I was going to ask whether this is the time to
talk about the 1995 and 1996 projections, or will you have a separate
go-around about that later?
CHAIRMAN GREENSPAN. Let us just hold up on that.
Unfortunately, our discussion has gone astray, but let us see if we
can get questions out of the way, then hopefully go back formally to
the agenda. President Keehn.
MR. KEEHN. Mr. Chairman, I agree with your comments with
regard to M2 and M3. The point on the debt aggregate that Bill raised
made the comment that I was going to make, but I really wonder what
the correlation has been over a period of time between the debt
aggregate and output, prices, and the like. Has there been a
reasonable correlation?
MR. KOHN. It was very, very good until we started to target
it!
[Laughter]
The nominal GDP/debt ratio fluctuated around a fairly
constant level until the early '80s, and then there was the explosion
of debt in the '80s. In the last few years, debt has come back much
more into line with nominal GDP, and our projection, as Mike showed in
a chart yesterday, is that it will remain in line. There is no
guarantee, obviously; it's hard to see the natural force that is
necessarily keeping debt in line. But it did fluctuate closely with
nominal GDP for many, many years, before the leveraging phenomenon of
the '80s.
MR. KEEHN. Hearing that, it seems to me that Bill's comment
is particularly appropriate. By focusing any attention on this, we
are creating something that could be very awkward in the long run.
CHAIRMAN GREENSPAN.

I am becoming convinced.

Governor

Blinder.
MR. BLINDER. Let me address the two questions that you
raised, Mr. Chairman. On moving the range for the debt aggregate, I
don't feel very strongly about that. I feel mildly receptive toward
the "let sleeping dogs lie" philosophy. But it's not something I feel
strongly about; one can make a case the other way.
I want to raise the possibility of being a bit more
forthcoming about the 1996 projections than seems to be the consensus,
at least based on what we have heard around the table so far. One of
the things the Federal Reserve gets accused of by those who are
looking to accuse it of things is being overly mysterious and
secretive. Some things have to be secret, of course. But the kinds
of numbers we were just speaking about for 1996 projections are very
much in line with the consensus; they would put us right where the
Administration is, right where the CBO is, right where the central
tendency of private-sector forecasters is. I very much agree that we
should qualify it, fudge it, make sure that these are viewed as

7/5-6/94

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projections, not goals. I couldn't agree with that more. But with
broadening them into ranges, with the kind of prose that goes around
it, I think our interests might be well served by saying a little more
about where we think the economy is going in the slightly longer run.
The second reason is, as we know and as we always stress, that
monetary policy needs to be focused on a longer horizon than six
quarters. I think any one of us around the table would say we
couldn't make monetary policy if we closed our eyes to what was going
to happen in quarters 7, 8, 9, and 10. All of us have some ideas
about what's going to happen in those quarters, which are quite
important to what we want to do about monetary policy today--probably
a lot more important than what we think is going to happen in the next
two quarters in fact. So, both in terms of clarifying our own
thoughts for the broader public that is watching us closely and in
terms of meeting a little bit--this is a very small step--the request
for more openness, I think there is at least something to be said for
going public, so to speak, with these projections.
CHAIRMAN GREENSPAN. Let me ask you this. These numbers, if
we could make sure they are conceived of as forecasts, are benign, but
releasing them would set a precedent, which would then have to be
continued in the future. There are going to be occasions when I would
suspect the judgment of this Committee as economic forecasters, as
professionals, would be to forecast a rising unemployment rate or some
other unwelcome development, and I wonder how we would handle that at
that point. You can argue that it's a forecast, but then the response
will be that the Federal Reserve should prevent it from happening.
MS. MINEHAN.

Yes.

CHAIRMAN GREENSPAN.

And we may not have the capability of

doing so.
MR. BLINDER. I think that's a perfectly good question. I
think it's likely--it wouldn't necessarily always happen--that in the
event that we were forecasting a rise in unemployment over the coming
two years, we would probably be easing monetary policy; possibly we
wouldn't.
CHAIRMAN GREENSPAN.
MR. BLINDER.

But maybe not.

Yes, maybe not.

CHAIRMAN GREENSPAN.

I don't disagree with that.

President Forrestal.

MR. FORRESTAL. I'd just like to comment on a couple of these
issues that we have been discussing. First of all with respect to the
ranges, I agree with you entirely that we ought to leave M2 and M3
alone--I assume you included M3 with M2. I don't think, given the
uncertainty surrounding those aggregates, that there's any purpose to
be served by lowering the ranges at this point. I don't think there
is a perception among the public or even people in Congress any longer
that the ranges really reflect our expectations of what policy is
going to be. With respect to debt, I don't feel very strongly about
this, but if there is a reason to change the debt range, I don't know
why we wouldn't do it. I am not persuaded by the argument that we
will focus too much attention on it. After all, if we have ranges,
presumably we have the flexibility to change them from time to time.

7/5-6/94

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If there is good reason to do so, then I don't see why we shouldn't
and let the markets make their own determination as to whether we are
giving the debt aggregate undue attention. It's quite different with
respect to the monetary aggregates because I don't think there is any
good reason to change them. If we think it is desirable to change the
debt range, then I think we probably should go ahead and do it.
With respect to Senator Riegle's request, I must say that I
want to identify with the comments that have just been made by
Governor Blinder. It does seem to me that there is a lot to be gained
by being a little more forthcoming with our information. It clearly
runs some risks; there's no question about that. But I think we
basically have the same risks with forecasting 1995. We could be in a
position, for example, in any given year of forecasting an
unemployment rate that is going up. The Congress could focus on that,
and that could give us some problems. Clearly, going out to 1996
presents more uncertainty, but I think the benefits of doing it are
probably greater than the risks.
CHAIRMAN GREENSPAN. Incidentally, President Jordan, I hoped
we would get back on the track, but I am afraid we are in the policy
discussion; you're on.
MR. JORDAN. In principle, I would be in favor of publishing
information on the inflation objectives out to 1998. But if a
forecast of higher inflation is what we are going to produce, again, I
am in favor of not even publishing 1995. I think it is a mistake for
this Committee to put out numbers saying that we expect the inflation
rate to go up in the context of what we think is an appropriate
monetary policy--one that will result in higher inflation in 1995 than
in 1994. The central tendency of our forecasts also has 1995
unemployment above where it is currently. So, we have both rising
inflation and rising unemployment in 1995, let alone 1996. I don't
think we ought to be putting out those kinds of numbers. I am pleased
that our 1994 forecasts are below where the Committee collectively
thought they were going to be in February on both inflation and
unemployment. But from here on, we see things getting worse in both
respects. I don't see why we would want to announce that.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. Alan, I am assuming now that you want our views
on what we would do with the ranges and these other issues; I am in
that mode. I would reaffirm the existing ranges for 1994 and I would
set the same ranges for 1995. I would be willing to adjust the debt
aggregate. I think we could deal with any uncertainties that that
might raise, but I don't feel strongly about it. My basic rationale
would be the same one you expressed--the long-run benchmark concept
with respect to M2 growth and normal velocity and the consistency of
that range with long-term price stability.
Now, having said that, and this has come up in other
discussions we have had, I don't think our target ranges communicate
anything with respect to our long-run intentions. That is really the
issue that Senator Riegle is raising. It has to do with the
uncertainty about velocity and how we have been treating the
aggregates, quite appropriately I think. My own view is that there is
a good deal of uncertainty about those intentions and there would be

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two things I would cite. One was a survey, and I think it might have
been discussed in a Board briefing, about long-run inflation
expectations with respect to the G-7 countries. I was somewhat
dismayed to see the United States ranked among the high inflation G-7
countries, along with Italy and the United Kingdom. The average
inflation expectations for the United States in that survey were 3.6
percent over 10 years, with four other countries being considerably
lower. So, that would be one piece of evidence in my mind about
confusion with respect to what we all say about being committed to
long-term price stability and yet having a survey--I don't know how
reliable it was--that creates that sort of result.
The other uncertainty about our intentions is in a much more
current context and relates to developments since our last meeting. I
think our actions at the last meeting created quite favorable
responses in financial markets, particularly in long-term fixed income
markets. Those actions initially had considerable credibility. But
if you look at what has been going on broadly since then, again it's
quite disconcerting to me in terms of what people think about our
intentions. In effect, we have had private-sector forecasters
ratcheting up their inflation expectations for 1996. We have had
additional anecdotal and other information with respect to rising
prices and perhaps labor shortages here and there. Yet, what the FOMC
said after its last action was that we had substantially removed the
degree of monetary accommodation that had prevailed during 1993. What
has emerged in the meantime is a perception that we breathed a big
sigh of relief, having moved rates 125 basis points and maybe gotten
at best to neutral, and we were going to rest on our oars while all
these other developments were going on which would lead to higher
inflation expectations and ultimately to higher inflation. In effect,
we are viewed as having said, I think, that 3 percent or somewhat
higher inflation is good enough as far as we are concerned.
Now, I understand that all hasn't been said and done by this
Committee and over the longer run we will do the right thing. But
there are significant costs, I think, to these sorts of perceptions,
particularly in terms of longer-term rates. Recognizing that the
aggregate ranges do not communicate anything about our intentions and
that there is confusion in the marketplace and perhaps elsewhere with
respect to what those intentions are, my own view would be that it's
time for us to be much more explicit about what our long-run
intentions are with respect to an inflation range and to indicate that
as a practical matter it would probably take us a while to achieve
that objective. If I did anything at all in response to Senator
Riegle's request, it would be some sort of a nominal GDP target from
which one could derive an implicit inflation target. I think if we
respond at all, that is how we ought to be responding. If we don't
make an explicit statement in this FOMC testimony with respect to our
long-run expectations on inflation that goes beyond "we think price
stability is good," and get more specific in terms of a target range,
then at the very least I think we have to make it clear that we
consider 3 percent inflation to be unacceptable and we are not willing
to accept it. Obviously, we have to back that up with actions, but we
are going to talk about that later. I really think there is a cost to
how things have unfolded here.
CHAIRMAN GREENSPAN.

President Stern.

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MR. STERN. With regard to the ranges for the monetary
aggregates, I certainly agree with those who suggest just leaving them
as they are, including the debt variable. I don't see very much to be
gained by fooling around with those right now for the reasons that
have been cited.
With regard to the question about Senator Riegle's request, I
would be inclined to provide the information on the notion that more
information is better than less, and also I am not too troubled by the
fact that somebody might look at those and think that they are goals.
Obviously, we would want to emphasize that they are projections or
forecasts and not goals, but some people could interpret them
differently. Presumably if we weren't responding to a variable in
that set that looked unfavorable to Congress, say, we would have good
reason or reasons for why we weren't. We would explain in any event
what policy was and why it was what it was. So, I am not too troubled
by questions that might come up about whether the forecast was
acceptable to us or why we were not responding to it.
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. Mr. Chairman, on the aggregates first, I am
right where I seem to hear a lot of other people are. For 1994, I
would not change them. I don't believe in changing targets or for
that matter budgets in midstream unless there's some very, very
compelling reason to do so, and I certainly don't see that here. In
the same vein for 1995, I would think to signal a prospective change
now would require that we have some very clear reason for doing so and
a pretty firm intention that we will want to do so early next year,
and I don't see that now. We may well change the ranges when we get
there, but we will have six more months of experience and facts at the
time and we will be at the start of the period that we are
forecasting. I see no reason to call a shot this far ahead.
With regard to the release of a 1996 forecast, by a narrow
margin I think it would be undesirable. Many of the reasons that have
been cited here for doing so--primarily along the line of more
openness--are quite significant and important, and I don't feel as
negative about it as I did when I came in this morning. But I still
think it is going to be very, very difficult to keep people from
ascribing a goal to this forecast instead of just simply viewing it as
a forecast and a very soft one at that. I am afraid that we would
leave an implication that we will try or possibly can cause this
forecast to materialize. Obviously, that would be over-promising what
monetary policy can deliver. I also fear that the related thought
process on the part of interested people would set up a whole new type
of speculation for markets to play with, and they have enough already.
CHAIRMAN GREENSPAN.

President Broaddus.

MR. BROADDUS. Mr. Chairman, I would agree with your proposal
not to change the M2 and M3 ranges. I don't feel strongly on the debt
issue, but I guess, on balance, I would favor reducing it on the same
sort of grounds that we had for setting the M2 target where it is now.
Since debt tracks nominal GDP at least over the very long run, there
is probably a case for trying to make that range fit our longer-run
monetary growth objectives a little more closely. The current range
has a midpoint of 6 percent, which is probably a bit high. So if we

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lowered it, it would become consistent with the rationale I hear you
giving for the M2 range.
So far as 1996 is concerned, I have a good bit of sympathy
with some of the things that Governor Blinder and Bob Forrestal said,
but I am really in Tom Melzer's camp on that. My own preference would
be to look at this as an opportunity to make our longer-term goals
more explicit with respect to prices and tie ourselves down a bit.
CHAIRMAN GREENSPAN.

Governor Phillips.

MS. PHILLIPS. I would leave unchanged the ranges for M2 and
M3 for 1994 and 1995. Again, I think that any change would imply more
than we know and exaggerate their importance. If the aggregates were
performing properly, they would already be set appropriately for
sustainable growth, so I don't see any case for moving them. With
respect to debt, I can go along with a change in the range, although I
don't feel strongly about it. Like Bob Forrestal, I think that if we
believe there is a good reason for doing it, we ought to go ahead and
change it, and 5 percent seems a better center point for the range.
With respect to 1996 forecasts, I agree that more disclosure
is better. I also think that if we are going to disclose more, we
ought to disclose more but better things, and I am not sure that the
numbers for 1996 would necessarily provide better information. So,
I'd prefer more of a description of direction or even goals. I know
for myself that when I sit down to do those projections and I look 21/2 years out, I just don't think that the numbers for 1996 represent
quality disclosure; it's quantity but not quality. So, I think we
would do better with some description.
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE. I would retain the M2 and M3 targets for 1994
and I would keep them the same for 1995. I think we ought to declare
a victory on the ranges that we have for M2 and M3. We have them down
now to where they are consistent with what we want to do longer term.
I don't think we are skillful enough at forecasting to factor in the
shifts in demand for either M2 or M3, and so I think we are
essentially where we ought to be for those aggregates going forward.
On debt, I came into the meeting without strong feelings. I still
don't have strong feelings, although I think at the margin there is
something to be said for lowering the range for 1995. I'd leave it
alone for 1994, but I think a lower debt range would be more
consistent with our ranges for M2 and M3 over time. I don't think
it's equivalent to your reference to a "real" federal funds rate.
That took a life of its own because people interpreted that as the
justification for tightening. I doubt very much whether this
Committee is going to tighten because we lower the debt range from 4-8
percent to 3-7 percent, so I just don't think it will come anywhere
near taking on the same life. But I don't feel strongly. If there is
a reason, and on balance I think there is some reason for doing it, I
would change the range for 1995.
As for releasing the projections for 1996, it is awfully hard
to recall an instance in this Committee when we had a request for more
information and our initial reaction was to do it. We always have a
long list of reasons; sometimes they are valid and I think sometimes

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it's just habit. We have the problem of goals versus projections; we
have the bad news problem; we have the quality/quantity issue.
If we
go out 18 months or if we go out 30 months, I don't think that in
substance it's much different.
I think we elevate the importance of
the 1996 projection more by not giving it than if we give it, so my
inclination would be to give 1996.
I would couch it in your usual
articulate way and say essentially that it doesn't mean very much--you
have a way of saying that very nicely.
[Laughter]
CHAIRMAN GREENSPAN.

Thank you, I think.

CHAIRMAN GREENSPAN.

[Laughter]

President Parry.

MR. PARRY. On the aggregates, I would leave the M2 and M3
targets at their current ranges for all the reasons that have been
mentioned. I do have a preference for lowering the debt range in
1995, since I think there is a good reason in that we believe it is
more consistent with the other ranges we have set.
I also don't think
it would result in an excessive focus by the markets if it's clearly
understood why the change was made. On the Riegle request, I don't
have strong views, but on balance I think that releasing our 1996
forecasts probably would not cause problems or create misinformation.
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE. Mr. Chairman, I would prefer just to leave all
three of these ranges the same rather than change them.
I don't see
any great advantage in lowering the debt range, and it may indeed
create something that we would find awkward to deal with in the future
if people attached more importance to it than we do. I don't see a
significant probability that debt growth is going to be outside of the
existing range for 1995, and so I think the better part of valor might
be to leave the range where it is.
With regard to the Riegle request, I ask myself:
In July
1992, what would I have forecast the economy to look like in July
1994? And I can't believe that there is any real accuracy in a
forecast that far out. We run the danger of not being able to
forecast accurately and then having to explain later on why we were so
far off and why we didn't do anything about it.
If, for example, the
forecast says one thing and the conventional wisdom is that it ought
to be something very different, then why are we not doing something to
make the forecast different. The forecast is always going to be
interpreted however someone wants to interpret it when they've got us
on the carpet.
If it was an attractive forecast, then it will be
assumed to have been a goal, and if it is an unattractive forecast, it
will be assumed to be an admission of failure. I just think we are
asking for trouble if we get into something that dicey. I doubt very
much that the models that we are playing with here would have
accurately forecast in July of 1992 where we are today. So, I just
think it's dangerous to get that kind of thing in numerical form in
front of the public.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. Mr. Chairman, I would leave M2 and M3 alone. I
believe I would be inclined to reduce the debt aggregate, and just say
the reason is to make it consistent with the other monetary aggregates

7/5-6/94

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and recent flows, not make a big deal out of it. I agree with those
who say that it's not the same kind of concept as the real fed funds
rate, and I doubt that it would be noticed or remarked upon. I would
hope that the rhetoric that goes with the aggregates would not write
them off as being moribund but help keep them alive for their return
in the future because they are very handy to have. It's a lot easier
to talk about monetary policy when we are trying to hold on to a
previously determined target range than it is when we seem to be
raising interest rates. I would hope you would discuss the flows
between the depository institutions and the stock and bond funds and
remind people why the aggregates have not done so well recently. I
would prefer that you keep alive the concept of modifying M2 at least
verbally with M2 adjusted for bond funds, stock funds and so forth,
and maybe even go so far as to have an anticipated growth range for
adjusted M2.
I don't know what I think about releasing the projections for
1996. It seems that there are no good options. We do need to be as
forthcoming as we can. I basically agree with Jerry Jordan that if we
are going to release them, we probably ought to redo them. They are
going to be treated as our targets. We are going to be blamed if we
are projecting bad things and not doing anything about it. So, at the
very least, I think we ought to redo them if we release them.
CHAIRMAN GREENSPAN.

First Vice President Minehan.

MS. MINEHAN. One of the problems of being on the end of this
list of people being called is that all the other people say the good
stuff! I am also in agreement with the discussion on the Ms; I would
leave them the way they are. I agree with the comments, whoever made
them, that it has taken us a long time to get the ranges down to a
reasonable expression of long-run policy and I think they should stay
where they are over a period of time. I am attracted to the idea of
reducing the debt range marginally as suggested in alternative II.
On the issue of releasing our projections for 1996, I have
some sympathy for what President Boehne said, being attracted to the
idea that we don't know too much about developments 18 months in the
future and therefore there may not be a much greater problem with
releasing further out data that we don't know much about. But
weighing everything in the balance, I think I am more attracted to the
argument that if we release very explicit forecasts going out that
far, we do set up expectations that may end up tying our hands rather
than allowing us flexibility in the future. I would go for the middle
alternative myself, not giving specific hard numbers but trying to
explain the factors that we weigh in terms of looking at the longer
run. I would be much in favor of a balanced discussion of inflation,
unemployment--those sorts of things. Maybe it sounds like Mom and
apple pie, but I don't know if we all share the same specific targets
with regard to long-run rates of inflation and so forth. So I am a
little concerned about putting out something that says that that is
the goal of the Committee. I would be concerned about not coming out
on a reasonably balanced side.
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. On M2 and M3, don't bother changing them.
Changing the debt aggregate range isn't going to make much difference,

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but I think we should probably lower it because I think it's a proxy
for nominal GDP.
On forecasting, I think John LaWare had a very good point. I
remember what happened to me when I was on the staff at the CEA in
1982. In December 1982, there was a deep recession and we had to make
a forecast for five years out. Marty Feldstein, who had sort of a
baseline, said let's guess 4 percent a year, starting in the second
quarter of 1983. Here is the dart thrown at the dartboard. It turned
out that the 1987 real GDP forecast was off in fact in 1987 by a total
of $3 billion, which is as close to a bull's eye as I have ever seen
anyone make. But in the meantime, first it was criticized as wildly
optimistic, and then it was criticized as wildly pessimistic as the
economy went above and below the forecast. So anyone has to be crazy
to make that kind of forecast even if it turns out to be right!
[Laughter]
Nobody ever remembers you were right. At the very least,
I think Jerry Jordan's point is correct, that this is going to be
interpreted somehow as our wish list. For us to put out numbers that
have unemployment and inflation rising has to invite an attack. It's
worse than forecasting 4 percent growth for five years.
CHAIRMAN GREENSPAN.

President Keehn.

MR. KEEHN. In my earlier comments, I didn't remark on the
forecast for 1996. I would be opposed to going forward that far
unless we really have to. It seems to be awfully far out on the
forecasting horizon, and I far prefer to state our expectations in
terms of our long-run objectives.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. I am in favor of alternative I
across the board for both 1994 and 1995. Perhaps, living in the city
where financial journalists swarm, I am not at all convinced that, by
leaving M2 and M3 alone and changing the debt ratio, we would not have
much more discussion of the meaningfulness of that move than anybody
in this Committee really thinks is meaningful.
As regards 1996, I find myself in the awkward position of
being trapped in the middle of Alan Blinder's syllogism. I believe it
is the major. I agree that we should be more open to disclosure, but
my concern at the present time about forecasting 1996 is not unrelated
to the fact that it is a year divisible by four, which may be the
interest behind the request. If we ever forecast that far out, it
would be better that we do it after considerably more discussion and
thinking than is possible now. So as a tactical matter, I prefer that
we not release a forecast for 1996. Perhaps as we meet in February or
get prepared for February, we may want to think more fully about
whether we wish to forecast out for a longer period. I suspect the
answer to that would be "no," partly because of what Larry Lindsey
just said. But it may very well be that we need to be somewhat more
forthcoming about just what we mean by price stability. I don't have
a conclusion for that, but I think it's probably a debate that we may
wish to have.
CHAIRMAN GREENSPAN. Before we go further, Governor Kelley, I
failed to put down your position on the debt issue.

7/5-6/94

-57-

MR. KELLEY. I would leave the debt range unchanged for now,
Mr. Chairman, but I would like to see us do some work--perhaps the
staff could give us a paper--on the implications of changing it to a
lower level for consideration at our February meeting. I think that
would be very helpful.
CHAIRMAN GREENSPAN. I am sorry, President Jordan, I didn't
get answers to questions on the ranges and 1996. As I understood you
on 1996, it's the goals issue. You prefer not to do that but you do
think we ought to think more seriously about it. Have I got that
correct?
MR. JORDAN.

Yes.

CHAIRMAN GREENSPAN.

The numbers are as Don indicated.
You would vote no on the specific Riegle

request?
MR. JORDAN.

That is right.

CHAIRMAN GREENSPAN.

And on the ranges?

MR. JORDAN. I wouldn't change them and I don't see what is
wrong with letting the journalists write stories about debt. If they
want to write the stories about the governors having green peas for
lunch on Thursdays and that is the key to monetary policy, I don't see
the harm in that. They have to fill up the space anyway. So I don't
see a problem.
CHAIRMAN GREENSPAN.
debt range.

So you would be inclined to lower the

MR. JORDAN.
lunches?

I really don't care about the debt aggregate.

MR. KELLEY.
[Laughter]

Who released that information on the governors'

MR. KOHN.

It was a week after the lunch!

MS. MINEHAN.

Or was it the week before!

CHAIRMAN GREENSPAN. Before we get to any formal vote, let me
just see what it is that we should be voting on. It's pretty clear
that there is a consensus to leave the M2 and M3 ranges unchanged.
The other two issues are really interesting. There seems to be a
marginal inclination to go to a lower debt range--most of the voting
members favor that. The Riegle request gets turned down, but there is
a general view that as best we can we should be more forthcoming.
There is a sense in which Humphrey-Hawkins essentially sets the
monetary aggregates as a signal that could be objectively evaluated by
the Congress with respect to what it is we are doing. As the meaning
of the aggregates falls away, there is an obligation on our part to
give the Congress some objective criteria. I happen to think that the
one requested by Senator Riegel is potentially mischief-making, and I
am not sure that it serves our purpose to do this in the way in which
it is requested. What I do think we ought to be saying more about is
what our goals are, what we are looking for, and what our outlook is
for 1995 and 1996 in a qualitative sense. I mean to draw the
distinction between goals and forecasts. I would judge that our

7/5-6/94

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forecasts as a group do not clash violently with those of either the
Administration or the CBO, as Governor Blinder indicated. Perhaps
noting that in the Humphrey-Hawkins text without putting numbers down
per se would enable us to associate ourselves with the forecasts and
still talk about broader questions such as where we think the goals of
the Committee should be without putting the specific numbers down. I
hesitate to think what would happen, as Cathy Minehan said, to the
interpretation of those forecasts.
So, leaving aside the actual formulation of this, the
consensus of the Committee seems to be that we leave M2 and M3 alone,
that we marginally are in favor of bringing down the debt aggregate
range and hopefully we will not get as a consequence a "real" interest
rates type of discussion. I suspect that there probably is not much
risk in bringing down the debt range; I don't think it's a big deal.
Look, if credit really starts to move, that might be an important
signal for us to respond to. So, I am not sure that it is wrong, in
and of itself, but it is what I will put up; we have to have separate
votes on 1994 and 1995.
MR. KOHN. Mr. Chairman, I heard a marginal preference among
those talking about debt aggregates for lowering the range for next
year but leaving it unchanged for this year.
SEVERAL.

Yes.

CHAIRMAN GREENSPAN.
the debt aggregate for 1994.
MR. KOHN.

Yes, I didn't hear any discussion about

Okay.

CHAIRMAN GREENSPAN. Let me first formally put on the table
for a recorded vote that we leave the ranges for M2 and M3 unchanged.
Why don't you read that part of the directive for 1994.
MR. BERNARD. I am reading from page 26 in the Bluebook, or
if you are looking at the draft directive version, it is at the bottom
of page 2, line 46.
The first general sentence, of course, stays the
same.
"The Federal Open Market Committee seeks monetary and financial
conditions that will foster price stability and promote sustainable
growth in output.
In furtherance of these objectives, the Committee
reaffirmed at this meeting the ranges it had established in February
for growth of M2 and M3 of 1 to 5 percent and 0 to 4 percent
respectively, measured from the fourth quarter of 1993 to the fourth
quarter of 1994. The Committee anticipated that developments
contributing to unusual velocity increases could persist during the
year and that money growth within these ranges would be consistent
with its broad policy objectives."
CHAIRMAN GREENSPAN.
MR. BERNARD.

That's it.

We need the debt sentence.

CHAIRMAN GREENSPAN. We haven't got there yet.
In other
words, we can vote on this and then we can vote on 1995.
MR. KOHN.

Well, he needs to read the debt sentence for 1994.

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7/5-6/94

MR. PARRY.

Yes, the next sentence--

CHAIRMAN GREENSPAN.

Okay.

Read that sentence.

MR. BERNARD.
"The monitoring range for growth of total
domestic nonfinancial debt was maintained at 4 to 8 percent for the
year."
CHAIRMAN GREENSPAN.

Call the roll.

MR. BERNARD.
Chairman Greenspan
Vice Chairman McDonough

Yes
Yes

Governor Blinder
President Broaddus

Yes
Yes

President Forrestal
President Jordan

Yes
Yes

Governor Kelley
Governor LaWare

Yes
Yes

Governor Lindsey

Yes

President Parry

Yes

Governor Phillips

Yes

CHAIRMAN GREENSPAN. Okay, the next vote that we need is for
1995 with the same ranges for M2 and M3 but a lower range for the debt

aggregate.
MR. BERNARD. All right.
"For 1995, the Committee agreed on
tentative ranges for monetary growth, measured from the fourth quarter
of 1994 to the fourth quarter of 1995, of 1 to 5 percent for M2 and 0
to 4 percent for M3.
The Committee provisionally set the associated
monitoring range for growth of domestic nonfinancial debt at 3 to 7
percent for 1995.
The behavior of the monetary aggregates will
continue to be evaluated in the light of progress toward price level
stability, movements in their velocities, and developments in the

economy and financial markets."
CHAIRMAN GREENSPAN.

Call the roll.

MR. BERNARD.

Chairman Greenspan
Vice Chairman McDonough
Governor Blinder
President Broaddus
President Forrestal
President Jordan
Governor Kelley
Governor LaWare
Governor Lindsey
President Parry

Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Governor Phillips

Yes

CHAIRMAN GREENSPAN.
Riegle request?
MR. KOHN.

I don't think--do we need a vote on that

I don't think so.

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CHAIRMAN GREENSPAN. I think I got the consensus for trying
to embody many of the notions that Jerry Jordan, Al Broaddus, and Tom
Melzer proposed, namely that we provide a general qualitative view of
our goals and their distinction from forecasts in reference to policy
and try to put it all in a language form that says less than it
sounds.
[Laughter]
This is what we mean by "Fedspeak." You know,
the trouble with a lot of this is that language does matter, and I
think we have to be very explicit in our terminology and clearly
distinguish between goals and policy because that is what the critical
question really is here. I hope, putting aside these facetious
remarks, to be clearer on this issue than we have been in the past.
MR. JORDAN. In fact, could I say one thing? I'll speak for
myself, but I think it does reflect the mood of the Committee and the
actions we have been taking since February. With regard to 1996, had
we not been moving this year so far in the way that we have to
establish our current policy stance, by late this year and 1995
inflation would probably be worse and inflation psychology would have
been escalating sharply, necessitating a policy response of such a
magnitude that it would have depressed output and raised unemployment
in 1996.
CHAIRMAN GREENSPAN.

You mean in discussing the forecast for

1996?
MR. JORDAN. Right, and characterizing 1996.
The uncertainty
about 1996 is the effectiveness of our actions in 1994.
If we are
successful in what we are doing in 1994, then we are going to have
higher output and lower unemployment in 1996. And that is the
difficulty in giving them a forecast of what 1996 is going to do.
CHAIRMAN GREENSPAN. I think we have been saying something
not dissimilar to that without mentioning the year. Coffee is
available and we will reconvene in 15 minutes.
[Coffee break]
MR. KOHN. Mike and I were just discussing this morning's
Washington Post and how I should adjust my presentation. Have you
seen this morning's Washington Post?
CHAIRMAN GREENSPAN.
MR. KOHN.
MR. PRELL.
SPEAKER(?).

I haven't read it yet.

I'll let Mr. Prell tell you himself.
No.

[Laughter]

Don't keep us in the dark.

MR. PRELL. The Post article carried an excerpt from the 1987
transcripts in which I said something to the effect that, given the
lags of policy, we either should tighten or should ease, but I didn't
[Laughter]
know which.
MR. KOHN. This was cited as evidence of confusion and
uncertainty in Federal Reserve thinking!

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CHAIRMAN GREENSPAN. Another interpretation is that we are
basically saying that the status quo is unacceptable.
[Laughter]
MR. PRELL. I have been trying so hard all these years not to
get quoted in the press!
CHAIRMAN GREENSPAN.

Mr. Kohn.

MR. KOHN. Well, I am sure I won't relieve any of the current
uncertainty here and probably will add to it.
[Statement--See
Appendix.]
CHAIRMAN GREENSPAN. Questions for Don? If not, why don't I
start off. I think it's fairly apparent that if we move today, the
general view is going to be that we moved in order to support the
dollar. I don't deny that monetary policy has a significant effect on
our exchange rate, but I think it's important for us to review just
why it does and what it means to alter the exchange rate from what the
markets themselves are engendering. Ultimately, when we are dealing
with a world currency that is held virtually in all corners of the
globe, the world portfolio adjustment process is very difficult to
understand at times. But what is fairly apparent is that we are
dealing with balance sheet shifts that essentially move toward
expected higher risk-adjusted rates of return. In this regard, we are
looking not only at interest rates but at stock prices or any type of
instrument denominated in dollars that has a rate of return relative
to similar types of investments in other currencies. We like to look
at the issue of current account imbalances and a variety of other
elements in the flow area, but fundamentally, the exchange rate
involves a balance sheet adjustment process. When we are dealing with
a reserve currency, the propensity to hold it in a balance sheet sense
generally tends to override where the exchange rate ultimately comes
out. If we think in terms of the aggregate amount of dollars growing
not only because of current account deficits and increased claims but
more importantly because of a general grossing up in the Euro-currency
market, we begin to lose sight of the flow effects. Much is involved
in the search for increased rates of return, but basically that is
what dominates the system.
The reason this is important is that if we get short-term
changes in expectations with respect to how the rate of return is
going to be altered, we need a very large change in interest rates or
rates of return to offset that. For example, an expectation of a 10
basis point capital gain in a week on an instrument translates to an
annual rate of 5 percent, or more actually. We have learned in this
process that it is very difficult to employ interest rates to
forestall changes in expected rates of return on a currency. The
result usually has been somewhat disastrous. We have to be careful to
recognize that if we employ monetary policy to offset normal market
forces, there have to be offsetting adjustments in the rest of the
system. If we are looking for a classic case of what type of
adjustments occur, remember what happened after World War I when the
British endeavored to restore the parity of sterling at its pre-war
rate with very extraordinary effects on the structure of their
economy. In today's environment, that sort of rigid adjustment is
very rarely seen, but I think the principle is fundamentally the same.
Any attempt by us to use monetary policy to offset exchange rate
effects has very considerable secondary, usually negative, effects on

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markets. Now, one may argue on the other side of that argument--and I
think quite correctly--that to the extent we affect our exchange rate
favorably and bring inflation and inflation expectations down as a
consequence, there are positive forces basically driving the system.
That leads me to conclude that the fundamental exchange rate
policy really ought to be that the best support of the dollar is to
keep domestic inflation down. Exchange rate volatility creates
problems, but they are different from those that exist in stock and
bond markets where the net position is long of necessity. If massive
uncertainty hits a market in which the net position is net long, then
disengagement, which is what uncertainty produces, of necessity
creates selling and lower prices. But currency markets are a zero-sum
game. If you want to argue that an uncertainty premium induces
disengagement of the dollar vis-a-vis the yen, then the question is
what about the yen vis-a-vis the dollar. You cannot have massive
uncertainty. Remember, uncertainty is not a statement that something
is going to happen; it's a statement that one doesn't know what is
going to happen and is therefore pulling back. If we consider the
case in which two people have gross uncertainty about long-term U.S.
Treasury instruments, they both sell and the market goes down. If we
have one person massively uncertain about the dollar/yen, and the
other massively uncertain about the yen/dollar, and they both sell,
what happens? So, there is a limit to the cumulative process within
an exchange market that is different from what exists in standard
positions where there is a net long position in the system.
At this stage, I am inclined to be very careful about making
a particular point of our moving in to support the dollar unless it
becomes crucially necessary because of increasing financial
instability and indeed an end-point game. We are nowhere near that,
as best I can judge. The exchange markets were quite weak today; the
stock market is up; the last time I looked the 30-year bond was down
10/32. This is not the type of environment in which more than the
exchange rate is involved. This is, I should say, an exchange rate
problem. It is a different type of animal than a broad inflationary
concern about the currency in which bond markets plummet, stock
markets plummet, the exchange rate plummets and the situation is
unambiguous. At that point, the central bank has no choice but to
move in and try to squeeze out the inflationary bias in the system.
At that point, I grant you, it is very late in the game and there is a
considerable question that the effort would succeed, but I would judge
that we are not anywhere near that stage. In sum, I would argue
strenuously that we should avoid being perceived as using monetary
policy solely for the purpose of addressing the exchange rate.
Essentially, we have to look at monetary policy in this context as an
anti-inflation issue.
This leads to the question of domestic policy and the extent
to which we address this. In a somewhat unusual sense, the outlook is
really intriguing. It's clear that the rate of economic growth is
coming down. The question is, from where? As a convention, we use
gross domestic product as our broad measure of the economy, largely
because the data there are seemingly more accurate. But gross
domestic income is conceptually identical. Yet if we look at the
gross domestic income in the fourth quarter of last year and the first
quarter of this year, we see that it differed from gross domestic
product. For example, as you may recall, GDP growth was at a 7.0

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percent rate in the fourth quarter of last year. Gross domestic
income growth, which is conceptually equivalent, was 7.8 percent. In
the first quarter, GDP was 3.4 percent and GDI was 4.0 percent. It's
pretty obvious, looking at the employment and hours data in the second
quarter, that the growth in GDI is quite likely again to exceed the
growth in GDP when we get final data for the second quarter. This
raises interesting questions as to what the economy is doing. Where
are we? Our alternative to looking at GDP and accepting the payroll
hours data is that productivity is falling in a rising economy. I
know of no conceptual framework, other than a bizarre scenario, which
would say that that makes any sense. But the question is, do we trust
the manhour figures and the work hour figures. What we have is an
establishment survey increase of about--was it 200,000, Mike?
MR. PRELL.

Exactly right.

[Laughter]

CHAIRMAN GREENSPAN. On the basis of the overall data that we
get from the unemployment insurance system with a significant lag, we
essentially are picking up what the BLS calls the "bias adjustment" in
the small business sector. It's probably fairly accurate going back
in history. However, there is this plugged bias adjustment which BLS
puts in that is not small; I gather that it has a 125,000 rate of
change for the second quarter. That is a monthly number and it's a
significant part of the 200,000 to 300,000 figures that were published
monthly. If it's wrong by a significant amount, the hours figures
that we are using as the denominator for the productivity figures are
wrong. So, the first problem I have with all of this is trying to
figure out where we are. And the conclusions are, as best I can
judge:
(1) the economy is still moving ahead at a fairly good pace;
(2) whatever that pace, which is important, it's slowing. We are
seeing very little cumulative deterioration in the system. We still
have inventories in terms of days' supply at very low levels,
especially when we strip the markup out of the trade inventories and
deal only with factory-value inventories. This makes the inventory/
sales ratio a lot more like the manufacturing series. When we
juxtapose that type of series with the evidence that we are beginning
to get some delayed deliveries, we are getting at least the early
makings of what one would expect to see if inventories were turning
around.
But, as Governor Blinder indicated yesterday, considering how
statistically close we are to all these various capacity levels, why
aren't inventories rising more? Why aren't we seeing far more
anecdotal evidence of skilled labor shortages? Why are we not seeing
more evidence of price movements in final goods? Given this type of
environment, if I were an anecdotal chronicler, I would be looking for
examples like those. I am not saying there aren't any; there are lots
of them. But the fact is, given where we are, the inventory situation
and the behavior of prices suggest that there is far more fuzziness
out there as to where the capacity constraints are. We are all
arguing that we are getting close to them, but the way to measure when
we are close is not by the NAIRU statistics or industry operating
rates but by the presumed effects of that phenomenon. At this point,
we are still looking for the effects. As Don Kohn said yesterday, the
employment cost index, which will be out on the 26th of this month is
going to be a very interesting statistic to see, because it will be a
very important test of the underlying costs structure that is
evolving. But having said all that, where we are at this stage is

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consistent with, as Mike Prell might say, either going back down or
going up!
MS. MINEHAN.

Or going sideways!

CHAIRMAN GREENSPAN. I don't think we know how far the
unwinding of the growth rate will go, leaving aside where we are
starting from, which I think may be higher than the GDP figures are
indicating. As a consequence, I would be inclined at this stage to
stay with "B," largely because, unless we tighten by 300 basis points,
I think the effect on the exchange rate would not be all that visible.
Doing 25 or 50 basis points, I fear, would be viewed as an endeavor to
hit the exchange rate. Once we have done it, the markets would
swallow it and say, okay, what more do we get? The more tools we use
without success, the greater the danger of getting a destabilized
system. I would not have any domestic concerns at this stage about
moving the rate up today because I suspect we will want to move at a
later time. But I am very uncomfortable about the inevitable analogy
to the exchange rate, because the order of magnitude is all wrong if
it were against the exchange rate.
So I would like to stay at "B" unchanged, but I'd like to be
asymmetric. The reason for that is twofold. One, I am by no means
convinced that this unwinding process will continue all the way down.
I think there is a reasonably good expectation, as we have seen in
many business cycles, that we will get unwinding pauses and the
economy will start back up again. We are going to learn a lot about
the most recent past in data to be reported over the next 10 to 15
days. However, I am not sure what if anything in those data would
significantly change our minds. The only thing it would do is that it
would distance us from the issue of the exchange rate if we were to
move, and I think that has very considerable value.
I have a suspicion that if we were to do nothing until the
August meeting, we might possibly want to do 50 basis points in August
if the economy starts to pick up. I am biased toward the up side
because of the way I read what is going on, but more importantly
because of the so-called "loss function" that we have discussed on
policy. If we were to move higher in the next few months and we were
wrong because our tightening was more than the economy could take, I
think we could adjust and move back down. There would be costs, but I
think they would be containable and reversible. So if we make a
mistake by being too tight, I don't think the cost is all that
significant. If we fail to act when we should and inflationary
pressures take off, I think the cost of restoring our position would
be much higher and conceivably irreversible. Merely dealing with that
loss function and knowing nothing about the outlook, I think we have
to be biased toward restraint, not only with respect to the
probability that whatever actions we take over the next six weeks are
more likely to be up than down. But I do think we have to maintain
the notion in the marketplace that we stand ready to move if
necessary, but not knee jerk to every type or set of pressures that
the markets can create for us. I think we have to move in a
deliberate way. Whatever one may say about the economy, the model now
I think enables us not to have to accelerate our tightening moves, at
least as far as I can judge the forces at work here. I don't know
what will evolve in the next four to six weeks, but I would feel more

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comfortable if the minutes that we release six weeks from today-hopefully they won't get released before that inadvertently--will show
that we were in fact asymmetric. President McTeer.
MR. MCTEER. Mr. Chairman, I agree with your wait-and-see
recommendation. When we do act again, I think we shouldn't consider a
1/4 point change; it ought to be 1/2 point, but I think 1/2 point
right now would be premature. We did get a stronger first quarter
than we expected, and it looks as if we are going to get a good number
for the second quarter, even in GDP terms. But that is in the past.
We have seen some signs of deceleration in the last couple of months,
and we don't have any idea how far that is going to go. I think
seeing some numbers would be helpful here. I agree with you that a
tightening now would be interpreted as a move in support of the
dollar. I would be against that for two reasons:
One is that it
gives the impression that we are placing the dollar above domestic
considerations, and I don't think we should do that; I also agree with
you that because of domestic considerations we wouldn't be able to
tighten enough to do the dollar much good. So, I think a show of
confidence in the dollar by not acting is probably more helpful. It's
even possible that we could get the reverse of the market reaction
that we got in February. In February, I believe that when we
tightened 1/4 point, a lot of market participants said things must be
worse than we thought if the Fed is concerned. I think it's
conceivable that doing nothing today would lead to some market
confidence that things may be calmer than the market might have
suspected. I am not sure of that, but I think a steady-as-you-go
policy today might be good for the markets. So, I would agree with
"B."
Normally, I prefer symmetric to asymmetric, but in this case
having the minutes reflect asymmetric at this stage would be helpful.
And I think I'd be inclined to use this as an opportunity not to make
an announcement.
CHAIRMAN GREENSPAN. Would you view not making an
announcement as consistent with saying "the meeting is over, we have
nothing to say" or did you want to just let it ride?
MR. MCTEER. For this meeting if we have done nothing, I
think I'd just go back to not issuing a press release.
CHAIRMAN GREENSPAN. Don, why don't you comment on what the
other side of that argument is just to-MR. KOHN. Mr. Chairman, I was hoping, as President McTeer
was suggesting, that we would be in the position by now of having
established a regular announcing time.
SPEAKER(?).

2:15.

MR. KOHN. And if an announcement is not made by that time,
it would be clear that no action had been taken. I think I'd ask Joan
Lovett and maybe Joe Coyne to comment. Both of them have some
concerns that not announcing would leave people on edge and guessing
that something was going on, with a result that could be a bit
disruptive. Joan.
MS. LOVETT. Yes, I think there is something to be said for
letting the market know that the meeting has concluded. In terms of

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what announcements the market is looking for out of this Committee
when there is no action, I have to say they haven't got a clue. They
know that decisions on how to handle these announcements have not been
made and they know the Committee hasn't addressed the issue, so most
of them think that the Committee wants to maintain as much flexibility
as it can until it has made a decision on that. For now, I think some
of them are hoping there will be at least an announcement that the
meeting is over, so they can go about their business. If we said that
we have nothing to announce, that would be helpful.
CHAIRMAN GREENSPAN. Yes, but that is not to prejudge what we
are going to do in the future.
MS. LOVETT. It's to buy time until the Committee has had a
longer discussion on this. That is what they are thinking.
MR. BOEHNE. Mr. Chairman, there was a subcommittee that
looked at this some months ago. Others on that Committee might want
to chime in, but as I recall there was a fairly strong consensus after
a number of discussions that we ought to announce only when we change
policy. However, I think today is a very awkward day, and whatever we
do today, we have to set the stage for a less awkward future. And
while I subscribe to the basic notion endorsed by the subcommittee
that we ought to announce only changes, it might be well today to
indicate what the Committee's policy is and to say the Committee's
policy is to announce only policy changes and then to say the meeting
is concluded and we will have no announcement. I think that gets us
through the situation of today but sets the stage for the future.
When the announcement time passes and there is no announcement, it
means there is no change.
So, we have addressed the awkwardness of
today and what we want to prevail as we go down the road.
CHAIRMAN GREENSPAN. There is an issue here, and at some
point--it will not be this meeting and I'll try to discuss why at
lunch--we have to be able to lay out what our new disclosure policy is
going to be. At that point we will make it very explicit. This
discussion is presupposing the substance of that meeting; I didn't
mean to get into that. We may end up deciding to do something. I
merely wanted Don to raise the issue largely for those who are
commenting on this because I didn't think that question was answered
appropriately. Bob, are you through?
MR. MCTEER.

Yes.

CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN MCDONOUGH. Mr. Chairman, I agree that we
definitely should not make a policy move today, because I think there
is no doubt whatsoever that the move would be associated with an
effort to strengthen the dollar. For reasons you have cited, I
believe the only way to help a reserve currency is to manage domestic
monetary policy appropriately by stabilizing and, in the longer term,
bringing down the inflation rate. I believe that any move that would
make sense for domestic policy, be it 25 or 50 basis points, would be
deemed to be an effort to strengthen the dollar, which would fail.
Therefore, it could well put us into the kind of market instability
that would require a sharp increase in interest rates, something that
would be completely inappropriate for the domestic economy. As I

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stated yesterday, I believe that the economy could conceivably be
moving to a path that will bring us sustainable growth and a
decreasing, or at worst for the short-run a stable, inflation rate.
However, I think that all the risks to that forecast are on the high
side, that is, that the economy will in fact be stronger than that.
Since we are quite close to capacity as is indicated by virtually all
of the statements yesterday, a stronger economy would almost certainly
bring increased inflationary pressures.
Therefore, it seems to me
that we should have a definite bias toward tightening, which says that
I think it's entirely
we should have an asymmetric directive.
possible, as the incoming data give us a better feel for what's
actually happening, that we would in fact wish to make a tightening
move before the next meeting. That tightening move could well be as
much as 50 basis points. Therefore, I am very much in favor of
alternative B with an asymmetric directive.
CHAIRMAN GREENSPAN. Let me just say that I forgot to mention
that I would very much like to call on the Committee in a conference
call if events are such that some significant action is required. I
would prefer that, implicit in the asymmetric directive, we left open
the possibility of a conference call if numbers or events are moving
in a way that is significantly different from what I have interpreted
as the Committee's general view. President Jordan.
MR. JORDAN. Thank you. I agree we shouldn't act on the
basis of strictly international considerations because ultimately the
foreign international market's purchasing power for currencies is
going to reflect what we are doing domestically. I don't have a
sense that within the marketplace today the problems we are seeing in
the international markets are the result of concerns about future
domestic purchasing power. If I thought the source of the dollar's
weakness was the U.S. inflation problem, then I would feel
differently. I would not want international developments to be a
constraint if I thought a policy move was the right thing to do for
domestic reasons, but right now I don't see that domestic reasons call
for a move. And I agree that if we needed to move in support of the
dollar, it would have to be a very, very large move.
The story that Bill McDonough told last night at the UK
embassy dinner about the deflation in Japan is correct, important, and
needs to be developed more fully. It's partly the curse of doubleentry bookkeeping. They have a huge current account surplus, yet they
have a large number of banks and institutional investors trying to
repatriate capital. This creates problems that have a price effect.
That is not going to go away, and I don't know where it's going to
settle down. It's going to keep coming back over and over again. We
need to try to get people to understand that the politics of Japan as
well as a lot of forces at work in that country are going to result in
a turning inward and a need for domestic investment,
CHAIRMAN GREENSPAN.
MR. JORDAN.

Can I just ask for a clarification?

Yes.

CHAIRMAN GREENSPAN. Does that affect the rate of change in
the exchange rate or does it bring it to a different level? In other
words, if there is net repatriation of say $150 billion a year, is
that consistent with a continuous erosion of the dollar vis-a-vis the

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yen, or does it merely specify a level that it adjusts to and stays at
until that leads to portfolio balance?
MR. TRUMAN. The portfolio balance model will tell you that
if you try to repatriate funds and your currency appreciates, that is
the way you reduce the foreign share in your portfolio.
CHAIRMAN GREENSPAN. But does the currency's appreciation
consistently go up instead of-MR. TRUMAN. The theory does not give an answer; it could be
either one. It's one person's decision; they all add to one so we
ought to treat everybody as one person. They can't as a group reduce
their foreign assets because of constraints on flows; they have to
leave those assets abroad. They may add to them, but they have to
have their assets abroad.
MR. JORDAN. I don't think you can answer in part because you
need to know more fully what is happening on the trade side. Japan as
we know is one of these economies where the net value added is all
labor inputs because they import everything else. So their imports of
raw materials, energy, and all of that give you the price effect of a
lower dollar. I find that a very difficult story to unwind, but I
don't think it's going to end soon. I don't know if the yen will go
to 90 or 80, but I think we need to articulate the story that this is
not a problem of the United States nor a concern about our inflation
and our other economic problems as much as this is about Japan.
Regarding our policies, I expect to see some bad CPI numbers
during the second half of this year. I have no reason to disagree
with the Greenbook on that. We talked about this before:
If the
staff is right that the CPI less food and energy is going to come out
around 3 percent or so this year as the Greenbook specifies, we are
going to run into several months with the CPI getting up in the range
of 3-1/2 to 4 percent annual rate. And that being the case, there
probably will be adverse market reactions to the superficial reporting
of those numbers. If we are going to act at some time in the second
half of this year, I would much prefer to see our actions coincide
with adverse price developments rather than strong real numbers,
whether it's employment or output or industrial production or anything
else. It would take a couple of months of bad CPI numbers to make a
case for saying we need to act to show our resolve to bring the
inflation trend back down again. That says to me that before the
August meeting, we are unlikely to have conditions that I would think
would trigger such a move. So, I would be inclined to stay where we
are at the moment. I would not be inclined to go asymmetric. I
wouldn't dissent against asymmetric, but I'd prefer to stay symmetric
with the expectation that we will reassess the economy in August and
see how the price numbers develop.
As for the announcement, I think Ed's point is right. Had we
previously set forth what our policies were, we might get away with no
announcement at all if we had said that that was what we were going to
do. But under the circumstances, I think we have no choice but to
put something out this afternoon.
CHAIRMAN GREENSPAN.

First Vice President Minehan.

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MS. MINEHAN. On the matter of policy, I have been impressed
that things keep coming in a bit stronger than expected. I realize we
are beginning to see indications of some slowing, probably as a result
of the actions that were taken earlier this year. Even so, I think
the risks for the rest of the year, given the depreciation of the
dollar and the improvement on the external side, are more on the up
side than on the down side. So the question is when do we purchase
insurance, if you will, against inflation.
I would be inclined to go
with your recommendation of not making a move this time, but I would
expect the need to purchase some amount of insurance in terms of
increased pressure on fed funds rates in August. You noted the
possibility of a telephone conference during the intermeeting period.
Just being new to this whole business, if we go with asymmetric, what
does that really mean?
Does that mean any amount of movement between
now and the next meeting? I know symmetric means 25 basis points.
CHAIRMAN GREENSPAN.
MS. MINEHAN.

It doesn't?

CHAIRMAN GREENSPAN.
MS. MINEHAN.

No.

It doesn't mean that.

Okay.

CHAIRMAN GREENSPAN. We don't have a specific formulation.
Asymmetry merely means a general sense of the Committee's disposition
or the direction of our bias.
MS. MINEHAN.
making a change?

How long we should expect you to wait before

CHAIRMAN GREENSPAN. No, I have tried to articulate this and
I have been much too specific, so I'll call on Don Kohn.
[Laughter]
MR. KOHN. As I said in my briefing, the use of asymmetry in
the past has been an expression of the Committee's disposition about
how it would like to react to incoming data.
If you think the risks
are more on one side than on the other and if for example you would
like to react to stronger data before you reacted to weaker data,
asymmetry would send a signal to the Chairman that when the data come
in a bit to the stronger side, or the data don't suggest a weakening
that you would like, he should give serious consideration to a firming
move, acting on behalf of the FOMC, or to having a conference call.
MS. MINEHAN.
MR. KOHN.
incoming data.

Fine--

It's sort of leaning to one side in reacting to

CHAIRMAN GREENSPAN. Let me be very specific using Jerry
Jordan's CPI as the model. Let us assume our normal expected CPI just
for the sake of argument was .3 percent and we were asymmetric toward
tightening. If the CPI came in at 0, we probably wouldn't move. If
it came in at .6 percent, we would tighten.
MR. LINDSEY.
asymmetric.

Regardless of whether we were symmetric or

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CHAIRMAN GREENSPAN.
MS. MINEHAN.

No, I'm just talking about asymmetric.

Does symmetric tie your hands?

CHAIRMAN GREENSPAN. Well, let me give another example:
Say
we expect a CPI of .2 percent, we are symmetric, and the CPI comes in
at -.1 percent or alternatively at .5 percent. This is a strained
example, but there is a different disposition depending on whether one
takes a specific figure as being an aberration or a more fundamental
change. In today's environment, if we saw strong data we would, at
least in my judgment, be more inclined to take the strong data as
representing generally what's going on because everything else looks
that way. Whereas if I saw a specific number, let us assume home
sales dropped 200,000 or something like that, I would say I don't
believe it; that figure is wrong. It's that sort of thing.
VICE CHAIRMAN MCDONOUGH.

Is that fully clear to you?

MS. MINEHAN. Yes, I am really clear on this.
[Laughter]
I
am leaning toward the side of buying insurance on the up side, but I
am a bit concerned about moving strongly one way or the other on any
particular number. I think six-week intervals are enough time to look
at things and see how they shape up. So, I guess I come out on the
symmetric side. On the announcement side, I think we would be well
off doing what President Boehne suggested.
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE. Mr. Chairman, for all the reasons that you have
suggested I support the recommendation for "B."
Ordinarily, I prefer
symmetric language, but in the current circumstances I think it's
appropriate to indicate a bias on the up side, so asymmetric language
is satisfactory to me.
I think we have to make an announcement.
I
don't think we really have any choice on that. I think the precedent
has been set now and it would be very difficult to avoid an
announcement at this particular meeting. So I think something has to
go out.
CHAIRMAN GREENSPAN.

Governor Lindsey.

MR. LINDSEY. Mr. Chairman, I agree with "B" for the reasons
you indicated. However, I strongly, avidly am against asymmetry. My
reasons are twofold. First of all, if we look at our four moves to
date this year, the most efficient ones with regard to the move in the
long rate relative to the move in the short rate were in May and in
March, when we moved at a meeting. In fact, we had bond market
rallies when we moved at a meeting. The next least efficient was in
February, which was our first move, when we moved at a meeting. The
most inefficient, the only one in which we actually had a bond market
selloff, was in April on our surprise move--a surprise in the sense
that it was not taken at an announced FOMC meeting. I don't think the
market likes surprises; I think moving between meetings will buy us
nothing; and it will cost us something on the long end of the market.
Second, the question comes up on what data we should move. I
don't think we want to move on employment reports (a) for the reason
Jerry Jordan mentioned and (b) for the reasons you gave. You
commented on just how inefficient and unclear the employment report

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data are; they are lousy in this respect. We don't know how to
interpret them and we should not move on their release. With regard
to moving on a price number, I have to agree with Jerry Jordan's
assessment that, even though I would tend to be very concerned, I
would want to wait probably for two bad numbers before I drew any
certain conclusions. For example, you stated in the past that the
homeownership component could move suddenly and that would bias the
number. I cannot imagine a single number that would cause me to want
to move between meetings, given the inefficient results we have seen
to date on our past four moves. The only reason given for doing it
is--your phrase was--to maintain the notion in the marketplace. Well,
in fact, the marketplace isn't going to know anything about it until
after the next meeting was over. And given that, based on current
expectations, we probably are going to move at the August meeting--and
I agree with your analysis completely--I see absolutely nothing to be
gained and quite a bit to be lost, by an intermeeting move.
CHAIRMAN GREENSPAN. Can I ask Don Kohn--I don't disagree
with your evidence of the four moves--but what is the history of
market responses to policy actions taken at or in-between meetings?
Would you know offhand?
MR. KOHN.

I don't know offhand.

CHAIRMAN GREENSPAN. My recollection is that the proposition
you state generally is not necessarily true.
MR. LINDSEY.

But has it--

CHAIRMAN GREENSPAN. It has been true this year, but that is
four observations and you are enough of a statistician to know that
you need five. [Laughter]
MR. KOHN.
these intermeeting
markets often tend
move--say, when we
is not definitive,

I think in the past, Mr. Chairman,
moves have been made after releases
to move ahead of us and then barely
were in the process of easing. But
I would say.

CHAIRMAN GREENSPAN.

a number of
of data. The
react when we
that evidence

President Broaddus.

MR. BROADDUS. This is a confusing period, Mr. Chairman. I
thought you laid it out very well in your statement. And I guess I
find it helpful in a situation like this to stand back sometimes from
what's going on currently and refocus on our longer-term goals and
objectives. We are on the record as aiming to gradually reduce the
inflation rate and to try to minimize the cost of doing that by
strengthening the credibility of that objective. We have made a lot
of progress in reducing inflation in recent years, but it's pretty
clear that that progress is at least slowing, maybe stalling, and that
we are at some risk of losing ground. I would just briefly cite three
things here.
First, the economy has grown at a much stronger pace over the
last three quarters than we had anticipated earlier. As a result the
unemployment rate is currently at the bottom of the range of estimates
of the NAIRU, as we all know. Now, in that situation I am not at all
sure that the actions we have taken to date are sufficient to get the

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sort of steady inflation picture and gradual deceleration in general
economic activity that the Greenbook is projecting. So far we have
raised the funds rate 1-1/4 points, and some outside commentators
refer to that as a strong cumulative move. But I think the record
shows that historically it's still pretty moderate. The second thing
that worries me is that I think inflation expectations are stuck at
too high a level and they may even be rising. The 30-year bond rate
has risen two full percentage points from its low point back in
October. Now, I know we don't fully understand what has caused this
backup; probably real factors as well as inflationary factors are
involved. But it's hard for me to believe that at least some of that
is not signalling an increase in inflation expectations. And finally
both the Greenbook and I think it's fair to say the great majority of
private forecasters are telling us we need to raise short-term
interest rates further just to maintain the current inflation picture.
In these circumstances, it seems reasonably clear to me that
we need to make another fairly strong move toward restraint, and I
guess I see no reason to wait. It seems to me sooner is better than
later, and I think a good case can be made for increasing the funds
rate 1/2 point this morning, quite apart from any particular focus on
the dollar. My estimate would be that near-term expected inflation
rates are somewhere between 3 and 3-1/2 percent. That would mean if
we moved the nominal funds rate to 4-3/4 percent at this meeting, we
would have moved the real funds rate from 0 to 1-1/2 percent
currently. I don't think that presents an undue hazard to the economy
at this juncture. On the contrary, it could save us a lot of grief
later on. At a minimum, I think we should raise the rate 1/4 point
today with the understanding that we would raise it promptly further
if incoming information indicates a need to do that. I don't like 1/4
point increases generally, but I think that in the current situation
such an increase would be better than none. I am still not sure I
know what an asymmetric directive is, but I think I favor it in these
circumstances.
As far as the announcement is concerned, I agree that we need
to make some sort of announcement this morning. A little more
generally, let me just say that on a couple of occasions this year in
addition to saying what we have done, we have had some additional
language in these announcements. Since those kinds of statements also
can affect expectations and perceptions of policy and presumably
longer-term interest rates as well, I think it would be good to do it
a little more systematically if we are going to do that in the future.
Perhaps we could have some alternative announcement language in the
Bluebook ahead of meetings along the lines of the current inclusion of
alternative directive language. But we can address that later.
CHAIRMAN GREENSPAN.

President Forrestal.

MR. FORRESTAL. Mr. Chairman, as I look at the domestic
economy alone, I have a slightly different view than you do in the
sense that, as I said yesterday, I think there is more symmetry there
than asymmetry. That is to say, in my mind the risks are probably
fairly evenly balanced. It's pretty clear from the evidence and from
the discussion we have had around the table in the last day and a half
that the expansion is moderating, and I think the big question is
whether it is going to continue to moderate to a sustainable level,
whether it is going to get down closer to potential. This is not to

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deny in any sense that there may not be some inflationary pressures
that are building.
So, I think the best course for monetary policy at the moment
is to pause and see what effect our actions totaling 125 basis points
have had on the economy. I don't think waiting until August 16
presents any particular problem. To me it's very, very clear, as you
have indicated, that any move today would be interpreted by the market
as intended to support the dollar, and I think that would be a mistake
for reasons that have been articulated by several people. It's also
important to remember that the basic problem with the dollar is not
widespread but really with the yen and to a lesser extent with the
deutschemark. Therefore, the inflationary effects will be minimal, at
least in the short term. I think there is one risk or one problem
that may emerge from no action in that it may reinforce the impression
held in some quarters that the United States really wants a lower
dollar and we are following a policy of benign neglect. But I don't
think there is a thing in the world we can do about that except
perhaps urge the Treasury to keep saying things to the contrary.
That leaves me, Mr. Chairman, with a view that we should
adopt alternative B. My preference would have been for symmetry
because of my view of the economy. However, if we are going to err, I
would prefer to err on the up side, and therefore I can support an
asymmetric directive. I also think that we need to make an
announcement today, but we face a dilemma in that we have not yet
dealt with this policy announcement question. It would be very
helpful to get that settled soon and inform the market.
CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Mr. Chairman, I would support alternative B
because I think the extent and duration of the moderating growth are
uncertain at this point. I do think, though, that we may receive
information in the next several weeks that will indicate more clearly
whether this moderating is going to continue, or if we are going to
follow a path that is more closely aligned with that of the Greenbook.
From my viewpoint if there ever was a good time for
asymmetry, this is it. I also feel that having a conference call
perhaps toward the end of the month is a good idea. It would give us
an opportunity to review some of the statistics that are coming out,
but in addition it would be an opportunity for you to share with us
some of your own views about the testimony, which will have been
completed as well.
CHAIRMAN GREENSPAN. I forgot about that; that is an
important point. It might be useful, irrespective of what is going
on, just to have a telephone conference after Humphrey-Hawkins.
MR. PARRY. Right. As far as an announcement is concerned, I
think one is probably necessary following this meeting. It seems to
me that to announce the fact that the meeting is over is subtle enough
that I am sure markets could deal with that!
Finally, unless I am missing something, the discussion about
waiting until a bad CPI number comes out is one I am very troubled by.
It seems to me that we spent the last six months telling people that

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we can't wait for bad inflation news before we act, that it takes 12
to 18 months for policy to have an impact on inflation. The tactic of
waiting until a bad number comes out, for whatever purpose, is just an
incorrect approach. In fact, such a number probably would be one I
would want to react to least. Thank you.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. I have a lot of sympathy for the views Al
Broaddus expressed earlier. In terms of reasons to act, the dollar is
not a reason to act. I think there is information in the behavior of
the dollar. I accept what Jerry and others have said about the
dollar/yen, but I think there is a depreciation going on more broadly
on a trade-weighted basis. Basically, markets are going to set those
levels, and we certainly are not going to set them through
intervention nor for that matter in the short run through policy
actions. In the long run, as you said earlier, Mr. Chairman, our
policy actions matter a lot. Secondly, I agree with what Bob Parry
just said:
Incoming data are not a reason to act now, particularly
real data, but even price data. I think the reason to act is to keep
inflation and inflation expectations from rising and ultimately to
make further progress toward price stability than we have managed to
accomplish so far. What I have been looking at for some time, and I
mentioned this before, is that we have a very large monetary stimulus
put in train over the last three years that we have to offset.
Really, all we have done in our own words is to get back to a neutral
policy. I continue to think that markets are sitting there looking at
what we have said, looking at what we are doing, and saying that 3
percent or higher inflation is okay with the FOMC. From their point
of view, if they think they have figured it out, it's okay with them
too; they will just go with the flow. But I don't think in the long
run it's okay for the country. So as far as I am concerned the sooner
we change that perception the better off we will be.
Where I come out is that I would move at least as
aggressively as we did last time. I'd move the funds rate up 50 basis
points, and I would couple that with an increase in the discount rate
of 50, maybe even 75, basis points. I would use the discount rate
announcement to make it clear that we are acting because of concerns
about domestic inflation and by implication not to defend the dollar.
I might just say--now obviously I am interpreting events differently
than others, so please take that into account--that from my
perspective, not to do something that is fundamentally called for
because of a concern about the perceptions about it is not a good
reason not to do it. We ought to do what's right and we ought to
explain why we did it.
To conclude, as I assess things and look at the risk-reward
tradeoff, I think there is little risk of somehow derailing this
expansion. There is a lot of momentum out there and I don't think 50
basis points is going to derail it. As I said before, the incoming
month-to-month data on the real economy are not important to me at
this juncture, although obviously they are over longer periods of
time. I think if we did move, it might allow us to get ahead of this
inflation process. Now, we could well have some development over the
next week or two that even in the short run would make our job a great
deal tougher than if we act right now, which I think is a risk
associated with waiting.

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CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE. I favor staying where we are today both for
international as well as domestic reasons. I agree with your
observations that we would have to have a very large bullet to be
credible in terms of the dollar, and I don't think we ought to use
that today; it's much wiser to keep our powder dry and wait for a more
demanding day. Hopefully, that won't come, but I think that is what
we ought to do. On the domestic economy, we are moving from a higher
growth path to a lower growth path. And I think we need to have a
better sense of the magnitude of that adjustment and where we are
likely to end up before we make an additional move.
On the symmetry/asymmetry issue, the vaguer that concept the
more comfortable I am with it. The more we try to define it and get
specific the more uncomfortable I become. So, this notion of
indicating a kind of disposition in a vague sense is fine. I think,
however, that all too frequently in the past asymmetry has allowed us
to key monetary policy on a particular statistic. We have had a run
on employment numbers, for example, over various periods. The markets
would anticipate that first Friday of the month, and they would move
because they were trying to guess how we would move. That is not the
kind of situation that we want to get ourselves into. I think we
should react to a total evaluation of how we see the economy rather
than a particular number on a particular day. So, as I hear
definitions of symmetry and asymmetry that lead us more toward
reacting to specific statistics, the less enthusiastic I am about it.
However, if I were voting today, I could vote for either symmetry or
asymmetry.
CHAIRMAN GREENSPAN.

President Keehn.

MR. KEEHN. Mr. Chairman, I came to the meeting in favor of
alternative B with a bias toward tightening. I think you made a very
strong case for that choice, and I certainly support that. Even so, I
would slightly favor symmetric language, not because I think an
asymmetric policy is an inappropriate stance--I think our next move is
likely to be toward tightening--but because I just am not sure what
asymmetric language really buys for us. On the other side of that
coin, we have had some bad experiences, it seems to me, with
asymmetric language. May of last year comes to mind in that context.
So, as long as we have a good sense as to what we want to do with
policy, I think that is all we really need to operate. Therefore, I
prefer symmetric language, but I don't feel that strongly about it.
In terms of the announcement, it is a bit of a dilemma, but the choice
that Ed Boehne suggests seems to be a good way of dealing with that
particular problem.
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. I support your suggestion, Mr. Chairman, with
"B" asymmetric. As far as an announcement goes, I like Ed Boehne's
suggestion also. I would like to add that I don't think it's
desirable that we tie ourselves into knots here trying to define
asymmetry. It's not necessary for us to achieve precision there. To
me, it's just a broad indication of a bias, or a leaning, or a
concern, or whatever qualitative word you want to use, and that is

7/5-6/94

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quite adequate and quite useful to have available.
to leave it at that.
CHAIRMAN GREENSPAN.

I am comfortable

President Stern.

MR. STERN. For the moment I am pretty comfortable with where
we are as well as with the way I see things unfolding. So I would
favor alternative B with a symmetric directive, which is my usual
preference. Having said that, I do think we need to be careful here,
though that is hardly new for monetary policy. There has been a lot
of talk--Al Broaddus touched on this--to the effect that we have moved
quite a bit and we have moved early and so on and so forth, but my
reading of the historical record suggests that this is neither a large
move nor a particularly early move. Now, other things are different,
of course, that have to do with the economy--the stance of fiscal
policy, and other things that we can enumerate. But I think we ought
not to believe some of the rhetoric that is out there about the way
policy has acted so far. We probably have not behaved as atypically
as at least some commentators have suggested, and that suggests to me
that over time we may well have considerably more to do.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. Mr. Chairman, I would point out that even our
more pessimistic projections suggest that the economy is continuing to
build some inflationary pressures and that they will occur through the
end of the year. And so I think there is a need to move. It's not a
matter of whether but when. I agree with you in the sense that I
think doing so now would get things confused as to why we are doing it
in terms of the international market. The law of unintended
consequences might take over and we could have some further problems
from that. With that in mind I would be inclined to take the "B"
alternative with asymmetry toward tightening, and would look for an
opportunity to do more. I have no problem about doing so in the
intermeeting period if we have the opportunity. As far as announcing,
I'd say we are down that track, and we need to announce. I think the
announcement should be very brief and it should say at most that no
action was taken.
CHAIRMAN GREENSPAN.

Governor Blinder.

MR. BLINDER. I think that alternative B, which is to do
nothing right now, is the prudent course. When you are into the game
of fine-tuning, which we are forced into once we get this close to
capacity, there is always a danger of oversteering. I think we should
be mindful of that. I see the risks, as I think Bob Forrestal and Ed
Boehne said, as fairly balanced, and we need to know a little more
about how much of a slower gear this economy is going into right now.
Since the last FOMC meeting, interest rates are up a tad; money growth
rates are down; reserves have now been falling for three months or so;
and the economy is giving off a feeling of a slowdown. It's also the
case that fiscal policy, which hasn't been mentioned, was moving into
its maximum contractionary phase in the first half of 1994, and it too
works with a lag, although not quite as long a lag as monetary policy.
Even though I think the risks are quite balanced now, I
believe it would be useful to go asymmetric in order to cock the gun,
so to speak. The asymmetry now says, I think, that we view it as

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7/5-6/94

extremely unlikely that we went too far in doing 125 basis points;
that it's modestly likely that we have to go further; but combined
with not doing anything now, that we are now in a waiting mode to get
more information about the economy, because we are not quite sure. It
leaves open the possibility that the 125 basis points were enough, but
it expresses the view that there is some considerable likelihood that
more will be necessary. I don't think--picking up on some of the
other threads of conversation--that this decision should be triggered
literally on any one number, be it CPI, employment, or anything.
The other thing I wanted to say is this: It was mentioned
that the markets will not know tomorrow whether we went asymmetric or
not, which is true. But we are in this game for a lot more than next
week. Roughly 45 days from today the decision will be made public,
and I think this asymmetric directive, if we adopt it, will feel right
in terms of the broader strategy that was started in February. It
will give the impression that the Fed had a general long-run strategy,
was pursuing that long-run strategy, and was ready to act if
necessary. Now, it might in fact be that we do act in August or at
the following meeting, or it might be that we don't. But I think the
asymmetric directive is the right message to give 45 days from now
rather than now.
With regard to the announcement, I certainly strongly join
what seems to be the consensus that we really have no choice but to
make some kind of announcement. Here I agree, I think, more with Al
Broaddus and Tom Melzer that saying something about what we are up to
is, generally speaking, a good thing. Now, we probably don't want to
try to draft something around the table, so if we want to make an
extremely terse announcement now that says we didn't change the
pressure on reserves or something like that, I wouldn't oppose that.
But thinking a little longer run about operating procedures, I think
the release of a few sentences pertaining to the policy decision would
not be a bad thing after each FOMC meeting and probably would be a
good thing.
CHAIRMAN GREENSPAN.
announcement?
MR. LINDSEY.

Larry, what was your view on the

I think we have to make a terse announcement.

CHAIRMAN GREENSPAN.

Okay.

Governor Phillips.

MS. PHILLIPS. Well, based on what we know now, I think that
we will have to tighten more at some point. I really don't see the
case now for 1/4 point moves, so when we do move I think it should be
1/2 point. I don't think our moves should be prompted by foreign
exchange situations, against the yen specifically. I can go along
with a pause for now, which would be the "B" alternative. I am
becoming increasingly skeptical of asymmetric directives, I guess
partially because it seems the definition always changes as to what
asymmetry is, depending on the circumstances. So, I worry a bit that
we are injecting more uncertainty into the market by leaving open the
possibility of moves. Having said that, I do think it's becoming
increasingly clear that we will have to move on the tightening side.
So, while I prefer symmetry, I probably would not vote against
asymmetry. I think that a short announcement at this point would be
appropriate. I would like to get to the final decision on what our

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policy is on announcements because I think it is probably appropriate
that we adopt this approach of using a few sentences. But since we
have not established a policy at this point, I'd go with a terse
announcement just to get us past this period.
CHAIRMAN GREENSPAN. President Melzer.
MR. MELZER. Alan, I forgot to comment on the announcement.
I agree with announcing something. I guess I am wondering whether, if
we just had Joe Coyne, as spokesperson for the Fed, contact the wire
services and say that the meeting was concluded and that no actions
were taken, that might give us a little more room in terms of setting
a precedent. If you actually make an announcement-CHAIRMAN GREENSPAN.

I think that's basically what we will

do.
SPEAKER(?).

That is what we have been doing.

CHAIRMAN GREENSPAN.

It would be Joe.

MR. MELZER. Well, no, it actually has been a statement by
the Chairman in the earlier-CHAIRMAN GREENSPAN. I think what I have suggested for today,
although I have not been explicit, is that Joe would do it.
MR. MELZER.

As spokesperson for the Fed or whatever.

CHAIRMAN GREENSPAN. In the past when we have had meetings he
said the meeting was still going on or the meeting was about to be
over, or something like that. He has done that in the past.
MR. MELZER. I just didn't think it would be a good idea to
have a statement in your name on this.
CHAIRMAN GREENSPAN. Yes, I agree with that. There seems to
be general unanimity on the announcement issue; we will work something
out. There also was a fairly broad consensus for "B" and a modest
majority for asymmetry. So, why don't we formulate that in the text.
MR. BERNARD.
"In the implementation of policy for the
immediate future, the Committee seeks to maintain the existing degree
of pressure on reserve positions.
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, slightly greater reserve restraint would or
slightly lesser reserve restraint might be acceptable in the
intermeeting period. The contemplated reserve conditions are expected
to be consistent with modest growth in M2 and M3 over coming months."
CHAIRMAN GREENSPAN.

Call the roll.

MR. BERNARD.
Chairman Greenspan
Vice Chairman McDonough
Governor Blinder

Yes
Yes
Yes

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President Broaddus
President Forrestal
President Jordan
Governor Kelley
Governor LaWare
Governor Lindsey
President Parry
Governor Phillips
CHAIRMAN GREENSPAN.
lunch is now served.

No
Yes
Yes
Yes
Yes
No*
Yes
Yes
The next meeting is on August 16 and
END OF MEETING

*Secretary's note: At the end of this meeting, Mr. Lindsey
indicated to Chairman Greenspan that his dissent on the operational
paragraph was based on a possible misunderstanding of the implications
of the bias in the directive. His dissent was from a directive that
he perceived as calling for a more or less automatic tightening of
policy during the intermeeting period. On the understanding that any
tightening during the intermeeting period would depend on further
indications of inflationary developments, Mr. Lindsey requested that
his vote be recorded in the minutes as in favor of this policy action.
Chairman Greenspan agreed that his request was appropriate.