Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 26-27, 1984 : Transcript

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Meeting of the Federal Open Market Committee
March 26-27, 1984

A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in Washington,
D. C., on Monday, March 26, 1984 at 2:00 p.m., and continuing on Tuesday,
March 27, 1984 at 12:00 p.m.
PRESENT:

Mr. Volcker, Chairman
Mr. Solomon, Vice Chairman
Mr. Boehne
Mr. Boykin
Mr. Corrigan
Mr. Gramley
Mrs. Horn
Mr. Martin
Mr. Partee
Mr. Rice
Mrs. Teeters
Mr. Wallich
Messrs. Balles, Black, Forrestal, and Keehn, Alternate Members of
the Federal Open Market Committee
Messrs. Guffey, Morris, and Roberts, Presidents of the Federal
Reserve Banks of Kansas City, Boston, and St. Louis,
respectively
Mr. Axilrod, Staff Director and Secretary
Mr. Bernard, Assistant Secretary
Mrs. Steele, 1/ Deputy Assistant Secretary
Mr. Bradfield, General Counsel
Mr. Oltman, 1/ Deputy General Counsel
Mr. Kichline, Economist
Mr. Truman, Economist (International)

Messrs. Burns,1/ J. Davis,1/ R. Davis,1/ Kohn,1/ Lindsey,1/
Prell,1/ Siegman,1/ Stern,1/ and Zeisel,1/
Associate Economists
Mr. Sternlight, Manager for Domestic Operations, System
Open Market Account

1/

Attended Monday session and Tuesday session before action to adopt
domestic policy directive.

3/26-27/84

CHAIRMAN VOLCKER. Without objection, Mr. Solomon will be
elected. We have a list of [proposed] officers, which is virtually
identical with that of last year, with a couple of additions from the
Board's staff. Do you want to read the list, Mr. Bernard?
MR. BERNARD.
Okay.
Staff Director and Secretary, Stephen Axilrod
Assistant Secretary, Normand Bernard
Deputy Assistant Secretary, Nancy Steele
General Counsel, Michael Bradfield
Deputy General Counsel, James Oltman
Economist, James Kichline
Economist (International), Edwin Truman.
Associate Economists from the Board:
Donald Kohn;
David Lindsey;
CHAIRMAN VOLCKER.

Those are the two additions, I think.

MR. BERNARD.
Michael Prell;
Charles Siegman; and
Joseph Zeisel.
Associate Economists from the Reserve Banks:
Joseph Burns;
John M. Davis;
Richard Davis;
Richard Lang; and
Gary Stern.
CHAIRMAN VOLCKER. As usual, the associate economists from
the Reserve Banks reflect the nominations of the Bank presidents
serving [as members of the FOMC].
We have two more, I think.
MR. BERNARD.
MR. PARTEE.
MS.

TEETERS.

They come later.
So move.
Second.

CHAIRMAN VOLCKER. Without objection, those will be approved.
Now we have the selection of a Reserve Bank to operate the System
Account.
MR. PARTEE.

Time to move that around, isn't it?

SPEAKER(?).

Let's bid!

MR. BLACK.

New York has already got a Vice Chairman!

CHAIRMAN VOLCKER.

Do you want to propose New York?

VICE CHAIRMAN SOLOMON.
CHAIRMAN VOLCKER.

I propose New York.

Do we have a second?

3/26-27/84

MS. TEETERS.

Second.

CHAIRMAN VOLCKER. Without objection. We have the selection
I assume the present incumbents have been
of the two Managers.
approved by their Board.
VICE CHAIRMAN SOLOMON.
CHAIRMAN VOLCKER.
and Mr. Cross?
SPEAKER(?).

Do we have a nomination for Mr. Sternlight

So move.

CHAIRMAN VOLCKER.
SPEAKER(?).

They have been.

Mr. Cross is not here today.

Second?

So move.

CHAIRMAN VOLCKER. Without objection. No changes are
proposed in the foreign policy--"foreign policy" sounds a little too
grandiose to me.
MR. BERNARD. The Authorization for Foreign Currency
Operations and the Foreign Currency Directive.
CHAIRMAN VOLCKER. In the various directives related to our
purchases and sales of foreign currency there are no changes proposed.
If there are no objections, they will continue
Are there objections?
in force. We have a $4 billion intermeeting limit on changes in
I'll ask whether there are
System holdings; that's the routine limit.
If there are no objections, we will
any objections to retaining that.
retain it.
That doesn't mean we can't change it temporarily from time
to time as we go ahead, but that's the basic authorization. I hear no
objection. There is an agreement with the Treasury to warehouse
No change is proposed.
foreign currencies.
MR. PARTEE.

That isn't being used currently.

Isn't that

right?
CHAIRMAN VOLCKER. It is not.
But it's thought to be a good
idea to keep the authority active even if the implementation is not
currently active.
VICE CHAIRMAN SOLOMON.

Right.

Does that need a formal

motion?
CHAIRMAN VOLCKER. We need at least a "no objection."
Again,
there is no change [proposed].
I don't hear any objections, so it is
approved. The next item is security of our procedures and related
materials. Mr. Solomon was the chairman of that subcommittee and we
will turn to Mr. Solomon.
VICE CHAIRMAN SOLOMON. You all have copies of the report
that we sent around containing our recommendation. I might summarize
the key points.
Before I do that, I should say that none of us on the
subcommittee assumed that the leak that the GAO investigated came from
the Federal Reserve System. But we felt that the GAO report did have
some basis for saying that our procedures were somewhat lax, or could
be tightened up, and that there was a very large number of people with

3/26-27/84

access [to FOMC materials].
So, we looked at many alternative ways of
handling the access problem. Basically, our recommendations were in
four major areas:
first, updated security classifications, with an
addition of one new category to the two old ones; secondly,
refinements in the procedures for distribution and handling of
classified documents; thirdly, stronger procedures for making sure
that people are familiar with the rules; and finally, a reduction in
the number of people authorized to see the more sensitive documents.
Briefly, the new procedures call for use of double-sealed
envelopes and distinctive cover sheets and for restrictions on
copying. Also, the rules will be circulated annually to each person
on the access list who would sign off on them. In regard to the
number of people who have access to documents, our proposal calls for
certain numbers.
At the Board and at the New York Reserve Bank, there
is a reduction of five each in the Class I list and of six each in the
Class II list. At the other Banks there is a reduction of one each in
the Class I list and a limit of seven for access to Class II material.
The most important switch we made in the classification of documents
was classifying part I of the Greenbook as Class II.
The systemwide
results of these restrictions and reductions in access work out as
follows:
The Class I list is reduced from 86 to 67 people other than
the members of the FOMC themselves; and the Class II list is reduced
from 348 to 183.
Even though we think these are reasonable, we did
provide for ad hoc exceptions by the Chairman and exceptions for ad
hoc assignments, which could be granted by governors and presidents.
I should also point out that the limitations in each category--for
example, seven for Class II documents at Reserve Banks other than New
York--apply separately to each type of document.
Those having access
to Part I of the Greenbook, for example, may be different from those
with access to the Managers' reports.
I think that summarizes the
main recommendations. We would recommend that, after discussion and
questions, the FOMC adopt this.
CHAIRMAN VOLCKER.

Are there questions?

MS. TEETERS.
I'd like to raise an issue that was not
addressed, which is the continuation of an existing policy, and that
is providing the Greenbook to the Secretary of the Treasury and four
or five other people at the Treasury, the Chairman of the Council of
Economic Advisers, and the Director of OMB.
We have never been able
to trace the leaks, but it seems to me that there is a potential there
for leaks coming from outside of the System regardless of how much we
tighten our own procedures.
VICE CHAIRMAN SOLOMON. Well, what we did do for the first
time was recognize the de facto practice by including it in the formal
proposals. But we did not feel that it was up to us--and frankly, I'm
not sure it's very practical without raising more dust than it's
worth--to restrict access to people in the Administration.
MS. TEETERS.
Well, there seems to be a lot of access at the
Treasury and we don't have any idea what their security provisions are
for these documents.
VICE CHAIRMAN SOLOMON.
But they don't get the Bluebook or
the Open Market directives or the policy records.
What they do have
are the two Managers' reports, and I think they're entitled to have

3/26-27/84

them because those are needed both in the managing of the public debt
and, of course, in the foreign exchange market where the Secretary of
the Treasury [has responsibility].
MR. WALLICH.

Do you mean the Managers' weekly reports?

VICE CHAIRMAN SOLOMON.

Just the weekly report goes to the Treasury.

MR. STERNLIGHT.
MR. PARTEE.

I think it's the weekly they get.

And, of course, the Greenbook.

VICE CHAIRMAN SOLOMON.
to restrict, Nancy?

What specifically would you propose

MS. TEETERS.
I would restrict them from the Greenbook
because in the past we have had some distinct and fairly specific
leaks of the contents of the Greenbook.
CHAIRMAN VOLCKER. My memory may not be perfect on this, but
my overall impression is that the record has been very good in terms
of identifiable leaks from them. I can recall one or two occasions
where a newspaper reported that the Federal Reserve staff was thinking
in a certain range or reported a certain number that sounded to me as
It wasn't
if it may well have come from the Administration.
particularly damaging or timely; it wasn't that we sent it to them and
it appeared before an Open Market Committee meeting. I can recall one
or two instances that made me suspicious, but generally I think the
I don't know if anybody else has a
record has been pretty good.
different recollection.
MR. BOEHNE.

When does the Greenbook go to the Treasury?

CHAIRMAN VOLCKER.
issued, I guess.
MR. KICHLINE.

Within a day or so of the time it's

I believe it goes out on Thursday morning.

MR. GRAMLEY. We have been sending the Greenbook to those
three places for at least 20 years, I think. And in the interest of
maintaining an exchange of views with people in the Administration
there are times, regularly, when the Chairman is provided access to
information well ahead of time--about the same time the President gets
it--and is one of the very few people who gets that kind of
information. There are times when we are made privy to what is going
I think we
on in the budgetary process, even at the staff level.
would be jeopardizing that free interchange of information if we
didn't send the Greenbook over there.
VICE CHAIRMAN SOLOMON. The only thing I could suggest would
be to advise them that we have reclassified Part I of the Greenbook
into a Class II document and that the Chairman and the FOMC would
appreciate it if the three principals who get it--the Secretary of the
Treasury, the Chairman of the Council, and the Director of OMB--would
take comparable measures to restrict access at their own agencies.

3/26-27/84

CHAIRMAN VOLCKER. We can. The point has been made to them
but obviously it can be made again and probably would be useful to do
so.
VICE CHAIRMAN SOLOMON.
classification].

Now that we're moving

[up its

MR. PARTEE. In connection with the reclassification it would
be a convenient thing to do.
I do believe that there [has been no]
difficulty, Nancy, except for a few times when the Secretary said
something.
We can hardly stop that.
There have been occasions when
it looked as if it had been circulated pretty widely on the staff.
But with a redoubling of emphasis on security of the document we might
be able to take care of that problem, though not the problem of the
Secretary saying something.
CHAIRMAN VOLCKER.
I would agree very much with what Lyle
said about ongoing relationships unless there is an apparent real
problem.
MS. TEETERS.
I simply wanted to raise the issue.
It was
something that has never been changed and is a potential [for leaks]
that we can't control.
MR. PARTEE.
It recognizes something that we have been doing
since the middle '60s, I think, or certainly since the late '60s.
MS. TEETERS.
Certainly, in my own mind this latest leak came
from the Hill. And we have a continuing problem of maintaining
security if we release confidential material to someone outside of the
System.
CHAIRMAN VOLCKER. I don't think anybody has proposed that we
release the Bluebook to them.
I don't know whether it makes any
difference whether we send it to them a few days before an Open Market
Committee meeting, which is the usual practice, or a day after.
I
don't think we've ever had a leak just before the Open Market
Committee meeting. Nothing in the document is all that sensitive to
issues of timing, I guess.
But I don't think the particular day we
send it to them is sensitive in terms of our relationship with them.
MR. PARTEE.
now isn't it, Jim?
MR. KICHLINE.

It probably is generally sent out on Thursday
Thursday morning.

MR. PARTEE. That's right away, so they get it very early.
Then the following Monday-SPEAKER(?).

The Bluebook is--

MR. PARTEE.

No, not the Bluebook.

CHAIRMAN VOLCKER.

They don't get the Bluebook at all.

MR. PARTEE.
It might be better to send the Greenbook to them
the following Monday or something like that.

3/26-27/84

MR. BOEHNE. These totals of four and seven [with access at
the Reserve Banks]:
Does that include members of the Committee, too?
VICE CHAIRMAN SOLOMON. Yes, it does.
We did a spot check at
about a half dozen of the Banks and talked with the staff here.
There
was one Bank that had five [on its access list] although most of them
had four. As we analyzed who had a need to know--I don't mean in the
formal sense of Class III, but in the sense of how the operations went
And
at the different Reserve Banks--seven seemed a reasonable number.
then Chuck Partee, Bob Black, and I discussed that. Originally we
were talking about restricting it to three but some of the presidents
felt that would be excessively restrictive and that four would be a
reasonable number.
MR. FORRESTAL. Tony, in that connection--this is a technical
question--on page 5 you talk about limiting the Class I [materials] to
the president and three other officers. Do you really intend it to be
members of the official staff?
I think that presents a problem in
some Banks.
It would in my Bank, for example, where we have some
people on the research staff who are not officers who are cleared at
the moment for FOMC Class I.
Now,
VICE CHAIRMAN SOLOMON. Well, that was our intention.
we made some recommendations on systematizing the downgrading of a
document's classification. The Bluebook would be downgraded from
Class I to the new Class II at the time of the release of the policy
record and directive. And then it would be downgraded to Class III
four months later, roughly; in other words, after a six-month period
old Class II is downgraded to Class III.
MR. FORRESTAL.

It's still Class I prior to the meeting.

VICE CHAIRMAN SOLOMON.
meeting, right.

It's still Class I prior to the

MR. BLACK. Bob, I don't think we addressed the issue of
whether they had to be officers or not; it just ended up as officers.
MR. FORRESTAL. Well, I think that's something you really
ought to clarify because, as I said, in my particular case I have two
people who are now cleared for access to FOMC documents--and they do
review the Bluebook--and they are not officials. So, that would put
me in an awkward position. On a broader question, I must say that I
certainly understand why you are trying to reduce the number of people
cleared for access, but I really think clearing only four people is
unduly restrictive for the Reserve Banks, particularly if one of those
people is the first vice president. With the president and the first
vice president, that leaves us with only two people.
MR. PARTEE.
president.

guess.

We were not thinking of the first vice

Well, that's the question, I
MR. FORRESTAL. You were not?
That makes it a little better if you don't include--

MR. PARTEE. You can, of course, if he's going to substitute
for you at a meeting. You can clear him for that purpose.

3/26-27/84

CHAIRMAN VOLCKER. It seems there may be some
miscommunication here. You were thinking the first vice president
would not get it?
MR. PARTEE.

That's right.

CHAIRMAN VOLCKER.

He's an addition to the pot.

MR. FORRESTAL. That puts a little different light on it.
But again, if the first vice president is going to substitute from
time to time, it seems to me he ought to be getting the material on a
fairly regular basis.
MR. BLACK. Bob, in our case, since we had to give up one, we
decided that the first vice president would not be one of the four
unless he was substituting. He can give it up more easily. But if
you were out of the Bank, you could made an ad hoc exception for him.
That was the way we were planning to do it.
I'm sure that will differ
from Bank to Bank. It seems rather bad to have to deny access to your
first vice president, but I don't think we have any alternative.
MR. FORRESTAL.

My druthers would be to leave it at five,

Tony.
MR. BOEHNE. On this ad hoc clearance, do you view that as
being a big deal or is that just something that's handled in each
Reserve Bank as it comes?
VICE CHAIRMAN SOLOMON. Each Reserve Bank would handle it but
there would not be a standing ad hoc.
MR. BOEHNE.

I understand.

VICE CHAIRMAN SOLOMON. And under our new procedures it would
require that the Secretary of the FOMC be notified immediately.
MR. GUFFEY. Bob Forrestal has raised a question that's
troublesome to me also and that is restricting the number to four,
which would mean I'd have to cut out the first vice president.
Under
the by-laws, on all other things he operates in my stead when I'm
gone, which is reasonably frequently. To go through the process of
sending a wire to add him on an ad hoc basis for some indeterminate
I'd like to
time while I'm gone seems to me unreasonably burdensome.
suggest that this be amended to permit four as designated and to
permit the first vice president to have access without this special
authorization at the time the president is not there. As I say, he
has all the powers that I have when I'm not present.
CHAIRMAN VOLCKER.
the Open Market Committee.

He doesn't have any powers with respect to

MR. GUFFEY. Yes, that is true.
But the fact of the matter
is that he stands in my stead and ought to be able to have the kinds
of information that I would have if I were there.
That seems quite
The only thing I'm suggesting is that there be a
reasonable to me.
built-in ad hoc exception without the notification process for the
first vice president at the time the president is not in the Bank.

3/26-27/84

VICE CHAIRMAN SOLOMON. Well, I don't understand. Given the
fact that we all have such good attendance records here, I gather that
you're not talking about the very rare case when your first vice
president would be attending [an FOMC meeting] in your absence, Roger?
MR. GUFFEY.

No, I'm not.

VICE CHAIRMAN SOLOMON.

I'm talking otherwise.

He cannot participate on the morning

call.
MR. GUFFEY.

That's correct.

VICE CHAIRMAN SOLOMON. So, I don't understand. What does
the first vice president do in your Bank in regard to the FOMC
directives if he's not in on the call?
MR. GUFFEY. Among other things, he has handled my board of
directors for a discount rate action when I'm not there. He certainly
ought to have available to him what the Committee has done and what it
is thinking about preceding that kind of action.
VICE CHAIRMAN SOLOMON.
doesn't it then?

In effect, it really becomes five,

MR. GUFFEY. Well, I'm suggesting that it remain four but
that we have an ad hoc exemption without the clearance procedure.
VICE CHAIRMAN SOLOMON.
MR. GUFFEY.

A permanent ad hoc?

Yes, but only when I'm out of the Bank.

VICE CHAIRMAN SOLOMON.

I see.

MR. GUFFEY.
Only when the president is not available.
would seem to me to be a fairly simple matter.

It

MS. TEETERS.
The most likely occasion would be when the
first vice president would sit in for the president in a conference
call. And that has been very rare.
CHAIRMAN VOLCKER.

That's not all that rare.

I have no objection to that if that
VICE CHAIRMAN SOLOMON.
is the consensus view of the Committee and if it's clearly understood
that it would only be in the president's absence.
MR. BLACK. I think it's a good improvement, Tony. I would
In fact, I was planning to send Norm a telegram
go along with that.
saying I'd like an ad hoc exception for just that purpose when I am
out of the Bank.
I'd like to support that, Tony, because I found
MR. BALLES.
myself in the same position as Roger. We have three people in the
research department who are actively engaged in research and analysis
of policy and I would not want to take any one of those off. My first
vice president is on the list to receive the Bluebook now under the
The
[current] authorization, although he never in practice gets it.
only time he would look at it would be an overt occasion when he

-10-

3/26-27/84

substitutes for me at this meeting or, alternatively, when he would
participate in a conference call when I was out of town or otherwise
unavailable, or on occasion when I'm out of town and he has to handle
a telephone conference on the discount rate, as Roger mentioned.
So,
if we could somehow get that exception you're talking about carefully
controlled but built-in to avoid the necessity of formally notifying
the Secretary every time I'm out of town, it would surely help.
We
would treat it as a true exception, not just a routine everyday access
to the FOMC Class I materials.
MR. GUFFEY. Yes, that's also true with regard to the
upgraded [classification] of the wire from the Desk. There is
information there that would be helpful if there were going-CHAIRMAN VOLCKER.
MR. MARTIN.

Is there consensus on this point?

It sounds good to me.

CHAIRMAN VOLCKER. I interpret this, Mr. Solomon, as not
limiting the prerogative of the Chairman to have more limited
executive sessions for whatever purpose.
SPEAKER(?).
anybody else.

And you have even more ad hoc exceptions than

MR. PARTEE. This would be on a strict need-to-know basis.
You would keep a record of when you let the first vice president have
access, I take it.
So, if we had to follow down a leak, he would be
caught up in it.
But it wouldn't be a continuous matter; it would
just be for specific occasions.
MR. FORRESTAL.
Special occasions. Did we settle the
question I raised earlier, Mr. Chairman? Does anybody have an
objection to amending this part A to indicate that Class I is limited
to the president and I would suggest language such as "three other
individuals designated by the president."
CHAIRMAN VOLCKER.
MR. FORRESTAL.

Where is this?

Otherwise, I'm going to make some new

officers.
MR. PARTEE. Well, I think we'd want them to be on the
payroll of the Federal Reserve Banks!
MR. FORRESTAL.

Oh yes, of course.

MR. PARTEE. You said "three other individuals."
be anybody. Let's see, Jack Anderson and-CHAIRMAN VOLCKER.
that the language?
MR. FORRESTAL.
be research staff.

"Three other officers and employees."

"Staff members."

CHAIRMAN VOLCKER.
members?

That could

Is

And they would, of course,

What's the magic word?

Employees, staff

-11-

3/26-27/84

MR. BLACK.
MR. AXILROD.

Staff members, I think.
You use "persons" on Class II.

VICE CHAIRMAN SOLOMON.

Use "Federal Reserve personnel."

CHAIRMAN VOLCKER. Federal Reserve personnel.
Any other comments?
be a consensus on that point.

There seems to

MR. KEEHN. Tony, it's not part of what you've taken a look
at, I'm sure, but did you also consider the way in which we distribute
The point I would make is that they are distributed at
the Bluebooks?
a time at which our security is at its very lowest level I would
think--namely, over the weekend. And each time we have to develop a
procedure by which we're going to handle them. I wonder if there's a
way we can distribute them to the Banks at a time when our procedures
are best geared to handle them.
CHAIRMAN VOLCKER.

How, in fact, do they get to the Banks

now?
MR. ROBERTS.

They don't get there all the time.

MR. KEEHN. They come in via something called Cannonball
Express.
And Cannonball Express delivers at a variety of times; it
could be either Saturday afternoon or anytime on Sunday.
CHAIRMAN VOLCKER.

Cannonball Express is a private delivery

service?
SPEAKER(?).

Yes.

MR. KEEHN. I hope it is.
procedure to deal with that.

And we have to go through a

VICE CHAIRMAN SOLOMON. The alternative, though--to do what
you have suggested--is giving out the Bluebooks on Monday morning. We
checked around and there were objections to that because presidents
and members of the Committee would not have a chance to consult with
So, I don't know what the alternative is.
their three other people.
I suggest it as a possible alternative because we
MR. KEEHN.
If they were distributed Thursday night by pouch,
have some problems.
I think that would eliminate all the problems and deal with the
concern we were suggesting.
MR. PARTEE.

They're not ready on Thursday night.

MR. ROBERTS. It is a problem. For example, I didn't get
mine this time.
Usually I have it delivered late Sunday, so I don't
have any time for consultation except while flying on the airplane.
CHAIRMAN VOLCKER.
MR. BLACK.
MR. ROBERTS.

I looked at mine a half hour ago.

Don't your people work on weekends, Ted?
Up until Sunday at about midnight!

3/26-27/84

-12-

Of course, if it's the consensus view
VICE CHAIRMAN SOLOMON.
here, I'd go along with that.
But there is one disadvantage to
sending it out Thursday night and to all the Banks having it Friday
And
We'd be adding one critical weekend of possible leaks.
morning:
that two- to three-day period before we have a meeting is when the
On the other hand, with the general view-media is the most focused.
CHAIRMAN VOLCKER. Just looking at it from the production
side, what is the problem in getting it out a day earlier?
MR. AXILROD. It would have been impossible before the money
It's more possible now
supply started coming out on Thursday night.
to do it Thursday night, but I would say it runs the somewhat needless
But it's certainly possible now, whereas it wasn't
risk of errors.
possible before.
CHAIRMAN VOLCKER. I don't know whether we should someday
review the magic day upon which we hold Open Market Committee
We wouldn't get into this weekend problem if it-meetings.
If it were on Wednesday instead of
VICE CHAIRMAN SOLOMON.
Tuesday or instead of Monday and Tuesday.
MR. PARTEE.

We've discussed that too at other times.

MR. GUFFEY.
There's one other problem associated with this.
The way the Bluebook is sent, two copies come to our Bank that are put
together in one package and we have to designate somebody in the Bank
either Saturday night or Sunday to open that material and repackage
If each were packaged
it, with one going to Tom Davis and one to me.
separately with our name on it, we'd eliminate that.
MR. AXILROD. Normand knows better than I do, but my
impression is that distribution of the Bluebook is a continuing,
miserable problem. And I think Cannonball Express is probably only
the latest in the efforts to find a reliable delivery service.
MR. BERNARD. That's primarily because the main delivery
Given that it's ready only
services just don't deliver on weekends.
on Friday evenings, we have to rely on-MR. BALLES.

maybe the

Well, that's exactly--

MR. ROBERTS.
In view of all this stepped-up security, Tony,
[additional] day is not that much exposure.

MR. AXILROD. We were very close, Mr. Chairman, to having it
ready this Thursday night. With a little more experience and if we
don't have last minute data that would involve [revisions], it may
prove possible. But I would-It
CHAIRMAN VOLCKER. Let me just give you a reaction to it.
has the problem of another day, which means the weekend, which I think
is a problem. We have an existing problem of relying upon these
carriers, which doesn't make me feel all that happy on the other side.
What is
In terms of substance, let me just raise a question with you:
You are supposed to be making up
the point of getting it so early?

-13-

3/26-27/84

your own minds before Mr. Axilrod prejudices your view.
good idea to get it late!

Maybe it's a

I think it's a good idea to
I'll speak to that.
MR. BALLES.
get it early because we do have people at the Reserve Banks--whether
it's one, two, or three--who spend a good deal of their time on
analysis of policy options and so forth. As things now stand, if the
Bluebook doesn't come in until Sunday, they never do get a chance to
read it or provide input or advice to the principal who comes to the
meeting, at least in my case.
CHAIRMAN VOLCKER.
without the Bluebook?

Why can't they give you that advice

MR. BALLES. Well, they can; it's just better if they know
I
all the nuances and the considerations that are in the Bluebook.
think they would benefit from knowing those before they render advice.
And on the other point, Mr. Chairman, Norm knows we have had some real
horror stories in terms of security in getting this material to the
It wasn't just a matter of it not arriving but a matter
West Coast.
It was out there floating around and
of it getting lost in the mail.
we didn't know where it was and Norm didn't know where it was.
We
He and I
finally retrieved it after extra copies were sent out to us.
were both very, very much concerned about the security problem of it
just getting lost in the mail because of this unreliable weekend
I'm very nervous about that.
delivery service.
CHAIRMAN VOLCKER. How does the ordinary pouch go, whatever
What does it consist of?
I keep hearing about it.
the pouch is?
MR. BLACK.

We would get it Monday morning that way.

CHAIRMAN VOLCKER.
MR. BERNARD.
MR. CORRIGAN.

Who delivers it?

Well, I'm not sure.
It's our check couriers.

It goes in the afternoon, right?
MS. TEETERS.
come out Thursday night.

It

[can't]

MR. BERNARD. The problem with the pouch is that we would
have to have the Bluebook ready by about 5:00 p.m. or it's just too
late to make it into the pouch.
MR. GRAMLEY.

On what day, Friday or Thursday?

VICE CHAIRMAN SOLOMON.

Thursday to get it to us on Friday.

MR. AXILROD. Well, we'd never make the Thursday night pouch.
We could make the Friday night pouch if that would get it delivered
any better. But I doubt that it would.
MR. BERNARD.

I don't believe that delivers until Monday.

MR. AXILROD. Yes, I know. As I said, I don't think that
will help one bit. But if we tried for Thursday, we'd be through

3/26-27/84

-14-

about midnight. As it is we could get it out in the course of the day
on Friday earlier than we used to get it out.
CHAIRMAN VOLCKER.

Whom does the pouch go with--our check

couriers?
MR. CORRIGAN.

Yes.

CHAIRMAN VOLCKER.

How do they get to Washington?

MR. CORRIGAN. It goes out of Richmond; it doesn't go out of
or come in to Washington. Everything that goes by pouch in and out of
Washington goes through Richmond.
VICE CHAIRMAN SOLOMON. What you're saying is that if we were
to try and get the Bluebook out to the Reserve Banks on Friday and you
don't finish preparing it until midnight on Thursday, then you are not
talking about the pouch but some kind of special express service that
will get it to us by Friday afternoon.
I don't think we'd all get it
by Friday.
MR. AXILROD. Well, that's what we do now. We have an
express service special that goes out whenever it's ready on Friday.
VICE CHAIRMAN SOLOMON.
I know, but it comes in over the
weekend. What I'm saying, though, is that if it doesn't go out until
sometime after midnight on Thursday, I don't think everybody would get
it on Friday in time to-MR. CORRIGAN. There may be a better solution to this.
Last
Saturday we tested for the first time this new high speed facsimile
transmission among all 13 of us, the Federal Reserve Board and the 12
Federal Reserve offices.
This thing really works fast and produces a
very good copy, and it may be that we can use that.
That would
eliminate the carrier and it would also eliminate the security problem
upon receiving it at the Reserve Banks.
CHAIRMAN VOLCKER.

How do you control the number of copies?

MR. CORRIGAN. I don't know where the machines are in most
other Fed offices, but at least in my Bank--and for precisely that
reason--it's right next to my office and it's very tightly controlled.
MR. PARTEE. There's a really good suggestion.
at 2:00 p.m. Friday afternoon or something like that.

We could say

VICE CHAIRMAN SOLOMON. It's fairly easy to deal with. All
Mr. Bernard would have to do is call that number and say "We're about
to transmit" and some designated person would just stand there and
physically take it off the machine.
CHAIRMAN VOLCKER.
MR. CORRIGAN.

Yes.

CHAIRMAN VOLCKER.
SPEAKER(?).

Is that in operation now?

Yes.

Can it take charts?

-15-

3/26-27/84

MR. CORRIGAN.

It really makes good copies.
could try that, Mr.

We

MR. AXILROD.

CHAIRMAN VOLCKER.

Chairman.

Is it secure?

It's more secure than Cannonball!

MR. CORRIGAN.

We have gone through that, Mr. Chairman, with
MR. AXILROD.
the Federal Reserve Bank of New York in getting comments from Mr.
Sternlight.
The transmission has been terrible.
Not with this new one.

MR. CORRIGAN.

old one

I don't know.
MR. AXILROD.
that doesn't work so well.
It

MR. CORRIGAN.
MR. GUFFEY.

Will

The new one may work.

It's

the

really is good.
it print a blue cover?

[Laughter.]

It could be transmitted that way and then we
MR. ROBERTS.
could pick up the regular report when we come down here.
Mr. [Vice] Chairman, would you speak just a minute
MS. HORN.
to the security [unintelligible]?
Our report doesn't get into this
VICE CHAIRMAN SOLOMON.
It seems to me that if the Chairman wants, he can authorize
question.
a trial run on it next time.
Yes, let me look at it and we'll see
CHAIRMAN VOLCKER.
This doesn't enter
whether we can make some alteration next time.
Should we reconsider
Are there any other issues?
into this report.
I won't do it now, but--.
when we meet?

days
day.

It seems to me that we once went through all the
MR. PARTEE.
of the week and it turned out that Tuesday was the only possible

CHAIRMAN VOLCKER.

I don't know.

Yes, but that had to do with the day
VICE CHAIRMAN SOLOMON.
of the directors' meetings and the last day of the settlement week.
Actually, I thought that Tuesday was a
CHAIRMAN VOLCKER.
particularly awkward day in terms of the data flow.
MR. PARTEE.

Yes, it had to do with directors' meetings.

VICE CHAIRMAN SOLOMON.
meetings on Thursday?
MS. HORN.

Do all

Banks have their directors'

Thursday.

MR. FORRESTAL.

We have a lot of ours on Friday.

3/26-27/84

So, it's either Thursday or Friday.
VICE CHAIRMAN SOLOMON.
No Bank has a day different from that for directors' meetings?
CHAIRMAN VOLCKER.
I thought one Bank had them on Monday or
Wednesday, but that could have changed. Well, we'll look into these
things.
Meanwhile, I guess we can approve the report with the two
amendments that were made. Do I have a motion?
SPEAKER(?).

Move to approve.

SPEAKER(?).

Second.

CHAIRMAN VOLCKER.
MR. PARTEE.

Without objection.

Mr. Chairman, did we take up item 7 on the

agenda?
MR. GRAMLEY.

Not yet.

CHAIRMAN VOLCKER.

You skipped it.

I don't know where we are

MR. GRAMLEY and MS. TEETERS.

[on the agenda].

Bankers acceptances.

MR. PARTEE. Yes.
There was a Manager's recommendation very
different from [the recommendation in the memo], and I thought we
ought to have some discussion of that.
CHAIRMAN VOLCKER.
MR. PARTEE.

Where am I?

I'm following--

You were on number 8.

Somehow item 7 got lost.

I
CHAIRMAN VOLCKER. Let's go back to bankers acceptances.
skipped it because it's not on this [summary] memorandum. Anyway,
let's consider bankers acceptances.
MR. PARTEE.

RPs on bankers acceptances.

CHAIRMAN VOLCKER.

Mr. Sternlight, you have a memorandum.

MR. STERNLIGHT. As noted in my memo to the Committee, Mr.
Chairman, I felt the decision on whether or not to continue doing
In fact, I had
repurchase agreements in BAs was a very close one.
initially written a summary for my own staff summarizing the pros and
We
cons, which came out marginally for staying with the operations.
kicked it around for a while and were persuaded, with varying degrees
of enthusiasm, to come out on the negative side. But again, for some
of us anyway, quite narrowly. That was our evaluation of, on the one
side, the modest usefulness of continuing the operations and, on the
other side, a small but nonnegligible risk of continuing those
operations.
CHAIRMAN VOLCKER.

What is the modest usefulness?

MR. STERNLIGHT. Well, that we do part of our operations in
For the System Account it has
them when we do repurchase agreements.
When
worked out in the last year that about 7 percent was in BAs.
this issue was reviewed a year ago the average had been more like 10
to 15 percent. When Mr. Axilrod and I presented a memo just a year

3/26-27/84

ago on this subject we also thought the decision was close and came
out narrowly for continuing the operations.
One factor that weighed
in that narrow balance was that our withdrawal might add to general
market anxieties about the banking system, which we regarded then as
less acute than in the previous summer and fall--that is the summer
and fall of 1982--but still present in some measure. We are now
another year past that relatively sensitive period of 1982, so that
reason for not withdrawing seems to carry a bit less weight.
In the
meantime the use of BAs in our repurchase agreements has diminished
somewhat further.
So, in my view, those factors tip the scale from
narrowly in favor of continuing to narrowly for withdrawing. But as
our recommendation stated:
If the decision is to withdraw, it should
be with several months' notice to the market.
MR. PARTEE. Peter, am I right in thinking that if you knew
some very, very compellingly bad information about a large bank that
you wouldn't want to make RPs on their bankers acceptances?
MR. STERNLIGHT. We would try to duck it.
If it were known
in the market, then I think the market would not present us with such
a name because that just wouldn't be a good name circulating in the
market.
But if we had some information and the market in general
didn't, then we would hate to make the waves that would be made by
rejecting it, so we probably would take it.
MR. PARTEE.

And that would also include a foreign agency or

branch?
MR. STERNLIGHT. It could, yes; and that tends to be a fairly
sizable proportion of what we do.
MS. TEETERS.
you accept?

Are you typically offered more of these than

MR. STERNLIGHT. Yes, but Governor, we don't really have that
choice. When we are doing RPs, we will make agreements with the
different firms to do an even $5 million or $10 million and so on.
It's only late in the day that we find out what actual acceptances are
being presented. They don't present us with a million at such and
such a rate in a particular bank that is named then; the names usually
come up later.
VICE CHAIRMAN SOLOMON. What rationale would you give in your
public announcement that gives a few months' notice?
MR. STERNLIGHT. Well, that we have found this of limited
usefulness and that the market is mature and certainly doesn't need
our participation for support purposes, but so as not to be
precipitate we are making the change as of 3 months hence or 6 months
hence or whatever. I'd say something like that.
CHAIRMAN VOLCKER. My reaction to this is that the issue
doesn't turn at all on its usefulness to open market operations, which
seems to me close to nil one way or the other. We were in there
historically because of some idea that this market ought to be
nurtured and supported and for a kind of regulatory coloration--that
we determine what is an eligible acceptance and all that business.
And there may be some usefulness there yet.
I don't know what it is

-18-

3/26-27/84

But against that, and given what I know or have
but maybe there is.
found out about the bankers acceptance market recently--that it is
operating in a high, wide, and handsome way--it strikes me that I
don't particularly want to endorse that. And we get into the messy
regulatory question as well--this question you described:
If
something goes wrong, do we do it or not do it or what kind of signals
are we sending?
We may be well advised to get out. My only
Are we really losing something on surveillance on the
reservation is:
regulatory side?
MR. PARTEE. Well, of course, we got out of buying and
selling them some time ago.
Isn't that right, Peter?
MR. STERNLIGHT.
CHAIRMAN VOLCKER.

The outright

[purchases and sales],

yes.

We don't examine them anymore.

VICE CHAIRMAN SOLOMON. There are some people, I think, who
misinterpret the Federal Reserve eligibility as a good housekeeping
seal.
We learned more about bankers acceptances when we looked into
the Mexican line than we did at any other time.
CHAIRMAN VOLCKER. Well, that's what worries me:
that we
give this implicit blessing and we don't really use it to see whether
the market is behaving within certain parameters yet there's this
assumption that we do.
If we don't use it, get rid of it.
VICE CHAIRMAN SOLOMON. But can we really have an
announcement that we will be discontinuing this within a few months
without raising questions that we think some banks are shaky or
without the market wondering what lies behind our doing this?
MR. MARTIN. Deregulation.
burden on financial institutions.

And we're relieving the reporting

MR. PARTEE.
Well, we say we have plenty of government
securities and no probability of any shortage any time soon. We say
we don't need it for open market operations and we say the market is
strong on its own and therefore-MR. MORRIS.

The market has matured.

CHAIRMAN VOLCKER. We don't use this now for any surveillance
purposes or any that I can understand.
MR. STERNLIGHT.

It's not used in a significant way.

MS. TEETERS.
If we stop using it for repurchase agreements,
could we drop that distinction between eligible and ineligible now?
MR. STERNLIGHT.
I think that's a distinction that still
applies for re-discount at the discount window, and relief from
reserve requirements would still hinge on that aspect.
I don't think
that would be affected.
CHAIRMAN VOLCKER.
operations, have you?

You haven't made that distinction in your

3/26-27/84

-19-

MR. STERNLIGHT. No.
We have a requirement for what is
eligible for our purchase but that goes to the market acceptability or
tradability of the name.
CHAIRMAN VOLCKER.
to get rid of it.
MR. PARTEE.

The more I hear, the more I think we ought

I do too.

MR. MORRIS. As far as the regulatory aspect, the New York
Reserve Bank could still exercise some surveillance over the market
even though we were not operating in acceptances as RPs.
Is that
dependent upon-CHAIRMAN VOLCKER. Well, I don't think it is absolutely
dependent but I may be wrong. Historically when we used to buy them
outright--maybe not in recent years but going back to the '20s, '30s
and '40s--somebody would sit there and say:
Is this a good
acceptance?
Has it got the document attached?
Does it meet the
criteria of eligibility? That has faded away through the years.
I
think that was part of the purpose of our being in there:
That we
would only buy the good stuff and the idea was that the market would
then gravitate toward the good stuff because that's the only thing we
would buy.
MR. GUFFEY. Wasn't there a time, though, in the recent past
when we used bankers acceptances when collateral was otherwise short?
MR. STERNLIGHT. Going back some years, yes. When government
securities were in short supply it was helpful but it hasn't been that
critical.

mature;

MR. GUFFEY.
But that's no longer present.
I don't see why we don't get out of it.

The market is

VICE CHAIRMAN SOLOMON. We could have a line in the
announcement that says that if the budgetary deficit-MR. PARTEE.
It is conceivable that we might have some
embarrassments looking ahead. We don't have any now. We can get out
gracefully now. And it won't present a possible issue later on.
MR. BOEHNE. To me, the marginal reasons for being in this
have gotten weaker and weaker over the last few years and there aren't
any good reasons that I can see.
comment?

CHAIRMAN VOLCKER. Is there any point in putting this out for
What do our lawyers say?
MR. OLTMAN.

You don't need to.

CHAIRMAN VOLCKER.
MR. MARTIN.

We've said that about some other things.

You're asking for a legal opinion.

MR. BLACK. It might make it a tad easier to resist buying
something else if we are going to get any pressure to buy something we
don't want--some favored security somewhere.

-20-

3/26-27/84

You are recommending, though, that
VICE CHAIRMAN SOLOMON.
you continue to have the authority just as you have the authority,
although you haven't used it, to buy them outright?
MR. STERNLIGHT.

Yes.

VICE CHAIRMAN SOLOMON.
what does it require?

Does this require a formal vote?

Or

We would still have
CHAIRMAN VOLCKER. What are we doing?
I didn't
the authority to buy but we're not going to exercise it?
understand that.
MR. STERNLIGHT. That's what was done when we withdrew from
There was no formal change in the
the outright [market].
authorization.
MS. TEETERS.

Did we announce it when we withdrew from that?

MR. STERNLIGHT.

I think we did.

MR. PARTEE.
I think all it takes is Committee acceptance of
the manager's recommendation, which is to stop in practice doing RPs
on bankers acceptances over the next several months in a graceful way.
CHAIRMAN VOLCKER. I really have no problem with that but it
raises the question of why we have the authorization. But we can face
that down the road.
VICE CHAIRMAN SOLOMON. Well, one could conceive of a
situation in which we would want to use the authority and we might
want to use the authority without waiting for the next FOMC meeting.
Presumably the Executive Committee could authorize that if there were
some reason.
MR. PARTEE.

Executive Committee on what?

VICE CHAIRMAN SOLOMON.
foreign currency.

There is an Executive Committee on

No, I think it would have to be a wire by the
MR. PARTEE.
Chairman or a notification vote.
CHAIRMAN VOLCKER. For the time being we don't have to face
If there is no objection, we'll leave the authorization for the
that.
time being and review it later.
MS. TEETERS.

item 9],

Are we going to have an announcement?

CHAIRMAN VOLCKER.
the minutes.

Yes.

Well, I guess we're up to

[agenda

MR. AXILROD. Mr. Chairman, do you want to decide whether
there should be a length of time between indicating to the market that
we're not going to be in and actually not being in?
CHAIRMAN VOLCKER.

That is the presumption isn't it?

3/26-27/84

MR. STERNLIGHT. Yes.
But I don't know whether agreement was
I would suggest about 3
reached on what that time interval should be.
months.
CHAIRMAN VOLCKER. You can delegate that to the Chairman and
the Manager if there is no objection. We have to get to the minutes
in a minute. The thought occurred to me in our discussion of
confidentiality that we have a request--I guess from Mr. Fauntroy, but
I'm not sure how hard it is being pressed by Mr. Fauntroy--that we
give his staff rather than the whole subcommittee on the House Banking
Currency Committee Part II of the Greenbook modified to redact those
very few sentences that have some confidential projection or policy
implication. There is very little of that in Part II.
It is mostly a
pretty straightforward rendition of the business picture and the
financial picture and so forth. There is an obvious problem with it
at least in the sense that we did it recently for the Redbook and it
becomes a question of whether conceding some of these things to them
is helpful in terms of harmonious Congressional relationships,
assuming it's harmless, or whether it only encourages the next
request. The fact is that it is a little hard to make a big
intellectual case about this because there isn't much in [Part II of]
the Greenbook that is not in the public domain anyway.
MR. PARTEE. But it's our analysis of the statistics, of
course, which may differ from other analyses from time to time.
CHAIRMAN VOLCKER.
think, for the most part.
MR. GUFFEY.
MR. AXILROD.
SPEAKER(?).
MR. GRAMLEY.

It's a pretty straightforward analysis, I

When is that released--if ever?
After five years.
Except for the parts discussing foreign banks.
What about the parts from the international

division?
CHAIRMAN VOLCKER.
would have to be made.

That is one place where some deletions

MR. GRAMLEY. If we do this, it might be wise to put a
different cover on it and stop calling it an FOMC document.
MR. ROBERTS.
Stop calling it a Greenbook.
identify these things. They hear there's-CHAIRMAN VOLCKER.
MR. GRAMLEY.

That's how they

That's what we did with Redbook.

Make this one beige too!

MS. TEETERS.
But Lyle, if we do that, then it is not being
limited to Fauntroy and his staff. It becomes almost a public
document and not an FOMC document.
CHAIRMAN VOLCKER.
I think one would have to assume this is
virtually a public document anyway whether they promise not to

-22-

3/26-27/84

reproduce it.
subcommittee]

Copies go to every member [of Mr. Fauntroy's
of the House Banking Committee.

VICE CHAIRMAN SOLOMON.
CHAIRMAN VOLCKER.
black file.

Why not give them a Blackbook?

They already think it is accompanied by a

MR. PARTEE.
If I were sitting down in Mr. Kichline's chair,
I would object strenuously because I think it would affect the way it
is written.
I think the Redbook has been greatly affected by becoming
the Beigebook and I think the Greenbook would be affected by becoming
a public document.
One is just much more careful--much more stylistic
For example, the staff
and formalistic--in the way things are said.
wouldn't point out that there's something wrong with the GNP figures
because of the treatment of PIK or they would say it in such a subtle
way that no one could understand what they were saying. And I think
there would be a loss of capability to communicate with the Committee.
MR. MORRIS.

Couldn't all that be brought over to Part I?

MR. PARTEE.
Well, I suppose so.
You remember, there didn't
Part I came about
used to be a Part I; there was just a Part II.
because we thought we would do those projections and that they ought
to be more confidential than Part II.
CHAIRMAN VOLCKER.

It didn't used to have any projections at

all?
MR. PARTEE.
It had no projections at all when I came here.
But I must say, I think it is a way of communicating. What you'll
probably have to do is develop a Part I supplement or something that
has more of the material that used to be in Part II.
CHAIRMAN VOLCKER. Well, I think you're right in worrying
about some inhibition on the way the document is written.
I don't
know how great that is and I don't know whether there is any general
impression that the Redbook has diminished since it is written to be
distributed or whether in fact that has led to any difference in the
way people write it.
Is that a common appreciation?
We do delete
these sections--they are distributed separately.
I have the perception from reading the
MR. GRAMLEY.
Beigebook that apart from some certain stylistic changes--taking out
comments such as one director said something and taking out the view
of panelists--that the content of the Beigebook is not materially
different from what the Redbook was before.
What
MR. BOEHNE. Another way to approach this is to ask:
will be the next request and is it easier to say no at that point than
to say no at this point?
CHAIRMAN VOLCKER. Well, we took a very strong line that Part
I was verboten and that has not been pressed at this point. Now, what
they will do six months from now or a year from now--.
MS. TEETERS.
Just looking at the current Greenbook, I think
the very first sentences of Part II would have to be totally

3/26-27/84

-23-

rewritten. That reads:
"The pace of activity picked up vigorously
early this year. Housing activity surged, auto purchases and other
retail sales rose strongly, and industrial production advanced rapidly
There's no question about where the
in both January and February."
Federal Reserve staff views the first quarter as a result of that.
Practically every one of those adjectives would disappear.
MR. KICHLINE.

We didn't try to leave any doubts in that

document.
MS. TEETERS.
MR. MARTIN.

That goes to Chuck's point about communication.
You wrote 4 headlines.

MR. BOEHNE. That would become:
first quarter on several fronts."

"The economy grew in the

MR. KICHLINE. I think there is some concern. When you go
through these with a little time lag, it's pretty difficult to spot a
whole series of things that are a potential problem. They come up in
Ted's area particularly. On the domestic side, in the past there have
been occasions when the monetary data we had were not for the full
month and we put in rates of growth for the full month. Or we have
put in our corporate bond and stock markets forecasts of various
With time, I think the sensitivity
things going out several months.
I do remember for many years I was assigned the unpleasant
declines.
chore of writing the Quarterly Report for Mr. Proxmire's Joint
Economic Committee and that report was very different from the
Greenbook. It supposedly said the same thing--it was on current
financial conditions--but it was quite a different animal. When you
write something you have in mind the nature of the audience and it
makes you more sensitive.
CHAIRMAN VOLCKER. I think there is something to that. But
of course you are risking that if they really press, we'll tell them
we will reinstate the Proxmire-type reports.
MR. KICHLINE. Well, I'm not adverse to that. And if I have
For
to do this, I would like to get some double mileage out of it.
example, we can get some bulletin articles out of doing that and save
If we put a public document out
some staff time to do something else.
but beef up Part I in a selected way to cover other things, it's
conceivable that the Committee might be better off with a different
Part I and a Part II that we use [as a public document].
CHAIRMAN VOLCKER. Well, I don't want to probe all your
minds, but how many people read Part II?
VICE CHAIRMAN SOLOMON.
read it some of the time.
MR. BALLES.

Now you have to ask how many people

Once a year.

[The Governors] don't have the personal staffs
MR. PARTEE.
that the Presidents have to give us all that information. We have to
read Part II.

-24-

3/26-27/84

CHAIRMAN VOLCKER. I don't think we have to linger on this
We won't do anything immediately but I think we ought to
any more.
I don't have any particular feeling that Part
review the whole issue.
I should be longer. But we'll get the answers to Part I when we
discuss Part II.
We won't do anything for the moment.
Now I'll go to
the minutes. Do we have a motion?

approved.

SPEAKER(?).

So move.

MR. MARTIN.

Second.

CHAIRMAN VOLCKER. Without objection, the minutes are
Foreign currency operations, Miss Greene.
MS. GREENE.

[Statement--see Appendix.]

CHAIRMAN VOLCKER.

Questions or comments?

MR. BOEHNE.
I have two questions in two quite different
When the chart show was given in January,
areas.
The first question:
as I recall there was a chart that forecast some decline of the dollar
this year.
I don't think it was given with a great deal of confidence
but as I recall the chart the dollar was down. The Greenbook forecast
is a good bit stronger and I gather that whatever your interest rate
forecast was two months ago it is probably higher now. How would you
draw the chart on the dollar now, if you had to do it, compared to two
months ago?
MR. TRUMAN. Fortunately, since we do the forecasting for
that purpose on the basis of quarterly averaging, it allows us to
smooth out some factors.
The chart show forecast was based on
projections from the fourth quarter of 1983 through the end of the
projection period and we had particular numbers for the intervening
In fact,
quarters just because we do that for the convenience of it.
we had felt that the dollar was going to stay up longer than we have
in this forecast although we have left the projection mostly the same
for the balance of the period--going out after the third quarter of
this year.
So it is the same for the fourth quarter of 1984 and the
fourth quarter of 1985.
For the first and second quarters we moved it
down just slightly, from 131 to 130 on average for the first quarter
and 129 or something like that to 126 or so for the second quarter,
because it looked like interest rates, if anything, could have firmed
a bit--and also because we have been burned so badly, if I may put it
that way, as you alluded to President Boehne. We had felt that it
might be some time before the cumulative effects of the current
account would begin to show through; in fact, they have come in
somewhat sooner and stronger than we had implicitly projected at that
time.
MR. BOEHNE.
My other question has to do with the debt
situation. Is there anything that can be said about that at this
point?
CHAIRMAN VOLCKER. You're looking at me rather than at the
Well, I think the answer to
people at the other end of the table.
Most of the attention right now is focused on
that is "Yes."
Argentina where, as you know, they have a new government and a very
difficult external problem. The amount of indebtedness is large; it's

3/26-27/84

-25-

half the size of Brazil's or Mexico's, but it is still fairly large.
The new government has had a lot on its mind to say the least
internally as well as externally and they were not moving very rapidly
toward an external--or internal for that matter--economic adjustment
program. In a sense they lost a quarter or so while they were
pursuing other priorities. As a result, there are possibilities at
I suppose it's fair to say that
least of more substantial problems.
the possibility of getting a letter of intent this week before the end
It seems very unlikely
of the quarter is at the vanishing point.
under those conditions that interest [arrears] will be brought up to
date through the fourth quarter of last year, which means those loans
will become nonperforming early in April and will affect earnings
statements early in April.
But more important than that:
This is the first time, I
think, that this has happened to any of these major borrowers. And
what psychological reaction it will have on the banks' attitudes or on
the market, and indeed on Argentina, remains to be seen. That would
be amplified further if it is followed by a classification of the
loans, which isn't automatic and which seems to be natural unless
activity picks up pretty rapidly with the [International Monetary]
There are some indications that it is picking up now and there
Fund.
has been a reasonably straightforward effort going on to reach
agreement with the Fund just in the last week--in terms of actual
discussions with the Fund even in the latter part of last week, to be
more precise. There are indications that the government wants to
reach an agreement. Certainly, the Fund wants to reach an agreement.
There are discordant voices within Argentina and some very real
difficulties on such little matters as how far they can reduce the
Wage policy traditionally enters
budget deficit, to take one example.
into these negotiations. They have been following an ad hoc policy
from month-to-month of increasing real wages.
Inflation is
accelerating; monetary policy is lax; and the [peso] is probably a
little overvalued. And two-thirds of their exports would'be eaten up
Otherwise there wouldn't be any problem!
by the need to pay interest.
I might say in just looking at the Argentina problem that
they have a big trade surplus, very largely based on agricultural
exports.
The country is reasonably self-sufficient. Part of their
big debt reflects some recent current account deficits, but not half
In rough numbers they
of it and maybe not more than two-thirds of it.
have had proportionally an exceptionally large amount of capital
outflow, and like some of these other countries they finance private
But the
capital outflow by the government borrowing the money back.
assets have flown. They don't generate any income for Argentina
because the income stays abroad as well as the assets, and it puts a
very large burden on their current account to manage their external
debt.
We have a problem within Argentina and, of course, we have the
contrary problem that whatever happens to Argentina--which in and of
itself might be a manageable situation--how can you expect a situation
to remain manageable or what are the risks that it will spread to
other borrowers and we will have a much bigger problem on our laps?
So, that is the focus of concern.
Now, there are continuing concerns with other countries.
Peru lost a finance minister recently. Mexico continues to look good
from the external side but it still has sluggish growth. However, it
does look as if they may be approaching a situation where they will

-26-

3/26-27/84

not have to rely much, if at all, on net new external expansion.
Brazil, on the other hand, is just in the middle of what has finally
become, I think--there are still some questions about it--a pretty
forceful internal adjustment program, tightening their monetary
policy. But the success of that is still not clear.
MR. BOEHNE.
Do you think there will be interest rate
concessions forthcoming from the banks?
CHAIRMAN VOLCKER. Well, I don't know what you mean by
concessions.
It's a very foggy word.
The idea of giving what one
might term a subsidy, which Argentina no doubt would like, would be an
extremely difficult one for the banks and in itself would raise a lot
of questions of precedent for the other countries.
Certainly, the
Argentines will at the very minimum go for whatever concession--more
narrowly defined as a low spread--they can get.
That would give banks
some heartburn too on the theory that the Argentine payments are not
as large as the payments of other countries and why do they deserve as
narrow a spread as Mexico has gotten.
The Argentines probably won't
be very happy with the Mexican spread. That poses a problem.
VICE CHAIRMAN SOLOMON. On those 22 reschedulings that have
The new
been held up, one went through; it was controversial.
government came in and they basically want better terms.
On those,
what the banks have offered them is to reconsider the maturities but
not the spreads, and so far there has been no movement because
everything is held up in Argentina.
It's not only the IMF thing,
which of course is the key.
There is also still that billion dollars
of money that they could make available to Argentina that would be
coming back to them as interest.
Then there are the 22 reschedulings
So, there is an impasse.
on which there is no movement.
CHAIRMAN VOLCKER. One can say increases in interest rates in
the United States don't help any of these problems.
for them.

MR. PARTEE.
It's close to a six month give-up of interest
I think the last payment was October 12th.
CHAIRMAN VOLCKER.
MR. TRUMAN.

It was October 3rd or something.

It was the 13th.

CHAIRMAN VOLCKER. However, some banks have told me that they
have gotten scattered payments since then.
MR. TRUMAN. They are [not] paying the interest. They have
been paying some of their trade arrears, which in some cases involves
payments to banks.
MR. PARTEE.

I see.

MS. TEETERS.
In these renegotiations, Tony, are the rates
being offered these countries a spread over LIBOR or prime and then
the rate moves as those rates move?
Is that the way they transmit the
change in rates in the United States?
VICE CHAIRMAN SOLOMON.

Or in the Eurodollar market.

-27-

3/26-27/84

MR. GUFFEY. How much of that Argentina debt resides in U.S.
banks and how much in non-U.S. banks?
CHAIRMAN VOLCKER.
that for U.S. banks.

It's $9 billion dollars or something like

MR. TRUMAN.
It's something like $9-1/2 billion for U.S.
banks out of the $25 billion.
VICE CHAIRMAN SOLOMON.
I looked at the hit that the New York
banks would take if the loans become nonperforming on March 31.
It
doesn't add up to a lot.
is the most vulnerable
but the numbers still are not terribly large yet, although it has a
definite impact.
MR. GUFFEY. When the loans go nonperforming, what percentage
do the banks have to charge off?
VICE CHAIRMAN SOLOMON. They don't have to charge off
anything automatically just because a loan is nonperforming.
MR. BOEHNE.
Don't they?

They have to take out what they put in, I guess.

CHAIRMAN VOLCKER. They would have to not record the accrued
interest for the first quarter and also subtract out from the first
quarter earnings what they already had accrued from the fourth
quarter.
So they get a double hit in the first quarter.
MS. TEETERS.

Do they have to put up reserves?

CHAIRMAN VOLCKER. No, not at this point. They don't have to
but the process is beginning that leads to classification and then to
further classification and at that point they would have to.
MR. TRUMAN. Our investigation, Mr. Chairman, suggests that
not all banks would automatically in all cases back out the fourth
It's not
quarter [accrued interest] under those circumstances.
It's an acceptable practice.
explicitly required by the instructions.
MR. PARTEE. They would deduct it from their reserve for bad
debts, wouldn't they?
MR. TRUMAN. They don't always. That's the form in which
they often would take out the fourth-quarter [accrued interest] if
they were doing the fourth quarter. But at least my information
suggests that they don't always do that in all cases.
They do stop
accruing after 90 days but the previous period in some cases-MR. ROBERTS.
The previous period is usually a reserve
adjustment and the current period is a reversal.
MR. PARTEE.
That's the way they are supposed to do it
according to the Call Report.
MR. TRUMAN. That's right. That's the so-called acceptable
to deduct it against loan loss reserves and then
way of doing it:
replenish the loan loss reserves to that extent. That, in effect,

-28-

3/26-27/84

takes the income hit in the first quarter. But in some cases, I
understand, banks have declined to do that--or their internal
accounting people have chosen not to do that.
MR. ROBERTS.
have to replenish it?
MR. PARTEE.

If you had an adequate reserve you wouldn't

Yes.

You might have to later on.

VICE CHAIRMAN SOLOMON.

Adequacy is in the eye of the

beholder.
MR. ROBERTS.

That's right.

The bank is the beholder.

MR. PARTEE.
Banks are supposed to have some outside
accountants that tell them.
MR. BALLES.
Mr. Chairman, I have a request that may be too
delicate for you to comment on--I'm not sure--but I'm going to read it
anyway.
I'm scheduled in early April to give a talk to a banking
They tried to get him
association for foreign trade, as Chuck knows.
In any event, the point may come up at that
and had to settle for me.
meeting in terms of comments that have been made in the press that you
have had a role, and maybe a leading role, in urging the banks to
reduce the interest rate that they are charging these troubled Latin
If that question comes up, is it true or not?
American countries.
Maybe?
I don't know?
What should I say? No comment?
CHAIRMAN VOLCKER. I don't think you want to get drawn deeply
into that subject, but I haven't made any great secret of the fact
that in the situations where there has been clear improvement I think
that ought to be taken into account in setting terms--whether interest
rate terms or maturity terms or the size of the package or whatever.
But we haven't gone around on a case-by-case basis [unintelligible]
A clear case of improvement is
drawing out interest rate spreads.
Mexico.
I think it was stated quite a bit more broadly
MR. PARTEE.
than that in the article in The Wall Street Journal that you probably
are referring to.
MR. BALLES.

It was.

That's the article I was referring to.

MR. PARTEE.
I don't know. As a matter of fact, I called to
find out if anybody knew whether you had been doing this or not after
I think it
I read that article and I couldn't find anybody who did.
was more broadly stated in terms of a considerable interest rate giveup.
It reminded me of the days when they used to say that the Fed
We never
told the banks they ought to continue with those REIT loans.
said it, but that was what all the bankers said we said.
VICE CHAIRMAN SOLOMON. Well, if interest rates keep going
up, the question is going to arise as to whether the [unintelligible]
banks are capable of devising some kind of new relationship in regard
to the increase or whether the financing put together by the IMF is
going to have to be revised in the middle of the year, although that
In other words, there has been some talk,
could create consequences.
but it has only been in general terms, about the banks and a cap on

3/26-27/84

-29-

payment of interest rates; and any rise in interest rates would be
capitalized so that it wouldn't disturb the cash flow projections and
the financing that has been arranged for the year. So far there is
nothing very concrete, even though there has been a good deal of talk.
CHAIRMAN VOLCKER. I detect an interesting phenomenon in this
When you talk to the banking statesmen, if there are such
area.
people--or to those who would like to think they are banking statesmen
at large banks or small banks or American banks or foreign banks--they
talk very freely about reducing interest rates and the need for
concessions, for caps, or whatever. When their delegates arrive at
the banks' advisory committee meetings that atmosphere seems to be
I think it's fair to say that we can have formal
noticeably absent.
conversations that probably encourage larger thinking but it doesn't
get transmitted very much in their-MR. BALLES. That's surprising, because I know that at least
at two of our big banks on the West Coast
those at the top level have stated that they feel
I wasn't aware that
concessions ought to be made on interest rates.
the people who show up at these meetings are taking a different view.
by and large does not
CHAIRMAN VOLCKER.
In some cases where
does.
show up at these meetings.
banks were not at these meetings, I could only report an impression.
I don't try to track all these down. Bankers who have talked in
rather sweeping terms are also reported to be with banks that don't
want to participate or want to raise the interest rate when the
They think the terms are too narrow. I don't think
telegrams go out.
There's a difference between
I'm completely misreading this situation:
the guy [whose] bonus is being determined by the performance of these
loans and the interest rates on them and the executives who are
somewhat above those levels.
Some of the regional bankers in my territory
MR. BOEHNE.
have said that they won't kick another dime into these but they would
Apparently what you are saying
talk about interest rate concessions.
is that they will talk about it, but that's about as far as it goes.
CHAIRMAN VOLCKER. Well, a lot of very tricky problems arise
in interest rate concessions or roll-ups or whatever in maintaining
any sense that these loans are then currently performing and
That raises a whole range of other problems about
[unintelligible].
how many reserves and so forth and it changes the whole nature of the
negotiation with foreign countries. There's a legitimate fear that
once they began making concessions, where does it stop?
I was told by the regional bankers in my
MR. BOEHNE. Right.
territory that regional banks around the country were getting together
to come up with a uniform approach to the next round when they would
be asked to kick in more. But I never did actually hear the result of
that get-together. Have you heard anything about that?
VICE CHAIRMAN SOLOMON. No, and I don't think it's very
likely, or practical either, for them to organize and talk that way
because among the banks that aren't coming along there is a mixture.
There are very few of the important regional banks that don't come
along eventually, although there may be 30 or 40 of the smaller banks.

3/26-27/84

-30-

I think the next time you try to get them to
MR. BOEHNE.
come along it's going to be a heck of a lot tougher than the last
time.
CHAIRMAN VOLCKER. It gets a lot tougher not just for them;
The
it gets tougher for the bigger banks and for the European banks.
But if you want to look at the
whole process is getting tougher.
other side of it and hold this thing together a while longer, it is
quite feasible, as I suggested earlier, that Mexico will come back
next year and we can forget about all those regional banks and smaller
banks. And maybe the bigger banks wouldn't have to provide anything
either. That doesn't say there isn't a lot of refunding to be done.
But I think it's easier if we can make a distinction between
restructuring or refunding and new money. Mexico might be getting
close to becoming a country that in some sense has made the adjustment
and isn't totally dependent upon these greatly ginned up programs.
And then people will begin saying yes, conceivably they are beginning
to see the end of the process--"end" is stretching a little, but at
least an end of the process of a mass draft of new money for one
country--and we can begin looking more hopefully at other countries.
But we have to hold it together for a little while longer before that
can happen.
MR. FORRESTAL. There was some talk in my District, Mr.
Chairman, about the banks getting together in connection with the
Brazilian situation to resist any kind of new money going in but that
I was going to ask some-never did materialize either.
CHAIRMAN VOLCKER. The basic arithmetic here, of course,
They can sit there and talk about not getting
still very strong.
new money. The fact is that they're getting more interest out of
It may be nice
these countries and they're putting in new money.
say the choice is no new money, but the response of the [debtor]
country is no interest.

is
any
all
to

MR. FORRESTAL.
In that connection, if the Argentineans don't
make an accommodation with the IMF and these loans are put into a
nonperforming status, does that automatically trigger a technical
default on the part of Argentina?
In some sense they're in
CHAIRMAN VOLCKER. Well, it could.
technical default now. They're in a position where a lot of banks
could say Argentina is in default if they wanted to take action.

example?

MR. FORRESTAL. Are the Europeans likely to do that, for
That's what I was thinking about.
MR. ROBERTS.

It just takes one, doesn't it?

CHAIRMAN VOLCKER. There is a mixture of opinion in Europe
So far they've held
and a mixture of opinion in the United States.
ranks, but I think the nonperforming status will give some of them
that idea.
It will be an event. We will see what happens.
MR. GUFFEY.

Is there any significance to the fire in your

ashtray?
MR. GRAMLEY.

He's an arsonist!

-31-

3/26-27/84

CHAIRMAN VOLCKER.

No.

When these loans are
MS. HORN. Mr. Chairman, just a point.
renegotiated and when regional banks do express reluctance on various
grounds, is it sometimes appropriate when that happens for presidents
to make calls and just state the Federal Reserve's position?
CHAIRMAN VOLCKER.

We were trying to avoid that.

MS. HORN. Yes, and so am I. Sometimes we get calls from
staff members from various places and it's a little hard--at least
speaking for myself--to read the seriousness of the problem and
whether it really does warrant a Fed president stepping in or whether
to tell these staff members that they really ought to try the regular
It's a little hard to
channels [through] the correspondent banks.
read the calls we're getting from the System to the banks.
CHAIRMAN VOLCKER.

From the System?

MS. HORN. From the Federal Reserve System to the banks.
Sometimes I get calls from staff members either in Washington or New
York suggesting that I call this, that, and the other bank.
CHAIRMAN VOLCKER.
MS. HORN.

Recently?

No, during these negotiations.

VICE CHAIRMAN SOLOMON. But even then, wasn't it couched in
terms of asking the banks what their view was on this matter and
whether they were going to go along or weren't going to go along?
[Unintelligible] stating the Board's policy as we saw it but saying
that, of course, they have to make up their own mind.
CHAIRMAN VOLCKER. You are raising the specter in my mind
that there are more such calls than I was aware of. And I hope that's
not the case.
MR. PARTEE.

Always a disturbing thought.

CHAIRMAN VOLCKER.
MR. PARTEE.

I have not been encouraging such calls.

Unless we are prepared to guarantee the loans.

VICE CHAIRMAN SOLOMON.

Well, we did those about a year ago.

CHAIRMAN VOLCKER. In the case of Mexico I can recall that
I'm not aware of any since then,
there were a few calls of inquiry.
but maybe I'm-MR. ROBERTS.

Yes, Brazil.

VICE CHAIRMAN SOLOMON.
a few but not very many.

Yes, in the case of Brazil there were

CHAIRMAN VOLCKER. I didn't think there were any on this
recent Brazilian exercise. I'd be interested in knowing where that
came from. Any other questions in this area?

3/26-27/84

Gretchen?

MR. PARTEE. What did happen with the dollar this morning,
You seemed to allude to a decline.
MS. GREENE.

It eased somewhat from Friday.

MR. PARTEE.

Just somewhat?

MS. GREENE.

Yes.

VICE CHAIRMAN SOLOMON.

A four-pfenig drop.

CHAIRMAN VOLCKER. Just to revert to the other issue:
I have
told the banks when they have asked that it's their job to round up
all these things.
I've made some statements about general support for
the program, which they can use in public, but not in terms of
contacting individual banks.
[Let's turn to] domestic open market
operations.
MR. STERNLIGHT.

[Statement--see Appendix.]

MS. TEETERS.
Peter, do you anticipate a situation like we
had in September when we had all that money just pouring into our-MR. STERNLIGHT.
It looks very much as though it could be
that large or even a little larger.
MS. TEETERS.
Do you expect the total balance to go up into
the $30 to $40 billion area?
MR. STERNLIGHT. Our figures have it up to about $40 or $42
billion, something like that.
I think the Board staff's projections
are not quite that high, but not far from it.
MS. TEETERS.
And there's no indication on the part of the
Treasury to cut back on their borrowing to compensate?
MR. STERNLIGHT. They cut back a little on Treasury bills a
couple of weeks ago.
I've been having conversations suggesting a
review of that. But I don't think we'll get very much help there.
MR. RICE. Does it seem likely that these funds will stay
with you as long as they did last year?
MR. STERNLIGHT.
[The Treasury balance] comes down again in
early May, fairly fast.
I don't have a very clear time profile,
Governor Rice.
MR. PARTEE.

There could be a debt limit problem couldn't

there?
MR. STERNLIGHT.
limit problem, yes.

In early May I think there could be debt

MR. PARTEE.

I move it.

MS. TEETERS.

I second.

3/26-27/84

If there is no objection, we will approve
CHAIRMAN VOLCKER.
[the recommended leeway increase] with a note in the commentary that
this is in reaction to a very large increase in the Treasury balance
and not monetary policy. We have to ratify the transactions since the
last meeting.
MS. TEETERS.

We didn't ratify the foreign currency ones, did

we?
VICE CHAIRMAN SOLOMON.
CHAIRMAN VOLCKER.

There were none.

Do I have a motion?

VICE CHAIRMAN SOLOMON.

Motion.

MS. TEETERS and MR. RICE.
CHAIRMAN VOLCKER.
MR. KICHLINE.

Second.

Without objection.

Mr. Kichline.

[Statement--see Appendix.]

CHAIRMAN VOLCKER. The [next] item on my agenda says:
Committee discussion of economic situation and policy implications.
Mr. Boykin.
MR. BOYKIN. Mr. Chairman, the Eleventh District economy is
growing, although somewhat unevenly. The weakness in the energy
sector has caused manufacturing to be sluggish, but most economic
reports indicate that both residential and nonresidential construction
In the District, the S&L
have continued their strong growth.
situation, which has been in the national news, is a matter of
In Texas the S&Ls had a 32 percent increase in assets in
concern.
1983 and the federally insured S&Ls from Texas closed about $20
Of
billion in loans in 1983 as compared to $9 billion in 1982.
course, we had the closing of Empire Savings in Mesquite, Texas, which
is out where I had mentioned earlier the land switching that was going
on.
MR. PARTEE.

You never said it was Mesquite.

MR. BOYKIN. Well, it's right out there next to the cowboys.
It's the largest S&L closure in the history of the corporation. My
notes say that it was caused by funding questionable real estate
development loans with a deposit base that consisted of 90 percent
jumbo CDs and 10 percent core deposits and that about $9-1/2 million,
Office construction continues
or roughly 3 percent, is uninsured.
In January we had 15
strong. Just to cite Dallas as an example:
million square feet of office space under construction compared to a
3-year average rate of about 8 million square feet. Vacancy rates in
Dallas are around 22 to 23 percent and in Houston are 26 percent.
Most people we talk to seem quite concerned about the whole real
estate picture, particularly that there has been so much built in the
multifamily area; but a lot of that concern is now beginning to shift
to single-family construction, although the pace of activity doesn't
seem to slow down. There are anecdotal comments such as that the
Mesquite situation was the tip of the iceberg and that there are some
real problems in the making out there. Land prices continue to jump-wanted to buy a little piece of
and jump daily.

3/26-27/84

-34-

The owner was asking $40 a
land in downtown Dallas for a parking lot.
He offered $38 and the seller didn't take it and two
square foot.
So, it's moving pretty fast.
weeks later he bought it for $52.
On the agriculture side--and on the call the other day some
question was raised about agriculture--our feeling is that credit
conditions at our District agricultural banks are characterized by
mostly improved cash flows for District farmers who are cotton farmers
and ranchers who are livestock producers; both now enjoy profitable
The feed, grain, and wheat farmers
price levels for their products.
are probably faced with over-production. The rate of loan repayment
seems to have quickened and farmers are requesting fewer renewals and
extensions right now, although the longer-term outlook still causes us
a little concern, Mr. Chairman.
CHAIRMAN VOLCKER. Your comments raise a number of questions
in my mind.
Let me just cite some of them and other people can
comment on them. On this last issue, the agricultural situation, your
comments are not what I am getting from some people in the Midwest.
They say the banks are liquid enough but the ability to repay after a
Land appraised values have declined and
few years is getting less.
land price [declines] if anything are accelerating and a lot of
On this energy situation that
farmers are getting increasingly stuck.
you started out with, my impression is that in recent months it has
been getting a little worse or going downhill instead of uphill for
some reason.
MR. BOYKIN. Well, Mr. Chairman, we did get an improvement in
the rig count; it has backed off a little but it seems to be coming
back slightly.
It's still a difficult situation but what I see at
least is that whatever movement there is seems to be a little on the
I'd say that there is not further deterioration.
positive side.
CHAIRMAN VOLCKER. Prices of unused rigs went up a little
from a very low level and have begun receding again.
MR. BOYKIN. Well, I would think that reflects the demand.
We had a little uptick in drilling and that has slackened off a bit.
I don't have any specific knowledge of the price but I know there is
So, if the price is
an abundant supply stacked up in the yards.
trending down, people might not be able to hold those things forever.
CHAIRMAN VOLCKER. I guess I just don't comprehend what is
going on down there with all this land speculation and the S&Ls and
I'm confused [unintelligible] exposed.
all of that.
MR. BOYKIN. It's difficult for me, as I say, to get a feel
The banks tell us that they don't feel exposed--that what
for this.
The S&Ls, I
they are doing is good and that it will be all right.
think, have fully anticipated that there will be fallout from Mesquite
and that there are a number of other S&Ls-CHAIRMAN VOLCKER. There are almost 50 S&Ls down there that
have grown by more than 100% in the last year.
MR. BOYKIN. Right.
and some odd percent.

And the largest increase was a thousand

3/26-27/84

MS. TEETERS.

-35-

Are these brokered deposits?

MR. BOYKIN. Mostly it seems to be brokered deposits, and
about half of the money is going into construction loans as opposed to
just the mortgages at the end.
They are taking equity positions.
They are--well, like Mesquite. They were building up the value daily,
two or three transactions a day, and getting it up to the price where
they wanted it and then packaging it and selling it out to less
sophisticated small S&Ls out in the country.
CHAIRMAN VOLCKER. And in many cases apparently making no
attempt to sell the houses.
MR. PARTEE.

Less sophisticated!

MS. TEETERS. The most recent housing starts figures showed a
very large increase in multifamilies in the Southern and Southwestern
areas. And you seem to have an increase in commercial building also.
MR. BOYKIN.
MS. TEETERS.

Yes.
What is your vacancy rate?

MR. BOYKIN. The vacancy rate is about 22 percent in office
buildings; I was told by a broker that the warehouse construction
seems to be doing a little better. Prices had been going for about
$2.00 a square foot right before the first of the year and now those
prices are up to $2.35 to $2.50 a square foot.
I'm trying to remember
what the absorption rate percentage is and I really can't, but the
feeling is that the absorption is picking up.
CHAIRMAN VOLCKER. How do you explain this record or nearrecord volume of office building in a city that has a 25 percent
vacancy rate?
MR. BOYKIN. A lot of optimism and the fact, first of all,
Mr. Chairman, that the funds are available. Take the big build-up in
funds in S&Ls, for example. We know they are going to have to do
something with that money and they are trying to shove it out as fast
as they can.
On the office building side, there seems to be enough
activity to continue to encourage developers and builders.
CHAIRMAN VOLCKER. What is happening to the price on all
these existing buildings that have all these vacancies?
MR. BOYKIN. Well, there have been a lot of concessions made.
If you want a year's free rent, that's not too hard to get on a fiveyear lease.
There has been some shaving of prices but I would say the
price is pretty well holding at around the $20 a square foot level but
with incentives such as paying moving costs or maybe a year's free
rent or something like that. That is the way they have been doing it.
I heard fairly reliably that a small insurance company went out to the
Los Galenos area close to Dallas-Fort Worth and took a very long-term
lease and got the first 5 years free.
CHAIRMAN VOLCKER. I don't think you can build a new building
any place at these interest rates and expect to rent it at $20 a
square foot.

3/26-27/84

-36-

MR. BOYKIN. No.
We just started a hole for the first of two
of our Twin Towers. The excavation is underway. There is a bank
that's going to be the lead tenant of that. A 55 story building was
just topped off for [unintelligible].
Mercantile Bank has announced
their 60 story building. The InterFirst building is a 70 story
building; the steel is about half way up.
There continue to be new
announcements about an area we call the "crescent development."
They
just dug the biggest hole that has ever been dug in Dallas and it's on
the north side outside the loop.
It's going to have a really first
class hotel and three office buildings of over 20 stories, another
hotel, shops, and an underground parking garage for about 2600 cars.
And that [project] is underway.
MS. TEETERS.
Are there vacancies in the residential area or
are the sales of new houses--?
MR. BOYKIN. New houses are selling. Used houses are turning
over now. Three of four sold in my neighborhood that had been on the
market three or four days.
MS. TEETERS.
You don't have the same evidence of excess
capacity in the residential sector?
MR. BOYKIN. No, but now in the multifamily area it does seem
to me that we really are overbuilt.
The condos built at Faulkner
point, which the Mesquite Empire Savings & Loan was behind, consist of
over 6,000 units, which is estimated to be about a 7- to 12-year
supply. They have over 6,000 vacant and they are selling them at a
rate of about 20 a month.
CHAIRMAN VOLCKER.

Mr. Keehn.

MR. KEEHN. I thought I might amplify a bit on the comments
that I made on the phone last week about the agricultural sector.
In
our area there are some parts of the District where the agricultural
problems are getting somewhat on the serious side but there are some
contradictions that are developing on the positive side.
Commodity
prices have improved from what were very low levels.
The opportunity
for exports seems improved, particularly to the Soviet Union and to
Africa, and certainly that picture ought to be improving rather than
deteriorating. And we expect that the participation in the 1984 grain
program will be higher than we might have thought several weeks ago.
So, in the short term, the situation seems to be better and would
provide for an improved situation. But having said that, there are
some serious longer-term problems.
I think it is fair to say that
some parts of the area are going through a significant transition.
In
Iowa, for example, 50 percent of the farm land is debt free and for 35
percent [more] the debt level is reasonable. Then you get down to the
15 percent where the troubles really are developing. There the debt
levels are high and the debt was created as a result of purchasing
land at values that were exceptionally high. The land values had
gotten out of the economic production scheme and were really pretty
much relating to inflation. As inflation has backed off, farm values
have gone down and the debt has built up.
That, as a consequence, is
causing the problems that you see [reported] so much in the press,
which are not necessarily reflective of the agricultural sector as a
whole. There are also a couple of timing considerations.
First, this
is line renewal time for most of the agricultural banks and I think

-37-

3/26-27/84

the banks put a pretty special focus on their credit exposures.
Also,
it's a time when farm auctions are typically taking place so that the
whole problem and the emotionalism that is involved with that comes
back into focus. And then, frankly, it's a slow time of the year.
It
is February or March before things begin to pick up and as a
consequence that gives people an opportunity to talk about it.
I
don't in any way suggest that the problems aren't serious.
They are.
But I think they are not necessarily reflective of the conditions
throughout our District as a whole.
CHAIRMAN VOLCKER. If you look at the aggregate figures--I
don't remember them offhand but somebody here collects data and makes
an estimate--there are a lot more than 15 percent that have these
heavy debt burdens.
It's a minority but it's very sizable.
MR. KEEHN.

Well, I'm really referring to Iowa particularly.

CHAIRMAN VOLCKER. Iowa is probably better off.
The
calculation of average farm income relative to assets is 2 percent.
If a farmer has 25 percent of his farm mortgage at 13 percent, the 2
percent is gone.
I don't know what the correct number is, but it
doesn't take very much.
VICE CHAIRMAN SOLOMON.
before servicing debt?
CHAIRMAN VOLCKER.
MR. PARTEE.

Yes.

You're talking about 2 percent gross,

All expenses before interest--

Your investment sector has done quite a bit

better?
MR. KEEHN. Yes, Chuck. I think it's a fair comment with
regard to the industrial sector that those parts that are susceptible
to a cyclical improvement are indeed experiencing it.
Many of them,
particularly those that are consumer-related, are doing very well.
In
fact, many are right up to the top on capacity. The sectors that are
having a problem are those that are dealing with some pretty secular
problems; they are doing better this year than they were last year but
nowhere near as well as some of the other parts.
But I think they are
beyond the scope of monetary policy. They have some special problems
all their own.
I must say I've been very impressed with the continued
progress on the wage side.
People I talk to are still settling
contracts in the 4 to 5 percent area but nearer 4 than 5. And they
expect to have a pretty good year this year, although they are all
very, very apprehensive about the auto negotiations. They can do well
now but if the auto negotiations go badly, that would create a
different environment.
On the price side, though, those sectors that
are doing well and are up toward the top of their capacity are
beginning to move through price increases with some success.
They
feel growingly encouraged that they are going to be able to put the
price increases in and make them stick.
So, particularly in those
sectors that are doing well, the price pressures are beginning to
grow; and with the passage of time that could be a significant risk.
Broadly, I think the answer to your question is that the industrial
outlook in the Middle West is far better than it has been.

3/26-27/84

CHAIRMAN VOLCKER.

-38-

Mr. Boehne.

MR. BOEHNE.
Well, Si said some of what I was going to say.
My District, particularly the Pennsylvania part of it, has been one of
the slowest in the whole country.
Every time we have looked at it,
the District as a whole has only been 10th, 11th, or 12th [among the
Federal Reserve Districts].
And yet as we look over what has been
happening, there really is a broad base to our recovery. In
manufacturing, it looks to us as though we have been having the most
significant growth period since 1977-1978. Manufacturing has been
expanding now for about a year and a quarter.
We are also noticing
the same kinds of things that Si reported.
We do an informal survey
among the biggest manufacturers in our District. About a year ago,
for example, only about 5 percent were reporting any kind of price
pressure. What we find now is that about 40 percent of them are
reporting higher input prices. We see it particularly in the
fabricated metals area and some in printing.
So, it really is a
recovery that is hitting our manufacturing area. We've tended to come
up last in these areas, yet it's clearly the strongest in a half dozen
years.
Outside manufacturing I have just some anecdotal evidence.
I've gone to a couple of shopping centers over the last several
weekends and I couldn't find a parking place.
Sales volumes are very
high; they are running something like 20 percent over a year ago.
Real estate [activity] is quite brisk. It's about average with the
rest of the country and that's really quite good for our area
traditionally.
The banks are reporting rather substantially higher
increases in consumer loans, in particular, and to some extent in
business loans. On the agriculture side--Pennsylvania is a big
agriculture state, although most people tend to think of the Midwest-the big problem in recent months has been the Avian flu problem with
poultry.
That has turned around. What we hear about weakness is in
the export business. Again, just to add on to what Si said,
unemployment is still high in some of the industries that have more
than cyclical problems--those with secular problems.
However, I did
find as I talked to a lot of people around the District, that they are
much happier than they were, obviously, with this pretty good increase
over the last year but they almost plead "Don't end the party so
soon."
They say it has been a half dozen years of pretty rough times
and it has been especially rough from about 1980.
It has just been a
very long dry spell and they are beginning to feel better about it.
Most of them see a relationship between their own business and
interest rates.
There is much more awareness of [the effect of]
interest rates on their business than I have seen. They talk a lot
about the deficit.
But even though business is much better, they
continue to think it's not going to last very long because they see
interest rates going up.
CHAIRMAN VOLCKER.
talked to them?

What did you hear about wages when you

MR. BOEHNE.
The same as Si.
I think the wage increases
generally have been fairly modest. We're seeing that in the public
sector.
Philadelphia, with its new mayor, has taken a pretty hard
line this year with the public area.
There is concern that the auto
[negotiations] might set a new pattern, but so far wage increases have
not shown any material increase. As I indicated a moment ago, there

3/26-27/84

-39-

are some inflationary pressures on the price side, especially in those
industries that have had some cyclical upturn.
CHAIRMAN VOLCKER.

Mr. Guffey.

MR. GUFFEY. Thank you, Mr. Chairman.
The Tenth District has
enjoyed some of the strength that has been evident in the economy
elsewhere. There are two or three areas to mention, and I'll focus
largely upon your question with respect to the agricultural sector.
As you know, we do a rather extensive quarterly agricultural survey of
bank lending and the most recent one indicates that there is some
stability felt among the bankers--stability in the sense that things
But there's a
are not getting worse and that they are manageable.
very long period of adjustment [ahead] for the agricultural sector.
In terms of specificity, they look to the projections for net farm
income in 1984 that are now running some 50 percent greater than net
farm income in 1983.
Part of that is the PIK program that has come
early in 1984 in which the sales have taken place of grain that has
been shipped to the producers themselves.
So, some of that income has
already taken place.
They have serviced the current debt and as a
result the banks are feeling somewhat comfortable about the upcoming
period. But the point that I think should not be lost is that there
is nothing on the horizon that they can see, absent a Russian grain
deal or some other magnificent event, by which the agricultural
situation is going to improve from this rather low stable level--in
particular in the debt service area. Farm liquidations were a very
small percentage of farm holdings; that has gone up modestly. There
has been some voluntary liquidation--that is, encouragement by the
lender to liquidate in order to service debt--but that again has
stabilized.
I think you have to understand when you're talking about
the agricultural community that, as Si indicated, January, February
and March are times that they sit around the hot stove and talk about
problems. It's only when the sun begins to warm things up and the sap
begins to rise that optimism comes back into that area. There has
been a pickup on Main Street of small ticket farm equipment sales but
the large machinery sales are still very weak. But there is some
encouragement on the agricultural input side--I'm talking particularly
of [sales of] chemicals and fertilizers, which have been very brisk.
In other words, the producers are anticipating large plantings this
year and have the money to put into fertilizers and chemicals.
Energy and mining are still very weak, particularly energy.
Just to give you a benchmark:
The last report that I have is that the
number of oil rigs working in the Tenth District is 716; that's up
from a low level of 574 a year ago contrasted with 1981 levels of
about 1600.
So, there is some modest exploration and production going
on but it is indeed modest.
With respect to the general aviation
sector, there is a good deal of optimism. They are not producing but
they think and still hope that production is going to increase in the
In the commercial construction field, Denver
latter part of the year.
is beginning to have an absorption rate of their overbuilt situation
that looks very favorable. Kansas City and Omaha have what might be
characterized as a commercial construction boom. In Kansas City there
have been seven major downtown office buildings announced within the
last 90 days and two or three of them have holes in the ground and are
ready to come out.
That is in contrast to Tulsa and Oklahoma City,
which essentially are overbuilt in the commercial area. We have seen
no real evidence of pressures in the area of wage increases.

3/26-27/84

CHAIRMAN VOLCKER.

-40-

Mrs. Horn.

We are approaching capacity in a number of our
MS. HORN.
industries.
In autos, given the current mix of demand, we're at
Those steel products related
capacity for the larger types of cars.
Aluminum is very
to eventual consumer products are going at capacity.
Alcoa is talking now about doing a lot of
much using its capacity.
They are at capacity
ingot importing because they are so backed up.
relative to the current plants and construction.
Of course, all these
companies have plants that they closed down during the last recession.
They are at this point deciding not to reopen them.
Heavy trucks are
going full out--light trucks a little less--as are [the companies that
produce] the equipment that goes into these heavy trucks.
The tire
industry is at more than capacity, working every shift their unions
One is electrical
will let them.
Of course, we have our weak points.
machinery.
Foundries--the ones that are still open, which are very
Machine
few--still haven't gotten their first order, so to speak.
tool orders are up, though that is not yet really reflected in terms
The reaction to all
of their production strengthening a great deal.
this strength seems to be, as I mentioned earlier, not reopening the
old capacity but concentrating on more efficiency within the current
capacity and not bringing back workers but doing a lot of overtime or
sub-contracting.
All of these reactions I think come from a couple of
causes.
Number one is a skepticism about the future--fear of high
interest rates and so forth. Another reason for these reactions is
one that I view as very healthy.
I think we are seeing some reaction
to the intensity of foreign competition and people are now beginning
to manage their businesses a little differently.
We really hear about
inventory control, about schemes to change the way of manufacturing
from having huge plants and more people than they can manage
efficiently to having smaller plants.
They are working on set-up
times and on the quality of the final product and so forth.
We're
hearing a lot about those adjustments and the new manufacturing
And, of course, these techniques are used in
techniques, if you will.
service industries as well in order to meet competitive pressures.
So, while I don't believe in discontinuities and in sudden and drastic
changes in productivity and quality, I do think we really are seeing
some significant differences in this recovery that I think represent a
beginning of a trend.
What all this has to do with prices is less clear.
I
certainly agree with a comment that was made that these people want
Of course, these folks that I'm talking
more time in the recovery.
about particularly may have waited a long time to take part in the
recovery as their industries are being affected at this stage in the
recovery.
They will talk about concern about future inflation but
there is less support when you say this may be the point in the
They say "But give us
recovery when we need to do something about it.
So the public opinion out there is that, yes,
a little more time."
there is a problem of future inflation but don't do anything too soon
Now, when we ask these people what effect this is having on
about it.
their prices right now and what effect it will have in the future, I'm
What is happening now,
not sure the story is completely believable.
We see so far some little increase
of course, they are honest about.
There is a dissatisfaction with profit
in prices in these industries.
margins and they don't expect too much cost pressure on that side in
the future.
And then they say they are not going to increase prices-And I think that's just a
that they aren't going to be able to.

3/26-27/84

-41-

current pessimism. They are dissatisfied with their margins and I
think they are just waiting for the moment.
We've seen a little
narrowing of the discounts in steel but that isn't very broad yet.
In
autos we've seen some shifting between models and some restoration of
dealer margins and so forth.
I might just make a comment looking to the auto contract.
The one piece of information I can add to the discussion is on the
industry side.
Of course, with the new union leader, the union is
making the expected strong sounds.
I have from a private source in
the industry--however, a source that I think wouldn't involve too much
posturing by the company--that, in fact, the company is ready to stand
for a very long strike and that this management is making quite
derogatory comments about previous managements giving the shop away,
which might lend credence to the company's willingness to stand
strong.
Finally, in machine tools there is no price movement but
that's an industry where we don't have capacity pressures.
Real
estate prices have firmed and maybe increased a little.
So, we
haven't really seen the price movement yet but the dissatisfaction
that is expressed by a lot of these people and the closeness to
capacity makes me think that their comments--pessimism from their
point of view about future price increases--may not reflect what will
come to pass and that we may get those price increases sooner rather
than later.
CHAIRMAN VOLCKER. I'm sure that they are never satisfied
with their profit margins but if you can believe the figures that we
have this morning, profit margins in corporate business are higher now
than at any time in the last decade.
MS. HORN. We have a lot of industries in the Fourth District
that I would think are on the bottom side of that average.
CHAIRMAN VOLCKER.
elsewhere.

There must be quite a few of them

MR. GUFFEY.

They are all in Dallas!

MR. MORRIS.

It was also a pretty lousy decade for corporate

profits.
CHAIRMAN VOLCKER. That's right--not much beyond the first
year of recovery. Mr. Morris.
MR. MORRIS.
Well, Mr. Chairman, I have a question for Mr.
Kichline.
I've been going around New England giving speeches against
the deficit and I argue that the problem with a deficit that doesn't
decline as the economy expands is that at some point in 1985 we are
likely to see a capital goods boom--which is clearly showing signs of
developing great momentum now and by a year from now ought to have
enough momentum so that the corporate sector will have to come into
the credit markets to take a substantial amount of the total credit
flows. And at that point in time interest rates are going to have to
go up enough so as to squeeze back the interest sensitive sectors of
the economy--namely housing and automobiles--sufficiently to make room
for the increased corporate demand for credit. Now, I look at your

-42-

3/26-27/84

projection through '85 and I don't see any squeeze on the interest
Sure, housing starts come down a bit from what we
sensitive sectors.
have now but throughout '85 they are running at about the same level
as in '83. And the automobile industry is projected to show a
substantial continued rise throughout the period to a level
substantially above the '83 level.
Paul Craig Roberts might look at
What are you guys worried
this and say "Gee, that's not too bad.
about the deficit for?"
My questions is:
Should I revise my speech?
MR. KICHLINE. Well, maybe you should leave out '85 and let
the time horizon be a bit fuzzier.
I think it's very hard in an
environment where rates are not regulated to pinpoint the time at
But I think our forecast really has in it
which it all will explode.
In part, the impact of the deficit
those sorts of pressures building.
is showing up even now in our view, and it has been for some time, in
terms of the current level of interest rates.
And it shows up in the
export sector where in a sense exports are being crowded out via the
foreign exchange value of the dollar.
You are right that this
forecast still has growth sustained in '85.
In part, you're really
We do have
looking at continuing fiscal stimulus pushing up incomes.
housing as rather the weak sector. As you mentioned, it doesn't
collapse but it doesn't grow. Autos we have growing.
Business fixed
investment, which we have growing quite a lot in '84, slows a bit in
I guess my concern with
'85; but it certainly doesn't go downhill.
the deficit is not so much the crowding out argument in a given period
of time but that we are looking at a structure that over time is not
desirable. As a part of this process, business fixed investment is
going to be a smaller part of GNP over the longer run than it
otherwise would have been and interest rates are going to be higher
and the interest sensitive sectors are going to get squeezed.
I might note too that in '85
Pinpointing it, I think, is a problem.
we do have built into this forecast a very small cut in the deficit;
it's about a $20 billion dollar package.
But if you envision that as
part of something that would be going on in '86 and '87, presumably
you would have beneficial effects in '85.
But the question is:
When do we reach a level of
MR. MORRIS.
total demand for credit that will require a substantial contraction in
housing?
That's what I would like to know.
CHAIRMAN VOLCKER.
target already.
MR. MORRIS.

We have demand for credit well above our

I know.

That's right.

MR. KICHLINE. Well, I have difficulty answering that
question.
I really have difficulty answering the housing question
because I think there are some very funny things going on.
Dallas may
be one part of it but the funny things are more widespread, with
adjustable rate mortgages and institutions quite willing today to
I have a concern that as interest rates rise we may
offer discounts.
indeed find that housing will change more than we have forecast. In
part, as we get into '85 all these neat things such as discounted
mortgages for the first year will be at an end.
That first year will
have ended and, depending on rate levels, we may find lots of
But I
pressures in '85 that we have not been able to readily define.
suspect the housing number, if anything, is on the high side rather
than the low side.

3/26-27/84

-43-

MR. MARTIN.
Frank, I would join Jim in that hypothesis of
the [likely] scenario. What is going to happen to housing will be a
credit loss not an interest rate replay of the old disintermediation
process, because the thrift institutions can pay the market rate.
They can go buy the money.
MR. MORRIS. The issue is that if rates go high enough, they
won't be able to find enough customers who are eligible to borrow.
MR. MARTIN. Oh, yes. Look at the builders that they are
working with. The Pulte homes people have now issued $4 billion worth
The
of builder bonds so far and it's on a stairstep going up.
builders and the developers they are working with will simply put up
the points on the front and raise the price of the house. They can
set the loan payment in accordance with whatever it takes to move the
merchandise. But I think we will have severe credit problems, maybe
in '85 or '86 or whenever, and substantial thrift institution loss
problems. And that's what will cut off the housing--not the
availability of funds.
CHAIRMAN VOLCKER. We've reached this advanced stage of
economic development--and I'm serious about this--where you don't even
need a buyer for the houses in order to build them. You see that
going on in Dallas.
It's a process of self levitation.
MR. MORRIS. May I suggest that Dallas is not the United
States?
Certainly, I don't see a lot of speculative building in
housing going on in New England.
CHAIRMAN VOLCKER.
MR. MORRIS.
I just
this picture of another year
problem in either housing or
way, but it just seems to me

I hope Dallas is the exception.
have a hard time reconciling myself to
and three quarters with no serious
automobiles.
I hope it works out that
too good to be true.

MR. CORRIGAN. Let me just add a few comments on this
I too am a recipient of a lot of war stories
agricultural situation.
flowing in from directors and other people with whom I come in
contact. But it's very, very hard to pin down whether this is just
what Mr. Keehn has called a "hot stove league" or something more than
that. My conclusion is that it is more than that, but I can't be
certain how much more. To give you a couple of insights into the
crosscurrents of information one gets:
We too have a quarterly survey
of agricultural credit conditions.
In the fourth quarter of 1982, 74
percent of the survey respondents indicated that collections were much
slower than normal.
In the fourth quarter of 1983, 37 percent said
collections were slower than normal, which makes it sound like things
are getting better.
If you look at the year-end Call Report data--and
we did this just for state member banks for the December 31, 1983
report--only 13 percent of the loans listed as past due 30 days or
more are agricultural loans whereas in that same population of banks
about 24 percent of the total loans were agricultural loans. Again,
that doesn't sound all that bad. We then looked at 76 state member
banks that we examined in 1983, and roughly 50 percent of those showed
particular problems with agricultural credits but the other 50 percent
We talked to
showed no particular problems with agricultural credits.
a dozen or so former directors and other people we know who are

3/26-27/84

-44-

presidents of agricultural banks, and 50 percent of them said things
The other 50 percent said it was very
were soft but not serious.
I got some data having to do with national agricultural
serious.
Ironically, it's almost exactly
lenders, mainly insurance companies.
about 50 percent of them reported improvement in
the same story:
delinquency rates and 50 percent reported serious deterioration. I
got hold of some data from the Farmers Home Administration covering
case loads of 422,000 agricultural loans of which 236,000 are
Twodelinquent, which of course is a very substantial percentage.
thirds of the delinquent total and two-thirds of the dollars are in
emergency disaster loans of one kind or another essentially growing
out of some kind of weather-related phenomenon during 1983.
So, it looks as though it's a situation where it's either
In our District we tried to look at it
pretty good or it's very bad.
in terms of geographic pockets, classes of farms, and particular types
of businesses, and we could find no patterns whatsoever geographically
or by particular crops or products. We do see more of a credit
problem with Main Street businesses than we see with farms, if that is
possible. We do see that land prices on average are probably still
Somewhat consistent with the hot
falling, although at a slower rate.
stove league philosophy:
The glow of the PIK program has come off, and
as the realization of that has sunk in it has made people feel worse.
Certainly, the widespread expectation of a year ago or six months ago
of generalized strengthening in agricultural prices--grains in
particular--has not materialized. So, while people thought things
If there is a
were going to get better they are not getting better.
common denominator, I think it's the one that Mr. Keehn indirectly
These problems, if they are concentrated in any
referred to earlier.
one area, do seem to be concentrated in situations where there was a
lot of debt taken out in the late '70s and early '80s either in
connection with acquisitions of land or substantial acquisitions of
very, very expensive capital machinery associated with farm
operations.
I have just a couple of other anecdotal comments from the
District.
While the Ninth District is certainly not a major energy
operation, there is a belt of oil and gas activity in North Dakota and
Montana which is about one fourth the size that Mr. Guffey spoke of in
But in that Williston Basin area drilling
the Kansas City District.
activity is now about 80 percent back to where it was at the peaks of
1980 and 1981, although it does appear that a fair amount of that
resurgence is being undertaken simply because rigs are available at
People are going out and seeing what they can
such favorable prices.
If they find something, they cap it and move on down the road
find.
and stick another hole in the ground. But, certainly, the pace of
activity has picked up very significantly from a year ago.
On the office space situation, I don't pretend to understand
this at all but in Minneapolis as well there is a tremendous amount of
I don't have the foggiest
commercial office construction going on.
idea who is going to fill all these buildings, particularly when
Northwest Bank and Oxford Development start this massive project that
they are going to build in place of the building that burned down a
But certainly, given the size of the Twin Cities,
year ago or so.
there is a tremendous amount of commercial construction activity going
on in the area. I continue to get some reports of delivery stretch
On the retail side,
outs, particularly in the high-tech industries.

3/26-27/84

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and others is
the encouraging thing that I hear from
that despite the fact that sales have been very, very strong they say
they are going to stick with the very rigorous types of inventory
control policies they put in place over the last couple of years.
In terms of the overall national business situation, I still
look at the [unintelligible] situation as being strong to very strong
even if consumer spending does recede a bit in the second quarter, as
it seems to me it must simply because the car sales and the car
capacity situation is going to produce that result. But even allowing
for that, I still think that in the next quarter or two anyway the
risks are that the economy will be stronger than projected. And
unfortunately--and Frank this may help your speech--I personally think
the implications of that are that the following quarter may well be
It is interesting to note that both the
weaker than projected.
unemployment rate and the capacity utilization rate in manufacturing
are now at the points where we began to see the building of price
pressures in the 1976-77 recovery period. The big difference between
now and then is that we've had some rise in interest rates earlier in
this cycle than we had then and certainly the wage situation, as has
been pointed out, looks better now than it did then. Unfortunately,
the other side of that coin is that at least to date the productivity
I think
side is weaker this time than it was in that earlier episode.
this wage situation is very, very important. I don't know what is
going to happen in autos but I think that's key, as is the dollar, as
it pertains to domestic price level pressures. It's also unfortunate
but true that we now have a situation in which there is some
anticipatory buying taking place in the expectation of either higher
prices or higher interest rates or both, and I think that makes our
I am very troubled at the prospect
problem a little more difficult.
in Jim's forecast of an inflation rate of 6 percent in the second half
of 1985.
Once it gets into that range it's going to be very difficult
I would just
to hold the inflation rate anywhere near that level.
conclude by saying that, at least as I view it, money and credit are
growing pretty rapidly and velocity is growing. I'm not sure what the
policy implications are right now because I'm not sure where policy
is.
Mr. Axilrod will tell us that later.
CHAIRMAN VOLCKER.

Governor Martin.

MR. MARTIN. Mr. Chairman, I'd like to comment on the thrift
industry and housing and very briefly on this situation with regard to
commercial property development and the syndication process, the
Accepting the staff projection of
limited partnership process.
interest rates, we have a situation in the thrift industry in which
the losses could run between $700 million and $2-1/2 billion,
depending on certain aspects of the sale of assets by these
institutions. As we all know, the sale of assets has been one way in
Of
which they have kept their profitability and avoided losses.
course, what is happening is that the interest rate increase that has
already occurred is affecting the turnover of the 30-month
obligations, many of which are coming due now. And the weaker
institutions may have 40 or 50 percent of their nonbrokered--I say
So, we
that carefully--funds in and around that maturity category.
are seeing the beginning of a conversion of 30 or 40 percent of the
liabilities at a time when that conversion of assets can run perhaps
These interest rate increases, of course,
10 percent of the assets.
are likely to continue at least in the near term. The nonoperating

3/26-27/84

-46-

income of these institutions, which one could look at as 15 basis
points or 20 basis points against the asset, is becoming increasingly
difficult for them to accomplish. As there is more discussion of the
credit risks and the overbuilding and the question of values, it is
going to be more difficult for them to attain that 15 or 20 basis
points.
That could push them toward the upper end of that range of
losses.
And here I'm talking about 1984. Before, at lower levels of
interest rates, there was an expectation of turning over the 30-month
paper at lower rates than face rates.
Of course, the outlook for that
industry was one of reasonable profitability for this year. That, of
course, tends to push these savings banks into very deep operating
losses.
It tends to produce some reliance upon the Federal Home Loan
Bank System.
Perhaps not unduly, it tends to force even more frantic
efforts to attain fee income by originating loans without, let's say,
complete or careful credit analysis and risk analysis.
That means, of course, that the housing numbers that are in
the Greenbook could be supported with an increasing exposure of risk
for these institutions, with what that means down the road. We've
already seen the Mortgage Bankers Association delinquency figures.
The foreclosure losses continue. That is almost never talked about in
the financial press, but the rate of foreclosure is substantial as the
rate of bankruptcy continues to be on a very high plateau; [so], in
another segment of the private economy the foreclosure losses are very
substantial.
With regard to the comments on commercial development,
of course, the new element in housing is the builder bonds. As I've
indicated, in one case that is a rather large number.
The newer
element in commercial development is, of course, the limited
partnership syndicate that the Congress has been trying to address in
some of the so-called "loophole closing" proposals. Those syndicates
continue to flourish; the limited partnership sales are substantial.
Down the road that is going to mean that these heavy vacancies are
going to cause those partnership interests to be of little or no
value, with a resulting impact on the commercial development process.
My only point is that as we witness the interest rates unfolding as
given in this scenario here, we're building up a future problem in
housing, in development companies, and in the commercial real estate
sector of the economy. All those things inevitably will produce
losses and close thrift institutions and commercial banks and other
kinds of enterprises down the road.
CHAIRMAN VOLCKER.

Mr. Forrestal.

MR. FORRESTAL. Mr. Chairman, I'd like to comment briefly
about developments in the Atlanta District and then turn to the
national picture and the projections of the staff and the implications
as I see them for policy. The situation in the Sixth District is not
entirely dissimilar from what you've heard from other Districts.
The
expansion seems to be pretty broadly based at this point.
There are
some areas of the District that are still experiencing difficulties
but everywhere I go, notwithstanding difficulties in certain areas and
certain sectors of the economy, there's a good deal of confidence and
a good deal of bullishness on the part of business people generally.
In a broader sense, almost all the indicators are quite good.
Employment in most parts of the District is up and unemployment is
down; even in those places where we still have rather high
unemployment rates, they are down from their earlier double-digit
The industries that are
rates.
That's particularly true in Alabama.

3/26-27/84

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doing very well in our District are pulp and paper, carpet, and
textiles generally. Interestingly, phosphate and farm chemical
industries are doing quite well, notwithstanding the weakness in the
agricultural sector. And that seems to be because of anticipation of
Phosphate mining in Florida is also
increased farm acreage in 1984.
doing very well. Consumer spending is very, very good in most parts
of the District, particularly in the major cities, and that includes
As a matter of fact,
auto sales, which have been extremely robust.
some of the General Motors and the Ford assembly plants in and around
Atlanta are planning to recall a little over 4,000 workers.
Prices, on the other hand, are moving up a bit more in most
of our cities than the national average, and that seems to be
primarily in the areas of food and beverage costs and transportation.
Construction also has been very, very strong in the Atlanta District
generally. In the residential area, we've seen substantial increases
In fact in the Atlanta
in permits and in sales of existing houses.
area, prices are escalating tremendously. As in the Dallas area--and
I've seen this personally in my own area--house prices are escalating
very, very fast and the houses don't remain on the market more than
In some cases I've seen bidding wars going on
two or three days.
where somebody will put a house on the market, for example, at
$170,000 and before the day is over people are offering more than the
contract price. And it's not unusual for a single house to have five
So, that's a
or six contracts on it within the space of 48 hours.
very unusual situation it seems to me. Multifamily building, on the
other hand, seems to be moving in the other direction. Multifamily
permits are down and the explanation that I get from people in the
real estate business is that more and more first-home buyers are
taking advantage of being able to buy a house and are moving out of
the multifamily areas. Office construction is also an anomaly in some
of our cities, particularly Atlanta. They are building office
I, too, don't know
buildings or office condominiums at record rates.
So far
where all the people are going to come from to fill them up.
they are doing it, but some concern is beginning to develop in the
Atlanta business community about overbuilding and the vacancy rate
that could develop later this year. The other cities in the District
The
don't seem to be experiencing that kind of overbuilding.
financial services industry, particularly the S&Ls, are doing very
well and I suppose that's a reflection of the strength in the housing
market.
Mortgage commitments around the District rose 66 percent at
S&Ls as of December 1983, which is the latest information I have.
Commercial bank deposits are going up and loan demand is going up as
well.
One of the weak sectors is tourism, and it's weak because of
unusually cold weather in Florida and reports of cold weather, which
Interestingly, travel agents tell me that
perhaps were exaggerated.
some of the weakness in tourism in south Florida and indeed around the
District is due to the fact that people are taking advantage of the
exchange rate and going to Europe instead.
The agricultural sector that other people have mentioned is a
It seems to be
source of pretty deep concern in our District as well.
concentrated in the Florida and Georgia areas, although some other
Just
states such as Mississippi and Alabama also are affected.
looking at the Farmers Home Administration delinquency rate, we find
that in Georgia and Florida it's running in excess of 50 percent and
In Florida those
that's among the highest in the nation.
delinquencies represent about 4 percent of the state's farmers and in

3/26-27/84

-48-

Georgia about 10 percent of the farmers.
The conventional wisdom that
I'm hearing from so-called experts in the agricultural area--and that
includes some Congressmen who represent agricultural areas--is that
the highly leveraged marginal operations are not going to make it
The other people who are better operators--usually the
through 1984.
larger operations even though they are heavily in debt--are probably
going to make it.
There seems to be a feeling that if they can get
through the next 12 to 18 months, the situation will improve
radically.
There are two major areas of concern that I hear voiced over
First of all
and over again in the District among people I talk to.
is inflation. They are seeing inflation demonstrated in higher prices
and in backlogs and capacity constraints in their particular
They, unlike some other people's comments that I heard,
industries.
wish that something could be done about this sooner than later.
They
all feel that their businesses are very good and they would like more
of the same but they are fearful of inflation down the road and they
do hope that something is done about that. The other thing that is
getting the attention of people in my District--and I hope around the
country, Mr. Chairman--is the deficit situation. There is more and
more talk about it in all of the functions and activities that I
attend. My personal view is that the message is getting out to the
I don't know
people and, in turn, is getting back to the Congressmen.
what that means in terms of action this year, but I think the message
that the people want something done is being heard by Congressional
delegations. One concern that I have personally--this is just a hunch
and I keep asking people about this--is foreclosure rates and
delinquencies on loans generally, especially in the installment area.
Bankers and S&L people tell me that they're not particularly concerned
and that their statistics don't indicate any particular problem. But
I look at the number of adjustable rate mortgages that are being put
out in my part of the country, and I think around the country, and
with interest rates tending to back up I think we're looking at an
explosive and dangerous situation down the road as some of these ARMs
begin to move toward the time of the balloon payments.
Let me turn just very quickly to the staff projection in the
Greenbook.
I have a slightly different view than the Greenbook in
three areas:
economic growth, inflation, and unemployment. Outside of
those areas, I'm entirely in agreement or don't have much problem!
But I've changed my tune a little. At the last meeting I was saying
that I thought the economy was going to move ahead at a faster clip
But this time I don't see the economy
than had been predicted.
moving, especially in the first quarter, at quite the level that the
I realize that the Greenbook is
Greenbook does--namely, 8 percent.
probably put together with the benefit of the Commerce flash report,
and the private forecasts that I looked at didn't have that advantage.
Nevertheless, it seems to me that we're not going to get the kind of
growth even in the first half that the Greenbook is projecting. One
of the reasons I say that is that I think there might have been some
We did
distortions reflected in the January and February numbers.
have some pretty adverse weather in November and December, which might
account for the rapid growth in January and February. And we had some
The other area where I would
changes in the PIK program, and so on.
differ, again based on what I'm hearing around my District and some of
the national figures, is that I think inflation is apt to be higher in
1984 than the Greenbook indicates.
Some of the indicators I looked at

3/26-27/84

-49-

commodity prices, which are moving up
to support that view include:
and have been trending up for some time; the price of gold, which is
We are
moving up; and the value of the dollar, which is coming off.
at an 80-81 percent capacity utilization number and monetary growth
I hope I'm wrong, but it looks to me as if
has been fairly strong.
inflation might be higher than the staff is predicting. And because
of my view about the lack of robust strength in the economy as
compared to the Greenbook forecast, I would think that unemployment
will not be as low as in the Greenbook. Summarizing all that in terms
of policy implications--and I guess we can talk about this more
I
tomorrow--it all adds up to me to one word and that is caution.
think we have to be very careful and very cautious as we formulate
policy tomorrow for the next period.
CHAIRMAN VOLCKER. I don't know how much time we're going to
have tomorrow. As you know, I have to testify in the morning and I
don't know when I will get back. We may have to go to or after lunch.
I'd like to get a little more done tonight, but I also am conscious of
time passing and I would ask those remaining to concentrate on points
that have not been made before. Mr. Roberts.
I'll
I think most points have been covered.
MR. ROBERTS.
make a very brief statement. In the Eighth Federal Reserve District
there's a very broad general feeling of optimism, confirmed by surveys
that we've done, meetings with our board and branch boards, and
sessions I've had with large and small companies, commercial
I find no real
construction people, and business economists.
exception to that general pattern, whereas maybe a fourth of those
people three months earlier would have had some remaining pessimism.
There are rising expectations of price increases to come later this
We hear talk in the chemical
year on the heavier industry side.
industry in particular about major price increases to come later on.
On the consumer side, all the evidence we've picked up is of
[Representatives of] three very
continuing confidence in spending.
large nationally-based department stores indicated to me that sales
slowed down a little in February but since then, in 10-day sales
reports, each has indicated that sales have picked up again and that
they think the earlier slowdown was weather-related. Housing is very
In all the major cities we're seeing some
strong in our District.
increases in prices in the 7 to 10 percent range after stability for
quite a while. Autos are very strong. Added capacity is being
Chrysler just
planned in the large-car category and in special areas.
announced an expected $350 million expenditure to produce more minivans, which is a red hot product in their line that they are producing
in the St. Louis area. Business loan demand, according to bankers
that I've talked to, is beginning to pick up now in the major cities
of the District after having picked up some earlier in the outlying
areas. None of this is related to merger activity. In the wage area,
the only indication of change that I've seen is at TWA and Ozark where
I don't think that relates
concessions have been made by employees.
to the general economy; it is a reflection of the pattern of
deregulation in that industry. I would certainly concur with the view
that Governor Martin expressed about the shift of risk in the mortgage
area from the savings and loans to the borrowers. This is a rising
concern on the part of the major savings and loans in my District.
Even though they're shifting a lot of the risk away from themselves,
they are worried about the impact generally from rising interest rates
If there are any problems in my District,
on the variable rate loans.

3/26-27/84

-50-

they seem to be a residual from the past and they would be in areas of
excess real estate financing, coal mining, agriculture, and the
foreign area.
CHAIRMAN VOLCKER. Mr. Balles, what do you have to say that
will add to our sum of knowledge.
MR. BALLES.
I will try to make this very brief.
The
business statistics in the West are quite good.
The aerospace
industry, which I don't think anybody has commented on, is very
strong.
Boeing is adding workers back after cutting back for two
years in a row.
Electronics demand is strong in Silicon Valley. One
curious thing I've noted is that business statistics are better than
And
the business attitudes, at least among some of our directors.
that requires a word of explanation. Housing and lumber, of course,
are so important in the Pacific Northwest that I think some of the
pessimism of the people in that industry is based on their lack of
faith in the sustainability of the uptick we've had.
They see
interest rates about to rise even more and they fear that will just
cut off the resumed demand that we've seen in recent months in
housing. So, they really are not holding their breath waiting for a
sustained uptrend in that area.
On the matter of what is going on in
the mortgage area, in the West we find that almost half of the
mortgages made last year in California, Nevada, and Arizona, which is
the area of the Federal Home Loan Bank of San Francisco, were based on
That, of course, leads right back to where the risk
adjustable rates.
has shifted. That may be the salvation of the housing industry if it
keeps up and borrowers can continue to be encouraged to go along with
adjustable rate mortgages. You asked about agriculture and that's
awfully difficult to say anything about now.
CHAIRMAN VOLCKER.

We've heard a lot about it since then.

MR. BALLES.
In that case I won't add to the pessimism that
has been [related]:
that there is the overhang of previous debt and
that some agricultural borrowers are having real trouble.
I think
I'll stop at that point.
CHAIRMAN VOLCKER.

Governor Gramley.

MR. GRAMLEY. Well, Mr. Chairman, I don't know anything about
what is happening in the agricultural sector but I do share Jerry
Corrigan's concerns about where the economy is going. I think the
dangers are very great that the economy may grow faster than the staff
The two areas where that is most likely
is forecasting for this year.
to happen are business fixed investment and the change in inventories.
The staff projection for business fixed investment essentially says
that, after slightly faster growth than had been anticipated earlier,
the growth rate continues from the second half on through all of 1985
just where we thought it was a month ago. And indeed, it's a markedly
lower rate than we're seeing currently. Business fixed investment was
growing at a 23 percent annual rate in real terms in the later half of
1983 and that tools right down to 5 percent by the latter half of
1985.
I think we probably are going to see a major revision in
capital spending plans develop over the first half of this year as a
consequence of the fact that the economy is growing so much more
And I think we're going to
strongly than had been widely anticipated.
see, even in the Cleveland District, the beginnings of some desire to

3/26-27/84

-51-

On the inventory side, the Board staff briefed us
increase capacity.
this morning and showed us a chart on the ratio of inventories to
Of course, part
sales, which is as low now as it was in early 1973.
of that is a consequence of better techniques of managing inventories.
But it's also true that the number of companies reporting slower
And my guess would
deliveries is back to where it was in late 1972.
be that during the course of this year we'll see some efforts to build
up inventories relative to sales, so we'll see a bigger kick from
inventory investment.
On the price side, the thing that stands out most is the
staff forecast for prices relative to unit labor costs. There is only
a 0.2 difference there, with 5 percent projected for the fixed-weight
deflator for gross business product as opposed to 4.8 percent for unit
That isn't even enough to take into account the effects
labor costs.
that depreciation would bring. And the ratio of corporate profits to
GNP declines during the course of 1984 from the peak in the first
quarter despite very active markets and relatively stable unit labor
I just don't think that's the way businesses are going to
costs.
price this year. I think they're going to have the opportunity to
The big sleeper,
improve their profit margins and will do so.
I
however, in the price area is one that I've talked about before.
don't know whether it's going to happen, but the labor force
projection that the staff has included in its forecast is for growth
That
of 2.4 million from the fourth quarter to the fourth quarter.
Now, last year's
compares with a 1.2 million increase during 1983.
increase was very, very small. We did not see the kind of cyclical
The staff
increase in the participation rate that we usually get.
namely, that in February we
forecast has one thing going for it now:
did get a big increase in the labor force and an upward movement in
If this proves to be the beginning of a
the participation rate.
If it's a one-month
trend, then that forecast may be right.
phenomenon and we were to see the continuation of the slow growth in
the labor force that we had last year, we'd be down to an unemployment
rate below 6 percent by the fourth quarter and then we'd have a big
I
problem. The word that Bob Forrestal put out is "caution."
certainly would agree with that and I may even be going toward a red
light.
CHAIRMAN VOLCKER.

Governor Wallich.

MR. WALLICH. I just wanted to comment on one aspect of the
Greenbook projections. As we look at the very high first-quarter real
growth and the tapering off very rapidly for the rest of the two-year
period, one gets the impression that perhaps not too much has
happened. But there is a distinction here between the level at which
And
the economy operates and the rate of growth at which it operates.
If we have 8 percent
we have now raised the level very substantially.
instead of, let's say, 4 percent for the [first] quarter, I think that
And if the 6 percent
[produces] 1 percent more GNP at an annual rate.
[projected] for the second quarter were to materialize, that would be
another 1/2 percent of GNP over a 4 percent growth rate. That means
there's $50 billion or so more GNP in the economy. The capacity data
seem to bear that out from the fourth quarter to the second quarter;
in the forecast we're chewing up almost 4 percentage points out of
capacity and we're really getting into the range where pressures
become strong. The same is true of the unemployment rate. We're now
moving close to what is technically known as the equilibrium rate of

3/26-27/84

unemployment. And at the same time we're encountering a very
substantial speed effect in the sense that unemployment is coming down
very rapidly.
So that factor adds to inflationary pressures.
It
seems clear, finally, that inflation expectations have increased over
the last few months.
That means that real interest rates, despite the
rise in nominal interest rates, may not have increased.
They may
indeed have come down, if one could make so precise a calculation.
So
on net the economy is operating at a higher level with greater
pressures, perhaps less interest rate constraint and, in a sense, more
momentum even though we see that the projected rates of growth from
the summer on are now lower than they were in the previous forecast.
CHAIRMAN VOLCKER.

Governor Partee.

MR. PARTEE. Well, the question, of course, is whether in the
future [those growth rates] are going to be that low.
I agree with
your concerns and I agree with Lyle's. Clearly, the economy has been
too darn strong for several months now and if it continues very much
longer, we will have used up any slack we have and will be backed into
a period of a substantial inflationary pressure. We're at 81 percent
capacity utilization, I think Bob said.
Even using the staff
projection, we get up to 85 percent in a not very long time.
The only
time that level exceeded 85 percent in recent years was around the end
of 1977 and early 1978.
And, of course, that was a period when high
inflation conditions were developing.
So, we have used a lot of our
capacity and unless we do get this slowing growth in the economy that
the staff has forecast, before we know it we will be into a period of
growing inflationary pressures. And that's the thing we haven't
faced.
Now, certainly, fiscal stimulus has been a problem with the
economy. But I have some feeling that another problem has been that
there is too much credit.
If you look at the credit ratios, they are
high compared with earlier cycles.
For consumer credit and even for
business credit they are showing sharp increases and are getting up to
the upper end of previous ranges.
Somebody who is well positioned in
the home building industry said to me not long ago that he hated to
tell me this but the difficulty in the home building industry was that
the lenders were throwing money at the builders.
They were calling
them up and saying "Come on, why don't you use my money?
Why not have
some more starts?"
And that wasn't in Dallas either, Bob.
It's an
indication, I think, of conditions that are just too accommodative-given the backlog of demand that we perhaps have developed for houses
and durables and things like that and certainly given the optimism of
consumers, which is just too strong to have that kind of money
availability around.
So, I see the danger much more clearly than I
have at previous Committee meetings over the last year as being the
danger of expansion over the staff projection rather than below the
staff projection. And I think the danger of that is much greater than
before because of having used up the unused resources that we
previously had available.
CHAIRMAN VOLCKER. If nobody else wants to pronounce the
benediction, we will quit for the evening.
[Meeting recessed]

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3/26-27/84

March 27,
CHAIRMAN VOLCKER.
MR. AXILROD.

1984--Morning Session
Mr. Axilrod.

[Statement--see Appendix.]

CHAIRMAN VOLCKER.
questions for Mr. Axilrod?

Are there any more or less technical

MR. RICE.
Steve, the Bluebook says that the alternative B
Does that mean
proposal is consistent with the staff forecast of GNP.
that alternative B takes into account the rise in interest rates that
Or does it mean that it will result in an
has already occurred?
additional rise in interest rates over and above what has occurred?
MR. AXILROD.
It assumes a funds rate--well, it says 10-1/2
We had
percent, but I'd say on the order of 10-1/4 to 10-1/2 percent.
a 10-1/4 percent funds rate for a few days. We don't have that today
and we didn't have it yesterday, so I think that really assumes a
Today funds are-further rise in interest rates.
MR. RICE.

You mean a further rise from today but not from--

MR. AXILROD.

I would say from the average of the last two

weeks.
I don't think we should over-estimate Mr.
CHAIRMAN VOLCKER.
Kichline's ability to predict the economy and even more Mr. Axilrod's
ability to project interest rates!
MR. RICE.

But it's helpful to know what they have in mind.

CHAIRMAN VOLCKER.

Are there any other questions?

MR. MORRIS.
Steve, I'm surprised at the very small estimate
that you came up with on M2 with respect to the IRA accounts. We are
talking about an awful lot of money here.
MR. AXILROD. That was a small estimate of the distorting
effect on the seasonal. We might have gotten some of the seasonal but
it could be more; I really don't know. But that was an estimate of
how much we thought the seasonal might be off in some reasonable way.
CHAIRMAN VOLCKER.

What is the estimate?

MR. AXILROD. Well, a quarter to a half [percentage point],
but I would take all of that-CHAIRMAN VOLCKER.

Is that an annual rate?

We don't think it is very large, but
MR. AXILROD. Yes.
that's just another way of saying we don't think we made a big error
in the seasonal.
MR. MORRIS.

Do we have very good data on the IRA accounts?

-54-

3/26-27/84

MR. AXILROD. We have IRA accounts at banks; unfortunately,
we don't have them outside banks. No, we don't have very good data
and that's a big problem.
CHAIRMAN VOLCKER.

Are there any other questions?

MR. PARTEE.
Do the data you have indicate that they are
going up faster this year than last year?
MR. AXILROD.

Don may have

[numbers on that].

MR. KOHN. I don't have the numbers, Governor Partee, but
they are growing faster this year than last year.
The big jump was
from the year before that.
MR. AXILROD. Our problem was not only the IRA and Keogh
accounts but we had to make an estimate of how much the MMDA shifts
early last year in January should be allowed for in calculating the
seasonals so as not to distort the seasonals. That, as much as the
IRA/Keogh accounts, was a problem to us in estimating the seasonals.
We tried to make some sense of how far we could be off if we made
different assumptions and we came up with this rather minimal number.
But that doesn't say that the IRA/Keogh accounts didn't have big
effects in and of themselves.
MR. CORRIGAN. You also have this big
these old, maturing 30-month certificates.
MR. AXILROD.

[unintelligible]

in

Yes, that's right.

MR. ROBERTS.
On this large increase in reserves in February
to accommodate the build-up in excess reserves:
I notice that you say
excess reserves are subsiding and that pretty much takes care of
itself. But if loan demand is rising and the excess reserves go into
loans, what is the effect of that prospectively?
MR. AXILROD. As a matter of fact, the excess reserves seem
to be running high in this two-week period in the latter part of March
as well.
But we think the excess reserve build-up has been
accompanied by a high funds rate, so it isn't as if people are taking
excess reserves and have gotten rid of them aggressively into market
instruments or things like that.
I don't think that the build-up of
excess reserves is pushing loans out or pushing money out.
I think it
is really rather transitory.
CHAIRMAN VOLCKER. Do you have an estimate for reserves and
the monetary base for March handy?
MR. AXILROD.
Yes.
Our estimates indicate a relatively low
[or slightly negative growth] and assume excess reserves a little
lower than I think is going to be the case at the end of this month.
For March we would have a drop in total reserves but I think it is
best to assume that reserves are about unchanged following the 19
percent increase. And the monetary base is falling to only a small
increase of 2 to 3 percent.
CHAIRMAN VOLCKER.

What do you have for nonborrowed reserves?

-55-

3/26-27/84

MR. AXILROD. Well, we have a drop there also, and it may
We have a drop
even have dropped a little more than [our estimate].
of around 7 percent, but I think a lot of that is the distortions of
It looks as if they are
the excess and required reserves in March.
increasing about the same as they increased in February--at about an 8
So this variation is largely the variation in
percent annual rate.
It's a sort of
excess reserves and some variation in borrowing.
sustained expansion in the reserves that is providing the base for the
deposit expansion.
Well, let me sum up
CHAIRMAN VOLCKER. Any other questions?
what I think is a difficult situation in terms of arriving at our
policy judgment. Drawing upon what you people were saying yesterday,
on the surface we certainly have a strong expansion. We haven't had
The wage picture to date--I
much change in the inflation picture.
There
make no statement other than to date--looks surprisingly good.
really is no evidence, looking backward, of a real change there.
Obviously, the issue is how to
Attitudes seem to be carrying over.
sustain progress, not just where we stand now. I think we have some
very large distortions in the economy that are becoming more apparent
--they may not be apparent in quite the way many predicted--arising
I
We have this enormous foreign trade deficit.
out of the deficit.
don't know how big the housing industry is these days--maybe you know,
Governor Martin--but I don't think it is much bigger than our foreign
trade deficit.
MR. MARTIN.

$100 billion.

MR. PARTEE.

It's more or less that.

We have
CHAIRMAN VOLCKER. Just to illustrate the problem:
this decline, by whatever it has declined, and it is equivalent to
losing half or more than half of the housing industry in terms of GNP.
Another way to look at it is that domestic demand has been expanding
considerably faster than GNP.
VICE CHAIRMAN SOLOMON. What is the estimate of domestic
demand--at least 1 percent more than GNP?
It's more than 2 percent if you take
CHAIRMAN VOLCKER.
Do you have that figure handy, Mr. Zeisel?
domestic private demand.
You computed it for me the other day.
MR. ZEISEL.
MR. KICHLINE.

I'm sorry I just came walking back in.
For the first quarter it is 10 percent.

CHAIRMAN VOLCKER.
government, doesn't it?

That figure you gave me excludes

It excludes government but it includes
MR. KICHLINE.
inventory investment and it allows for an adjustment of this PIK
distortion.
CHAIRMAN VOLCKER.
government?
MR. KICHLINE.

And it would be less if you included

Right.

3/26-27/84

-56-

CHAIRMAN VOLCKER. This agricultural problem is obviously
mixed.
If you don't have any debt, you haven't any problem. But
quite a few farmers have debts and the problem gets bigger.
This
There are very funny
housing market could be living on borrowed time.
things going on in Texas and I suspect a few other places.
One of the
disturbing things to me for the future is that I think there is a
As you mentioned
reluctance to add to capacity for several reasons.
yesterday, [manufacturers] have been through a sluggish period and
they have had a lot of instability. And interest rates bite when
you're talking about a new factory or something. I don't know whether
to be encouraged or discouraged about the future of the country.
I
was in Winston-Salem last weekend and there's a huge new factory down
It's the only big factory of that sort that
there for cigarettes.
I've seen for a while, and it is big.
But all these distortions seem
to be interrelated with interest rates.
The economy [unintelligible]
when demand moves very rapidly; I don't think that's so surprising in
But I also think interest rates are not in the
view of the deficit.
short run--I don't know about the long run--a very effective brake on
many sectors in this deregulated world that we live in.
People go
ahead for a while anyway, except in some areas like new plant, without
responding. And I think it raises a question of how the shape of the
economy will look in the future.
I would add to Mr. Kichline's view that he gave yesterday in
response to Mr. Morris as to what may happen. He has a good
traditional, and I think fair, view of what one ordinarily might
expect:
low investment, low housing, and foreign trade problems. But
on top of that we have lots of vulnerability. This thrift situation
can rapidly turn negative and is turning negative.
We were talking
about their throwing money at builders and I think they are going to
continue to throw money at builders whatever the interest rates are.
They will pay whatever they have to pay and raise the interest rates,
but they probably will continue to throw money at them or engage in
speculative investments.
It's a sign of weakness not strength. We
have this LDC problem. There is an interesting article in The
Washington Post this morning which is not new news but indicates the
kind of psychological treatment this problem may get.
We have the
foreign exchange rate problem. If the dollar declines and the foreign
trade picture improves, it pushes all these pressures--bottles them up
in the economy--and we will see more results there.
I observed that a
lot of you reported that businessmen don't want us to take away the
punch bowl; they don't want us to tighten now. I think there is some
real fear about interest rates and the question is, in part, whether
these little changes in interest rates necessarily do all that much.
I don't think they do. Maybe it's just not very visible but if you
scare people enough, there is a risk of a discontinuity [in their
response] here.
They may suddenly say "Oh my gosh, we are going back
I
And people could draw in their horns quickly.
to 1980 or 1982."
say that because when I talk to people about interest rates they don't
seem to be worried about a small increase.
What they are worried
about is that it is the first step toward a big increase that they
We are
consider very serious; they have that pattern in their minds.
operating in an atmosphere where interest rates are considered the
problem and we are considered interest rates.
Whatever we say about
the budget, [unintelligible] doesn't reflect the budget or the
economy.
It's a very simplified view--that we can control interest
rates.
So, we're dealing with that kind of atmosphere and I think

3/26-27/84

-57-

we're living to some degree with all these distortions on borrowed
time.
I don't know whether
Broadly, I guess we have three options.
my comments exactly conform to the statistics of Mr. Axilrod, but I
think one can take the view that the economy is going to slow down by
itself and inflation will remain under control and we don't have to do
I
much--we can luck out and avoid adding strains in the short run.
I
don't know what you think about the reliability of that [scenario].
The middle
think it is possible but how reliable it is is a question.
option, in a sense, is that we can help nature along by making sure we
resist any excessive money and credit growth. Under the circumstances
we have at the moment that's a middle course but it raises the
question of whether it's enough. Or one can take a more aggressive
and what might be considered therapeutic approach that certainly is
going to be reflected in short-term changes in interest rates and we
will be face to face with some of these risks--the international
negotiations and the psychological risks that I referred to, of
If things don't go well, we are going to face those sooner or
course.
We can proceed.
Those are the options that I see.
later anyway.
It seems to me that it's very
VICE CHAIRMAN SOLOMON.
difficult to have as useful a discussion, and ultimately a decision on
whether and how much to tighten open market operations, if we don't
factor in what the Board of Governors may do on the discount rate.
Let's say we tightened along the lines of alternative B and presumably
If then
got a fed funds rate in the neighborhood of 10-1/2 percent.
the Board were to move the discount rate a half point, we might not
get a full 50 basis points out of that move coming on top of this
But I think we would
because there is some expectational component.
So, we really would end up with something
get very close to that.
It seems to me that we have this
virtually close to alternative C.
problem that doesn't usually arise. This time we have a combination
of circumstances where the markets are expecting a discount rate move.
There are some good arguments for that. There are some arguments
against it, I'm aware. If we want to be in the posture of not sending
a strong signal that we're taking the initiative--that we are simply
not resisting the market's tendency to drive up interest rates--there
is an argument against a discount rate move. If we want to indicate a
more forceful view, then there is an argument for it. All I'm saying,
though, is that I don't see how we can know whether to talk in terms
of the objective as alternative B or alternative C unless we have some
I
sense as to whether there is going to be a discount rate change.
realize that you would be reluctant to talk about that in a large
group but I don't know quite how to address this question.
MR. PARTEE.
aggregates?

You're talking about the rates, not the

VICE CHAIRMAN SOLOMON.
MR. PARTEE.

I'm talking about rates.

I don't see how this changes the aggregates.

CHAIRMAN VOLCKER. I am certain that we are not going to
In making your
arrive at a discount rate decision at this meeting.
comments you may want to make whatever observations you want from your
particular perspective about the discount rate and how it might affect
your judgment as to what should be done on monetary policy.

3/26-27/84

-58-

MR. GUFFEY. To join Tony, I have the same dilemma with
respect to which of the alternatives to select if indeed a discount
But the more important part as far as
rate action may be forthcoming.
I am concerned is how the Desk would react to a discount rate increase
and whether it would use the post-1979 operating regime or the postIn other words, the latter approach would involve
1982 regime.
adjusting the borrowing level in some measure to moderate the
If we go with the post-1979
increase, if I understand [that regime].
regime then we're going to get a one-for-one result--a half point
discount rate increase produces a half point rise in the federal funds
rate.
If we use the post-1982 practice, we moderate it by adjusting
the borrowing level.
I think Steve appropriately raised this issue of
But
whether it will be incorporated in some measure in the directive.
some expression from the Desk or the Chairman as to how they would
react to a discount rate increase is important to deciding whether to
go with alternative A, B, or C.
CHAIRMAN VOLCKER. Well, I'm not so sure it is so important
if one looks at it in terms of the monetary growth, which is the
initial focus here.
But I will accept any comments anyone wants to
make here as to how one manages one's affairs in the interim.
VICE CHAIRMAN SOLOMON.
But a considerable number of people
on this Committee have an interest in interest rates not just in the
monetary growth. And I cannot see that this isn't an extremely
relevant factor. Now, we can always give two votes, I suppose:
one
on one assumption and one on the other assumption.
CHAIRMAN VOLCKER.

Let us proceed.

MR. GUFFEY.
If I look at "B," for example, it may be
attractive to me at least in terms of a 10-1/4 percent or maybe 10-1/2
But if we get a discount rate increase on top of
percent funds rate.
that and use the post-1979 procedures, that would get it up to 11
percent.
CHAIRMAN VOLCKER. In the first instance, I will repeat:
If
you are talking about "B," I don't see an interest rate there and I
don't see a borrowing assumption there.
So, I think we can do a
certain amount of talking. And I would suggest that we proceed. Mr.
Black.
MR. BLACK. Mr. Chairman, I agree with those yesterday who
indicated that they think the economy is currently very strong and
that we will be lucky if we hold inflation down to the level that the
Greenbook is forecasting. Accordingly, it seems to me that our main
I would focus, of
objective ought to be to deal with the aggregates.
course, mainly on M1 and try to get that to the midpoint of our 4 to 8
percent range and hold it there in order to reduce the risk that
inflation would really be a problem in 1985.
I like the M1 path of
But the
"C" because that would get M1 to the midpoint by midyear.
Bluebook associates that with a federal funds rate of 11 percent or
more and I would feel a little more comfortable--and here I am
assuming no change in the discount rate--if we let the federal funds
rate move up to the neighborhood of 10-1/2 percent and hold it there
until we have some additional information on the behavior of the
aggregates. I like the "B" specifications for the federal funds rate
I have to say, though, that I have no confidence
and the borrowing.

-59-

3/26-27/84

in my ability to tell you what kind of growth in the aggregates we're
going to get under current procedures if we push the federal funds
rate to that level or indeed to any other level.
I just don't think
that there is really any way for us to know under our current
operating procedures. But we've now had 2 months of experience,
roughly, under contemporaneous reserve accounting and I was happy to
hear Steve suggest that he thought there might be some merit in
looking at the idea of introducing some automaticity into that.
I
would strongly endorse that and would express the hope that somewhere
along the way we get as close as we can to something approaching total
reserves.
If we do get to that point, we ought to think about the
I think that kind of
discount rate as a penalty rate at all times.
procedure would greatly enhance our chances of controlling the
aggregates and inflation and help us maintain this hard-won
credibility that we have finally gotten.
MR. PARTEE.

Do you mean a penalty rate above the funds rate?

MR. BLACK. Yes.
reserves more closely.

That's right--in order to control total

MR. MORRIS. Mr. Chairman, I would support alternative B.
I
don't have the confidence in the behavior of M1 that Steve suggests he
has--that, after not having served as a very useful target in '82 and
'83, it is somehow going to revert to its old historic norm in '84.
But I think the rate of growth of debt is quite clearly excessive.
That growth plus the extraordinarily strong economic numbers that have
come in tell me that we have to move now to moderate the rate of
advance in the economy.
I think moving to "C" and having a funds rate
possibly as high as 12-1/2 percent is a little overkill.
It seems to
me that we need more feedback from the effect of interest rates than
would be implied in alternative C, and the idea of returning to the
old automaticity sends a chill up my spine.
I certainly would like to
restrain the funds rate range to no higher than the "B" level.
CHAIRMAN VOLCKER.

Mr. Balles.

MR. BALLES.
Several people commented yesterday to the effect
that the potential for inflation accelerating down the road is now
increasing, unfortunately. Certainly, the work that we've done in our
Bank strongly supports the same conclusion:
that inflation begins to
accelerate as we approach the unemployment range of 6 to 7 percent or
the operating capacity range of 80 to 83 percent. And I fear that may
be down the road.
So, for that reason I also would come out in
support of alternative B and would suggest a borrowing assumption-since it isn't listed in the Bluebook table though it is listed in the
text of the Bluebook--of about a billion dollars. That would seem
reasonable to me.
I think we should not shrink from letting the funds
rate creep up to 10-1/2 percent in the near future for starters, and I
would hope that it wouldn't have to go much above that. But I think
we are going to have to do something more than we've done recently to
slow down the generally rapid thrust of all these aggregates,
especially M1.
I was glad to hear Steve's remarks--and perhaps I'm
reading more into them than he meant--but it almost sounded, Steve, as
if you're ready to take M1 off probation, which I would welcome.
CHAIRMAN VOLCKER.

Mr. Corrigan.

-60-

3/26-27/84

MR. CORRIGAN. This is a real predicament, to put it mildly.
I guess I would come out supporting alternative B, with the borrowing
number and so on that go with it in the Bluebook, even though I must
confess that I like the aggregate profile in "C" better than that in
"B."
But at this point "C" scares me a little in that it could
actually make things worse in the short run.
That is what I see as
the great dilemma. If we went with "B" and that meant that the
federal federal funds rate had to get up to 10-1/2 percent or so, like
John, I would say "So be it."
But in the context of "B," I would
favor the directive variant 2 that Steve has in the Bluebook.
Personally, I would favor an asymmetrical directive that would say
that we would strongly resist money and credit growth above the
specifications of "B" and be tolerant of shortfalls in the growth of
money and credit below "B."
MR. PARTEE.

Did you say "strongly resist"?

MR. CORRIGAN.
I think I said "strongly."
I'm not sure what
I am very
that means, though, Chuck. I won't try and define that.
Those numbers are
troubled by this credit growth, in particular.
really very, very strong.
I certainly would favor an asymmetrical
directive, one that would-CHAIRMAN VOLCKER. On those credit growth numbers, I don't
know if the number was touched upon yesterday but that shouldn't
change the general comment:
February growth was swelled by these
mergers and is accompanied by a decrease in equity, which isn't a very
healthy thing. The equity is not in the number whereas the debt is,
and that makes a difference of 2 percentage points or so for one
month, if I remember correctly.
It's still strong, however you look
at it.
But it doesn't show an acceleration; it just shows strength.
MR. CORRIGAN.
I don't know the right adjustment for the
mergers, but if you look at bank credit or total credit-CHAIRMAN VOLCKER.
that extra bulge.

It's strong, no question.

There's just

MR. CORRIGAN. And it's partly for that reason. Also, when
we set these targets for 1984 we seemed to say that if velocity was
growing, the Committee was thinking in terms of M1 in particular being
about at the middle of the range.
So, I certainly would not resist
any shortfall in the growth of money and credit during the second
quarter relative to the specifications of alternative B.
CHAIRMAN VOLCKER.

Mr. Rice.

MR. RICE. Mr. Chairman, when [we face] an economy [that] is
expanding as rapidly as it is and the outlook is that it probably will
slow down because of its own internal dynamics and, on the other hand,
the economy may continue to expand rapidly and slow only a little, I
think it's a good time to rely on what we consider to be acceptable
I would do that and let the
rates of growth in the money supply.
dynamics of the economy--the rate of expansion--determine pretty much
In other words, if we set the course of
what interest rates will be.
growth for money at rates of expansion within target ranges that we
And if
believe to be appropriate, then we should stick with that.
money and credit demands in the economy intensify and force interest

3/26-27/84

-61-

On the other hand, if the
rates up, then we should accept that.
[growth in the] economy moderates as we hope and expect, that leaves
scope for interest rates either to stay at current levels or perhaps
even fall somewhat.
I think alternative B is the alternative that is
most consistent with that way of looking at things.
So, I would
accept the rates of growth for the aggregates set in alternative B and
would accept the federal funds rate fallout from that.
CHAIRMAN VOLCKER.

Governor Gramley.

MR. GRAMLEY.
I agreed with Emmett all the way up to where he
said that alternative B was his choice.
I start with the view that
the staff forecast is not an unreasonable one but that if it is wrong
it's likely to be that growth will tend to exceed the 5.3 percent rate
the staff has forecast for the fourth quarter to the fourth quarter
and that we will have somewhat more price pressures.
I would be happy
with the kind of growth the staff was forecasting a month or two ago-4 to 4-1/2 percent or somewhere in that neighborhood. But 5 to 5-1/2
percent and possibly more in the second year of a recovery when we're
moving rapidly toward much higher rates of resource utilization for
both capacity and labor is something that I find disturbing. Now, "B"
is essentially the alternative that is consistent with the staff
forecast. And that means, I presume, that in the second half of the
year if we stayed with "B" and extended it with the same interest
rates that we are talking about as consistent with "B," we would find
that money growth would slow with the slowdown in the pace of the
economic expansion that is forecast. And this is a policy that I
would call leaning with the wind.
It's providing enough money in the
first half to keep interest rates from going up too much and then
letting the money growth come down a little as the economy begins to
slow down of its own natural processes.
If we are in the second year
of a recovery and are willing to supply the kinds of increases in the
Ms that are involved in "B" and to permit credit to grow by more than
11 percent, when are we going to get back to a policy that is designed
to bring inflation down over a long period?
So, I just don't think
"B" is the right alternative.
I share your worries and concerns about
Now, "C"
the economy, but I think we've got to go further than that.
is a bit of a shock perhaps, but I think we ought to move in that
direction; something between "B" and "C" is where I would come out.
CHAIRMAN VOLCKER. Let me ask a question inspired by your
comments.
It really wasn't developed yesterday, and I will direct it
to Mr. Kichline. We face various probability distributions of the
outlook. I saw in the paper this morning that somebody is projecting
2 percent growth in the second quarter.
I guess a lot of people are
still projecting 4 or 5 percent.
Can you explain to me the
probabilities and the kind of profile of that kind of slowdown?
MR. KICHLINE.

I saw the 2 percent number but--

CHAIRMAN VOLCKER. You don't have to explain the 2 percent
figure necessarily, but what are the chances of that and what is the
evolution of events that would produce it?
In your view how probable
is it that we will see what you have projected?
Did you project 6
percent or so?
MR. KICHLINE. We have 6 percent for Q2.
about the second quarter?

Are you talking

-62-

3/26-27/84

CHAIRMAN VOLCKER. Yes.
Suppose it were in the neighborhood
of 4-1/2 percent. How likely or how unusual would that be and what
would have to happen to get that?
MR. KICHLINE. Well, I don't view that as inconceivable at
all.
We struggled with this whole issue. There are some technical
reasons that the number could readily come out below 6 percent and
there are some rather substantive reasons that it could come out below
6 percent. My personal view is that 6 percent is a good number.
If
it's wrong--and I'm assuming that interest rates don't decline in this
environment but perhaps are where they are now or rise a bit--I think
the odds favor a smaller number than 6 percent.
One example is in the
auto area where we have production levels that we think are sensible.
But GM is closing several plants. At the moment the way the Commerce
Department is going to measure the numbers, they are not inclined to
change the seasonals; and if they don't do that, we're going to find
auto production declining substantially. That's a technical reason
but it shows up in the numbers.
There are a number of cases where
some of the retail sales may well have come early in the year due to
weather effects and we may be facing a situation where the economy is
not that strong.
So, I feel very comfortable with the 6 percent
number; but if I were to bet that it's not 6 percent for the second
quarter alone, I would bet on a little lower number.
CHAIRMAN VOLCKER. The major vulnerability, if that is the
right word, is that retail sales may develop less buoyantly than you
have forecast?
MR. KICHLINE. Well, I think housing is the other area.
Those housing numbers may well be in the process of change as well.
We have seen a half point increase in the VA rate with the general,
even mild, rise in interest rates.
It seems to me that some of the
attitudes in the housing industry may change and take a little of the
edge off what was really an extraordinary increase in residential
expenditures in the first quarter.
I do feel comfortable looking for
a very strong number for the full year, but your question was really
on Q2 and my assessment of what the odds would be.
MR. PARTEE.
If retail sales fell below your projection in
the second quarter--I'm talking right ahead--wouldn't the result be
just a larger increase in inventories?
It would seem to me,
especially with the inventory/sales ratio so low, that it wouldn't
affect production.
MR. KICHLINE. Perhaps some, but we do have inventory
increases in this forecast.
MR. PARTEE.

Yes.

MS. TEETERS.
In answer to your question:
In the second year
of the recovery from the mid-1970s recession, the quarterly pattern
was a boom and bust pattern, essentially. It averaged out to a good
year. I haven't looked to see whether they have revised that
particular pattern out, but there was a good quarter followed by a bad
quarter followed by a good quarter and it was [primarily] in the
automobile sector of the economy.
CHAIRMAN VOLCKER.

Governor Martin.

-63-

3/26-27/84

I would like to join those who indicated
MR. MARTIN.
yesterday that there are number of signposts leading us to something
like an 85 percent capacity figure as in 1978 and 6 percent
unemployment--putting us at or even below the natural rate of
unemployment. But I think there may be some merit in qualifying those
trends.
In talking about 80 or 85 percent capacity in this second
year of recovery I think probably all of us are keeping in mind that
the importance of imports both to the business sector and to the
Capacity of 81 or 82 percent
consumer sector is different this time.
in the United States doesn't mean 81 or 82 percent capacity in Germany
or the United Kingdom or Japan or for the steel producers in Brazil or
In
for the exporters to the United States in Mexico and so forth.
terms of our stress on industrial production, I think it is
appropriate. These are rather spectacular increases but the context
is that manufacturing--I'm varying my element here a bit--accounts for
something like 25 percent of the labor force. In the short run, it
isn't so much a matter of industrial production as it is perhaps
production of value in services and employment in the services
industry. I recognize that that has shown a strong increase also, but
I don't think we are talking about 81 percent of capacity of offices
or of computers or telephones or the other tools in the services area.
So, I think it needs to be qualified a little.
Secondly, the vulnerability of some sectors has been
I have some difficulties going from the staff forecast to
mentioned.
the alternatives on page 6. My difficulties are--let me characterize
it unfairly--the gaps between the rates of growth in alternatives A,
B, and C. I have a little difficulty moving from a 6-1/2 percent
growth in M1 to an 8 percent growth. That's a rather heroic jump to
me. My druthers are for an "A prime" where we look at the 7 percent
that we've just been told is the [projected] rate for M1 in March. We
might wind up at 7-1/4 percent or somewhere in between [the 6-1/2 and
I don't have any marvelous
8 percent rates of Alternatives B and A].
I'm just going in the middle
econometric approach here to give you.
[of the Bluebook ranges]--for the M2 figures and the M3 figures and a
federal funds rate that perhaps would stop at 11 percent and not at
I'm impressed by the hints of the lagged effect of
11-1/2 percent.
One mentioned
the interest rate increases we've already had.
yesterday was of 125 basis points on CDs and 100 points in this
maturity and 80 points in that maturity. We haven't seen the effects
So, I would vote for an "A
of the lag response to those numbers.
prime," if you will, with borrowings around $800 million, not a
billion, and a 10-1/4 to 10-3/4 or even 11 percent range on fed funds.
I agree with Governor Rice that we ought to be a bit flexible with
The market is moving and we should to some
regard to fed funds.
degree validate the moving. But I think too much of a slowing now
might indeed be a shock, considering the vulnerabilities and the
potential softness that we face, as noted by the Chairman in his
So, I vote for an "A prime."
usual, very good summary statement.
MR. PARTEE.

"A minus."

MR. MARTIN.

"A minus."

CHAIRMAN VOLCKER.

Thank you.

Governor Teeters.

Well, I would like to point out one thing that
MS. TEETERS.
We don't have any pressure
is remarkably different in this expansion:

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on oil prices. During the 1970s we always had upward pressure on oil
prices and the threat of very large increases in prices, and in my
mind that takes a great deal of the inflationary pressures out of the
Having
situation. As regards the aggregates versus interest rates:
sat here, I don't believe in the aggregates except in a very broad
sense as an indicator that is as good as some of the others that are
around. But to run monetary policy with highly volatile interest
rates in order to obtain a rate of growth in the money supply which we
So, I come to
don't really control directly seems to me really bad.
That
the conclusion that what is important is the interest rate.
doesn't mean that it's an interest rate on fed funds which we say is
I think some
10 to 10-1/2 percent and it comes in at 10-1/4 percent.
I think we also can follow
variation in that interest rate is good.
the market with it.
I have a great deal of sympathy for Tony's and
Roger's point of view that what we decide today is not independent of
I don't want to get [unintelligible] because I
the discount rate.
have to vote on both of those decisions.
I want to come out with a
If we vote as a
policy that somehow puts those two together.
Committee to go for alternative B and then as a Board to raise the
discount rate, we're going to end up with 11 percent on the fed funds
rate. On the other hand, if the Board decides to raise the discount
If we raise the fed funds rate to 10-1/2
rate, then we get trapped.
percent, the staff may come back and say the fed funds rate is 10-1/2
percent and as a result the borrowings are going to be a billion and
half dollars because [banks] are going to utilize the discount
[window]; we may then have to raise the discount rate to keep the
There is a certain amount of
borrowings at a certain point.
We have raised interest rates already; the
circularity going on here.
I think
[funds rate] average of the last two weeks is 10.36 percent.
I would go with a fed funds rate of
it was probably the proper move.
about 10-1/2 percent.
CHAIRMAN VOLCKER.
MS. TEETERS.

I object a little.

You say we raised--

Well, we didn't resist it.

CHAIRMAN VOLCKER.

That's a little different.

MS. TEETERS.
I am assuming that we are going to raise the
discount rate to 10 percent if we decide on alternative B.
MR. PARTEE.
MS. TEETERS.
SPEAKER(?).
MS. TEETERS.
MR. PARTEE.

Raise the discount rate to 10 percent?
It's at 9-1/2 percent isn't it?
8-1/2 percent.
Raise it to 9 percent.
All right.

MS. TEETERS.
If we raise the discount rate by a half
percentage point, then it seems to me that the specifications should
be the federal funds rate at 10-1/2 percent and the borrowings at $800
million. If we raise the discount rate, we want to offset the impact
of that to some extent because if we don't we're going to get 11
If we don't raise the discount rate,
percent on the fed funds rate.
then it seems to me that we can go with "B" and have borrowings of $1

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billion and have the fed funds rate fluctuating in the neighborhood of
10-1/2 percent. But I don't think one can disconnect those two
decisions at this point.
CHAIRMAN VOLCKER.

Governor Wallich.

MR. WALLICH. Well, I think we are in a critical phase.
There is some danger of the economy getting away from us on the up
If this is a long expansion, this is the
side in the mid-passage.
middle of it and the economy is accelerating when it ought to be
moderating. I think the market sees that and expects some kind of
action. And unless we do something, we're going to lag behind rather
than be with it.
I'm not arguing that we ought to lead the parade but
we shouldn't be hanging back. Moreover, if we do less now, we have to
anticipate the possibility that this economy will continue very strong
So, we would be saving ourselves
and we may have to do more later on.
some agony later if we take action now. I realize all this isn't
targeting on the aggregates; it's targeting on the economy.
I do
think the aggregates should be our focal point.
I would not want to
The idea of having to chase after some
go back to automaticity of M1.
blip, as we did at one time, is just too alarming. But then one has
to be a little firmer on the other means by which we steer. We've
already allowed some tightening and if we now move up a second step, I
don't think the second step needs to be a very big one.
We would be
taking two steps in succession. We could at least afford for a while
to see if this doesn't work.
Like Lyle, I feel that's somewhere
I would say M1 at 6 percent, M2 at 7-1/2 percent, M3
between B and C.
at 8 percent, and the funds rate range at 8 to 12 percent. I don't
want to discuss the discount rate but it's like the word
"hippopotamus" in that once it is dropped into your mind it's very
So, I do make my borrowing assumption with
hard not to think of it.
some thought about that; if we go to $1 billion on the borrowing, that
probably would produce the right effect overall.
CHAIRMAN VOLCKER.

I think we can go to lunch.
[Lunch break]

CHAIRMAN VOLCKER. If we are reassembled, we ought to
proceed. What I would like to do is complete this general go-around.
Then I think it might be appropriate to go into a more limited session
of the kind we have had before. After we finish the comments by
people generally, I would appreciate the staff leaving and we will go
into that kind of session. We will proceed with Mrs. Horn.
MS. HORN. For many of the reasons that have been stated, I
would like to see the monetary aggregates closer to the middle of the
ranges. And I'd like to see that happen sooner than alternative B
would bring it about, in part because I do have real concerns about
the strength of the economy.
But I also think there are significant
risks in the future on the down side and that moves me more toward
"B."
While the other reason moves me away from "B" toward "C," that
moves me back toward "B."
I must say I like the Chairman's words on
his second option "help nature along."
In my view a "B-" path does
that. By a "B-" path I'm talking about a borrowing assumption of
about $1.2 billion but I'd not quibble on decimal points there. And
When I say "B-" I am
then just one comment on Henry's hippopotamus:
assuming no change in the discount rate; I'm assuming that we'd be

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moving with open market operations rather than with the discount rate.
So, I would be for a "B-" path.
CHAIRMAN VOLCKER. Does that imply, as a matter of curiosity,
that you think that's better than changing the discount rate?
MS. HORN.

Yes, it does.

CHAIRMAN VOLCKER.

[Your Bank]

having proposed one.

I feel, as someone who doesn't take part
MS. HORN.
It does.
in that decision, that there are several reasons why one might want to
It could be done to make a statement or
change the discount rate.
drive home a point or because of real difficulties at the window with
I
too much of a gap between the fed funds rate and the discount rate.
would not be in favor of changing it to make a strong statement at
this time.
The political situation is such that I'd like to see the
move made on the open market side, presuming that the gap doesn't
become too big between the fed funds and discount rates and that maybe
we could just live with leaning on the open market side.
VICE CHAIRMAN SOLOMON. May I make a comment at this time?
There's a danger in a discount rate rise in the sense that the
political critics in the developing countries in Latin America may be
able to get somewhat more ammunition from the Federal Reserve actively
raising interest rates than from a posture of it being the market
From a purely
But I think that's very marginal.
[raising rates].
domestic point of view, I would say that it would be better to raise
I'm giving
the discount rate--if you're talking about alternatives.
my personal view in response to your hypothetical question to Karen.
CHAIRMAN VOLCKER.

Mr. Forrestal.

MR. FORRESTAL. Mr. Chairman, I said yesterday that I thought
the risk to the economy was on the down side and I expressed some
disagreement with the staff's forecast for growth for the first and
Nevertheless, it seems to me that we definitely are
second quarters.
looking at a pretty strong year, and associated with that are the
inflation dangers and the inflationary expectations that many of us
talked about yesterday. For that reason, I think we need to have some
movement even to validate what the market has been doing, but I don't
I don't think we ought
think it ought to be very much at this time.
So, my
to be overreacting to a few months' economic figures.
preference would be something between alternative B and alternative A,
It seems to me that the specifications
and I'd call it "B+" or "A-."
for that would be an M1 figure of around 7 percent with an associated
federal funds rate of [around 10] percent and a borrowing number of
$800 million. I think that kind of movement would give us enough
restraint in the economy, along with what has happened in the short
term, until we get additional data or some other indications of what
is actually going to happen in the economy. At the same time I'd keep
the monetary aggregates about where they are; they should be within
our targets but moving a little more toward the center of the range.
I really don't get very
Just a quick comment on the discount rate:
hung up on that, and in this particular meeting it seems to me that
the Committee ought to be making its judgment based on the aggregates
and so on.
I'd leave the decision on the discount rate to the Board.
In other words, if you think that enough has been done, you don't move

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the discount rate. But if you don't think enough has been done, then
So, I'm not particularly
you can do something with the discount rate.
concerned about that relationship.
CHAIRMAN VOLCKER.

Mr. Roberts.

I agree that the economy is quite strong at the
MR. ROBERTS.
moment, although I wouldn't be surprised to see some moderation in its
growth by midyear.
And I think that will be a function of these
capacity constraints that have been mentioned, a slowdown in some of
these high growth rates that are predicted on seasonals like housing,
and the lagged effect [on economic activity] of the reduced money
growth the last half of last year. On the other hand--and I think we
should deal with these lags--the lagged effect of the very large
growth in money in late '82 and the first half of '83 should be
showing up in higher prices by later this year, which fits into our
other discussion about the economy. So, it's important not to
aggravate this higher inflation that I expect by raising the growth of
Therefore, I think our original
the aggregates beyond the trend line.
objective of staying in the center of the 4 to 8 percent range, or
about 6 percent, is an appropriate policy at this time.
I don't see
why we should be concerned about the natural consequences of increased
credit demand relating to a good and adequate supply of money.
It's
normal that if activity is strong, interest rates will rise. And
that's not something that is likely to kill the economy; it's simply
an evidence of the strength of the economy. I would prefer to see us
operate on alternative B, with perhaps a small minus on that, in order
to accomplish those objectives.
CHAIRMAN VOLCKER.

Mr. Boykin.

MR. BOYKIN. Mr. Chairman, I basically agree with Governor
Gramley's description of the economy and what he thinks is likely to
happen.
I agree that if the staff forecast is wrong, it's probably on
the conservative side.
It seems to me that the increase in interest
rates that has occurred recently is really a reflection of economic
strength rather than any policy actions.
I remain quite concerned
about the long-run implications for inflation; I sense that
inflationary expectations are building. I think timing in terms of a
policy move is very critical.
Intuitively, I would go to alternative
C. But I also agree that it would be quite a shock at this time and
would probably be a bit strong, so I would come out between "B" and
"C."
Mention has been made of the discount rate, so I'll go ahead and
put in my two cents' worth. Frankly, I think there should be a
discount rate change.
I could be persuaded to accept alternative B if
there were some feeling that there would be a discount rate change,
but I'd leave the alternative B specifications as specified, which
effectively--as you said, Nancy--would take the fed funds rate
probably to 11 percent.
CHAIRMAN VOLCKER.

Mr. Boehne.

MR. BOEHNE.
I think the risks in the economy have shifted
toward too much growth. But that long list of vulnerabilities--which
you started with, Mr. Chairman, and others have added to--is an
impressive list as well.
It is the time in the cycle, I think, for
some restraint. How I would do it at this point is to accept the
greater restraint that has become apparent in recent weeks but keep an

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open mind about whether additional restraint is needed in the coming
weeks, depending on how economic activity comes in.
I don't think I
would load the dice or load the directive to tilt it more toward overt
[restraint].
I would accept what we've done but not much more.
It
seems to me that a move toward alternative C really would be too much
too soon.
On the question of automaticity and additional reliance on
M1, I'm not in favor of that.
It seems to me that the crosscurrents
that we're dealing with are just too complex to return to some
automaticity or to rely on a rule. Whether we like it or not, I think
we're just stuck with using a lot of judgment.
On the discount rate,
I'm lukewarm at best on raising the discount rate.
One argument, if I
were making one, would be that as we go through a cycle the longer we
wait and don't move the discount rate the more we can't move it later
on.
So, there is some argument for doing it, if only to keep the
If the Board in its wisdom should decide
option open in the future.
to raise the discount rate, I would be in the camp that says the
borrowing figure ought to be reduced so as to offset pressure on the
funds rate.
And since I only have one vote and not two as Nancy does,
in order to get a little better coordination here and a little firmer
grip on what we're voting for and its implications, I would feel more
comfortable with an 11 percent ceiling on the funds rate.
That would
seem to me to keep it more in the spirit of alternative B, given the
uncertainty as to what the Board might do with the discount rate.
CHAIRMAN VOLCKER.

Mr. Keehn.

MR. KEEHN. For all the reasons that have been stated, I
certainly think it's an appropriate time to be taking some action.
Inflationary pressures are clearly building, and I think it would be
very, very unfortunate to see these pressures and not do something
about them. So, it seems to me that the timing is appropriate despite
I think we'd be
the risks--and there are many, and they are serious.
better off taking some action now rather than waiting and perhaps
having to react a bit more vigorously. I certainly think that we
should be aiming toward alternative C over a period of time but, like
others, I would find that a pretty abrupt step to be taking today. As
I was thinking about this earlier, I frankly wrote down the numbers
that Henry Wallich has suggested as a course between "B" and "C," with
M1 at about 6 percent, M2 something under 8 percent, M3 under 8-1/2
percent, borrowing about $1 billion or a little over and the fed funds
rate between 8 and 12 percent.
CHAIRMAN VOLCKER.

Governor Partee.

MR. PARTEE. As I said yesterday, I think that there is now a
danger of an overheating of the economy in the foreseeable future.
And that, of course, will materialize rather quickly if the staff
projection of a moderation in economic growth does not come about.
It
may well come about, but it's a risky business. I also am impressed
by the extent to which debt expansion has played a role in this more
rapid growth in activity. When we had to use a variant of Frank's
favorite number--private domestic nonfinancial debt--at the meeting of
this Committee on January 26 we were estimating for the fourth quarter
that it would increase at a 9.2 percent annual rate. The quarter was
already over by 26 days. The revised estimate that we have this time
is 10.9 percent--an increase of 1.7 percentage points for the fourth
quarter.
For the first quarter, the estimate we were looking at last
time was 8.4 percent.
Now we are looking at 11.1 percent--an increase

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of 2.7 percentage points from the [previous estimate], some of which
is due to these oil company takeovers but not more than a point, I
think. Clearly, it seems to me, there is an excessive rate of
expansion in domestic debt that can't be attributed in a first effect
sense at least to the deficit but to private borrowing. I have the
sense--and I only look at the Washington papers and maybe to some
extent New York--of a tremendous amount of momentum in the drive to
extend consumer credit to the public on the part of the banks and of
There are radio ads and all
the drive to put out mortgage credit.
kinds of ads--a lot of them deceptive--about the terms and conditions
Businesses are
of borrowing, and people are responding to those ads.
too. They have variable rate loans and whether people know what that
means I have no idea. But there has been too much debt expansion, I
think.
I wouldn't be as aggressive as Lyle in saying that it's time
not only to pull the punch bowl a little distance away but to turn it
partly over because I'm not that certain of the future. And I do
think there are some structural weaknesses of the kind that the
The thrifts are
I'm worried about the thrifts.
Chairman mentioned.
going into a deficit situation very shortly now with this level of
It may
rates.
And the higher the rates, the greater the deficit.
turn out, as I told some of them, that 1980-81 was just a dress
rehearsal to what is going to happen to them in future, in which case
we have a whole industry that will be very, very shaky in the economy.
I'm worried about housing. Those are housing starts, not housing
sales, and it's not customary for builders to line up their buyers
I'm worried about the change in psychology
before they start a house.
in the consumer market that would turn people off housing so that the
housing inventories would be sitting on the market as unsalable items
the way they are in Dallas. And I'm worried about the LDCs who I
think will react quite adversely to a major increase in interest rates
in the United States economy and will be very, very sorely impacted.
So, I just don't have the courage to move as aggressively as an
aggressive fellow like Lyle Gramley would at this stage. Therefore, I
If we take that
come down to alternative B as not being unreasonable.
in terms of the aggregates, that's not a modest ambition for the
The reason that M1 is as low as it is in alternative
second quarter.
B for the second quarter is that there's one relatively low month, and
It's not a slow rate of expansion as
that may or may not materialize.
you look over the quarter as a whole; it's going to be a rather hard
I'm particularly impressed by Steve's comment,
thing to accomplish.
which I happen to believe, that after a quarter where velocity
increases sharply it's more likely that in the next quarter velocity
won't increase so sharply because the money supply increases a lot
I think the danger is going to be that
more than it did before.
whatever of these alternatives we set, money is going to run higher.
That's why I questioned Jerry on "strongly resist" because to resist
strongly, if we really mean that, could mean very high interest rates
I think we need to lean and lean
by the end of the second quarter.
pretty hard and look at the aggregates more seriously than we have
before, but I don't want to lean all that hard.
In sum, I would buy alternative B; I certainly wouldn't buy
anything tighter than alternative B for the period to come.
Considering what I think may happen, 11 percent on the funds rate
seems to me too much of a near-term constraint that will require a
telephone call and I would use the full funds rate range. On

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borrowings, $1 billion seems okay to me; $1.2 billion seems awfully
high. We're starting to move up toward the levels of borrowing that
are associated with fairly tight money periods as we get well above $1
billion. And, what's that rate, Henry?
I don't know what to do about
the hippopotamus rate!
MR. WALLICH.

50 basis points for $200 million on borrowing.

MR. PARTEE. That's not a decision that can be made here or
that can be made readily. There are lots of strategy questions
involved in [the discount rate decision], so we shouldn't really talk
about it.
CHAIRMAN VOLCKER. There are a couple of outliers or people
not heard from yet, anyway.
VICE CHAIRMAN SOLOMON. Well, in order not to be repetitious,
my bottom line is alternative B.
I would strongly oppose recasting
the directive in the direction of automaticity. And I would assume
that the Board of Governors in its wisdom, if it did decide on a
discount rate hike, would lower the borrowing assumption somewhat.
I
have no problems with alternative B.
CHAIRMAN VOLCKER.

Mr. Guffey.

MR. GUFFEY.
I would select a "B+", which would be something
with the following specifications:
7 percent growth for M1; 8-1/2
percent for both M2 and M3; and a borrowing level of about $900
million. And if there were a discount rate increase, I would suggest
a drop in the borrowing level to about $700 million to accommodate
some of that upward pressure on the funds rate.
CHAIRMAN VOLCKER. I think we can go into [an executive]
session now. I have some wording that Steve or Mr. Bernard might
distribute. This is no great attempt to be radically different but it
seemed a little more coherent to me than some of the others.
It accepts the notion of putting the aggregates first.
That may be
ducking a bit, but it reflects the comments made by a number of people
that this is probably a time when we don't want to be too precise
about knowing where we want interest rates, within limits.
I don't
want to prejudge where the limits are put.
I'd start off with that
foot rather than the other.
It's fairly symmetrical.
I put in a
mention that we would want to take some account of the rate of credit
growth, which I think is of concern. A number of people have
mentioned it.
So far as the numerology and assumptions are concerned,
clearly the center of gravity and indeed the majority is toward "B"
whether one takes the limited group or a wider group.
But there are
feelings on both sides of that in varying degrees.
I rather share
many of the feelings that Governor Partee just expressed, including
the possibility that if the economy is as strong or stronger than Mr.
Kichline has suggested, there may be considerable difficulty whether
We could run into a deviation in the real
we take "A," "B," or "C."
aggregates from the assumed aggregates that will overshadow any finetuning of whatever precise numbers we put down. And presumably we
would have to respond to it if the economy were all that strong and
the aggregates were all that high. But, based on past patterns, we
could get a high month or two.
I have no projection of that sort but
I just know that that could happen. Even if the economy goes toward

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the lower side of Mr. Kichline's projection, which I think is less
likely, I still think it's possible that we could have a rather high
money figure--or rather that we're much more likely to be faced with
that contingency than the opposite. But that remains for the future.
As I say, I suspect that to a degree that will overshadow any half
point or one point differences in the numbers we put down here.
There might be some
MR. BLACK. Mr. Chairman, one comment:
It looks as if there might be a seasonable
[complication] in April.
adjustment problem on M1; that came in so weak last year and that was
more than made up-CHAIRMAN VOLCKER. I think we have a seasonal adjustment
I don't think you have to worry about
[problem] in M1 every month.
I trust that number about as much as--I was going to say my
April.
grandmother, but I would trust her if she were alive.
I think we're going
MR. BLACK. That's precisely my point.
to see a number we really can't trust in April--maybe even more so
than in most months.
CHAIRMAN VOLCKER.
MS. TEETERS.

I don't trust them much in any month.

If you don't trust M1, why are you putting it

up front?
VICE CHAIRMAN SOLOMON. We're not only putting it up front
but also we have gone back to a monetary aggregates directive.
MR. RICE.

It's not just M1; it's M2 and M3 as well.

CHAIRMAN VOLCKER. I have no particular feeling about where
I put
We can put it the way it was before.
M1 is put in this list.
it there because I think that's basically what we are concerned about.
I trust it
I'm talking about not trusting it in narrow one percents.
if it shows a big increase or a big decrease. And it gives us the
best excuse in a real sense and in an excuse sense.
But I think in
this particular situation if these aggregates continue to run high, we
should in substance react to them. I just don't think my judgment is
so fine as to know what we should do when it gets down to the + or one percent area [of differences in growth rates].
VICE CHAIRMAN SOLOMON. But the bigger problem is the real
It's not so much where
economy; that's what we're concerned about.
the monetary aggregates stand that we are all concerned about in the
end.
I think you're leading us right back in the direction of
automaticity in this directive.
CHAIRMAN VOLCKER. I'm not talking about automaticity in the
sense that I take it Mr. Black was talking about.
MR. PARTEE. This is really reserve restraint.
algorithm of the amount of overage.

It isn't an

VICE CHAIRMAN SOLOMON. Yes, I understand. You know, the
market tends to over-interpret, and I think the changes in the wording
Okay, we put
of the directive are reinforced by putting M1 in front.
M1 further back. But I think this will tend to awaken expectations

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that we may once again be on that roller coaster. Nobody is going to
believe necessarily that this is the last ride, particularly if the
economic data continue relatively strong. And then there would be
expectations of [rates] going to very high levels.
I just think it's
disturbing to move back in that direction. I realize we haven't moved
back 100 percent in terms of the way the short run feeds back with the
nonborrowed reserve paths.
CHAIRMAN VOLCKER.
MR. MARTIN.

Where is the old directive?

The old directive also put the aggregates up

front.
MS. TEETERS.

No, it didn't.

It's the same as variant II on

page 13.
VICE CHAIRMAN SOLOMON.

Right.

CHAIRMAN VOLCKER. I have a little technical problem, but
it's a very great problem, in starting out with reserve pressures,
which is partly what convinced me [to start with the aggregates].
I
don't know how we'd describe the current degree of reserve pressures.
It's a meaningless concept. Well, the concept isn't meaningless but
if you look at borrowings or if you look at net borrowed reserves or
free reserves, you're going to get entirely different answers for the
month of March. You get borrowings up to what--$1 billion?--with net
What does maintaining the
borrowed reserves probably a minus.
existing degree of reserve pressure or increasing it or decreasing it
mean in that circumstance?
VICE CHAIRMAN SOLOMON.
your second sentence?

Well, what does it mean then to have

CHAIRMAN VOLCKER. That's precisely why I put the second
sentence in brackets. Maybe we can drop the whole thing.
VICE CHAIRMAN SOLOMON. No, I mean the third sentence where
What does that mean then?
you have "greater reserve restraint."
CHAIRMAN VOLCKER. Greater from wherever we start; we don't
have to describe where we start. The problem exists. But at least
one avoids it in the directive by dropping the second sentence.
VICE CHAIRMAN SOLOMON. Well, I don't think that is a strong
enough reason to convey such a strong [unintelligible] impression,
which is what I think will be conveyed by recasting it.
MR. GRAMLEY. Well, because of this problem of not knowing
how to interpret borrowing numbers, I'd like to hear--when we get to
the point of getting down to specifics--what we're going to mean with
this directive or any other in terms of how far we're willing to let
I would not be shocked to contemplate a federal
interest rates go up.
funds rate of 11 percent.
I take it that others would be.
But if the
idea is to run a monetary policy which in effect says that what we've
done so far is let the federal funds rate and associated rates of
interest go up in recent weeks and we will just hold them there, I'm
not going to be happy with that.
I just don't think that's the way we
But I'd like to have a translation.
ought to go.

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CHAIRMAN VOLCKER. Well, I'm just looking over what people
I don't think anybody, except maybe Governor Teeters, has
said here.
said that they wanted a lower upper limit--for whatever that means,
I don't
since we waive it when the rate gets there--than 11 percent.
know about Governor Teeters. Nobody else who spoke to that point
directly--and there were some who did not--[said less than 11
percent].
MR. BOEHNE.

I spoke to it.

MR. PARTEE.

Yes, I didn't want to--

MS. TEETERS.

I don't think I spoke to it, but I--

CHAIRMAN VOLCKER.
percent ceiling.
MR. BOEHNE.

Yes.

CHAIRMAN VOLCKER.
an 11 percent ceiling.
MR. BOEHNE.
MS. TEETERS.
percent ceiling.

I have you marked down as saying an 11

That's what I just said.

Oh, below.

Nobody was below

Okay.

I didn't speak to it, but I would accept an 11

CHAIRMAN VOLCKER. There is disagreement above that point,
but nobody said less than 11 percent. Well, if it's nothing, we can
get to the wording of the directive. Maybe we have the cart before
the horse and people are going to want different emphases, which are
going to have to be blended in the directive. That's the fact of
life. But in terms of the specifications, I'll take them up backwards
starting with the funds rate. Apparently we have established that
Some people
nobody wants to put the upper limit below 11 percent.
want to put it above that. Well, the limit is irrelevant, I guess.
If we keep the 4 point range,
What we had before was 6 to 10 percent.
7 to 11 percent would be the minimum that anybody is talking about.
And a lot of people are talking about [a higher range], but I don't
Is that generally acceptable or not?
know if those are outliers.
MS. TEETERS.
MR. PARTEE.

Keep the 4 points.
I think it ought to be higher.

MR. GRAMLEY.

I do too.

MR. ROBERTS.

So do I.

CHAIRMAN VOLCKER. Well, quite a few people have expressed
the opinion that it ought to be higher and the question is whether-VICE CHAIRMAN SOLOMON. I don't feel strongly whether it's 7
I'm always bothered by 1/2
to 11 percent or 7-1/2 to 11-1/2 percent.
points.
MR. BOYKIN.

8 to 12 percent.

-74-

3/26-27/84

VICE CHAIRMAN SOLOMON.
new ceiling is going to mean.

The markets may overread what that

CHAIRMAN VOLCKER. I myself would think 8 to 12 percent is
We may be under pressure to release this
too high in the directive.
I don't intend to do
directive early. You might have that in mind.
so, but--.
VICE CHAIRMAN SOLOMON.

What do you mean?

What kind of

pressure?
I intend to
CHAIRMAN VOLCKER. Congressional pressure.
resist that but I can't guarantee it. My own feeling is that putting
down 8 to 12 percent and having this come out will be interpreted as a
much stronger step than we would want it interpreted. Knowing that if
we use something less and get to that point and think the situation
justifies going higher, our record has been 100 percent, I'd say that
we've never felt constrained when it came to that point.
What is the needle on the
MR. BOEHNE. What is the guide?
I
I think Lyle has put his finger on a good point.
compass here?
don't think anybody--well, some people may--would put a lot of faith
in M1 or M2 for any given month if we don't know what reserve
restraint or ease means.
CHAIRMAN VOLCKER. Maybe we can define what it means for us,
but it's a little hard to describe to the market simply [in terms] of
putting out the directive.
It seems to me
MR. BOEHNE. What is the meaning of this?
that we have more or less been using the real economy with some sense
of what reserve restraint means. That's pretty messy, but from my
point of view at least I have some sense of what it means and what
But I don't really know what using M1, M2, and M3
causes changes.
means.
Is it a different ball game than we've been playing over the
last few months?
CHAIRMAN VOLCKER. I don't know what ball game you think
we've been playing in the last few months, but I don't see much
difference here, frankly. It says we're going to set a restraint
level and we're going to stick to it depending upon how these
aggregates go, but we are going to look at what is going on in the
I think that's what we've been saying.
economy before we change it.
MR. MORRIS.

Except that you have promoted M1.

CHAIRMAN VOLCKER.

Well, that's a separate decision.

I think there is a difference between
VICE CHAIRMAN SOLOMON.
starting off the way the Chairman has been talking about on the degree
of reserve restraint and then saying the Committee believes these to
be consistent with intermeeting monetary targets of X and Y or
whatever, and putting it this way. The substance of what we do may
not be different, but I think it will be the impression in the markets
that we are returning toward much more emphasis on the monetary
aggregates, and more volatility in interest rates then becomes a
possibility. And I don't think that's a helpful thing at this time.

-75-

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CHAIRMAN VOLCKER. I think you're back at the wording of the
directive. Let me see whether we can sort this out.
VICE CHAIRMAN SOLOMON.
live with either 7 or 11--

Well, in substance I said I could

CHAIRMAN VOLCKER. I understand. I'm just trying to sort
I sense that there's a lot of
this out.
Let me try 8 to 12 percent.
Is that true?
resistance to that.
MR. MARTIN.
MS. TEETERS.
MR. BOEHNE.

I would not go along with 8 to 12.
I would not go along with 8 to 12.
I wouldn't either.

VICE CHAIRMAN SOLOMON & MS. TEETERS.

Do you want a show of

hands?
I
I don't think we need a show of hands.
CHAIRMAN VOLCKER.
think as a practical matter we are between 7 to 11 percent and 7-1/2
to 11-1/2 percent.
MR. CORRIGAN.

The way this directive is written, Mr.

Chairman--

CHAIRMAN VOLCKER.

Let's resolve the numbers.

MR. PARTEE.
I think [we should use] 7-1/2 to 11-1/2 percent.
Somehow 12 percent does sound awfully rich--doesn't it?--although it
It's just a culture shock.
may not be.
MR. BOEHNE.

It's called rate shock!

MR. MARTIN.
We were at 9-1/2 percent a long time.
a little arithmetic one can do vis-a-vis 11-1/2 percent.

There is

MR. GRAMLEY.
I would go back to the comment the Chairman
made earlier. We are living in a world in which interest rates have
become the cutting edge of monetary policy.
MR. PARTEE.

Yes.

In a world of deregulation, they have to move a
MR. GRAMLEY.
lot more.
I know that causes potential damage here, there and
elsewhere in terms of the LDCs, the thrifts, and so on. But the point
is that if we want to get any restraint on the economy we have to let
interest rates go up.
And in this kind of world we have to let them
If we sit here and let these interest
go up more than we used to.
rates creep up by 1/4 percentage point per FOMC meeting, we are never
going to get the job done.
MR. PARTEE. A rate of 11-1/2 percent, though, Lyle, is a
reasonable amount above where we are at about 10-1/4 percent. And as
the Chairman points out, we never have let that stop us if in fact
something were going on that called for more restraint.

-76-

3/26-27/84

point.

MR. BOEHNE.
I don't think we're letting it go up 1/4 of a
Three weeks ago the funds rate was around 9-3/4 percent.
CHAIRMAN VOLCKER.

It wasn't very long ago that it was 9-1/4

percent.

1/4 point

MR. BOEHNE.
It's not as if we're just moving along here at
[per FOMC meeting].

MR. GRAMLEY. My point, Ed, was that the rate has been close
to 10-1/2 percent in recent days and if we have a ceiling of 11
percent, that tends to leave no room to operate unless we say the
ceiling doesn't have any meaning. And if it doesn't have any meaning,
then I don't know why we'd want to put that kind of ceiling on it.
It
just leaves almost no room to maneuver at all starting from where we
are now, if we have a federal funds range with an upper limit of 11
percent.
If it's going to mean anything at all, then it's very, very
restraining in terms of the amount of interest rate movement we will
contemplate.
If it doesn't have any meaning, then it's just purely
for publicity purposes, so then let's decide among ourselves what we
really think it ought to be and keep that a secret.
MR. BOEHNE.
meaningless move.

I wouldn't consider 50 to 75 basis points a

VICE CHAIRMAN SOLOMON.
I think Lyle is right that we
probably need a little more movement and, therefore, even though I
could live with either I would have a slight preference for 7-1/2 to
11-1/2 percent myself.
MR. GRAMLEY.
MR. CORRIGAN.

I could live with that.
I'd join that.

CHAIRMAN VOLCKER. We'll go on to the next numbers. Assuming
we are somewhere in the neighborhood of "B," does anyone have a more
felicitous series of numbers than "B" pure and simple?
And one that
they also think will command wide support?
MR. GRAMLEY.
I was going to offer a series of numbers, but
now with that stipulation--.
MR. PARTEE.

I think they look pretty good.

VICE CHAIRMAN SOLOMON.
I think they're fine.
MR. PARTEE.
pretty happy.

If we don't take them too seriously,

If we could actually come out there, I'd be

CHAIRMAN VOLCKER. Are there people who can't live with "B"
as put down in the Bluebook?
MR. BOYKIN.

I would prefer 6, 7-1/2, and 8 percent, Mr.

Chairman.
MR. GRAMLEY.

I would go with Bob.

-77-

3/26-27/84

MS. HORN.

I'll go with that.

CHAIRMAN VOLCKER.

Those in combination are awfully low

numbers.

MS. HORN.

Lead off with 7-1/2 and 8 percent, not 6 percent.

MR. CORRIGAN. In terms of the numbers, could I ask my
Do you interpret the third sentence as a symmetrical or
question now?
asymmetrical sentence?
MR. PARTEE.

It's symmetrical.

CHAIRMAN VOLCKER. I interpret it as a symmetrical sentence.
The reality I don't consider very symmetrical, but I consider that
sentence symmetrical.
MR. BLACK & MS. HORN.
CHAIRMAN VOLCKER.
as written.
MR. MARTIN.

Somewhat.

Well, I guess it's slightly asymmetrical

Somewhat.

MR. CORRIGAN. This is the area where I have the greatest
worry. Whether we use Mr. Boykin's numbers or those in alternative B
doesn't matter all that much to me because I don't have the same
But I must say
problems with the numbers that everybody else has.
that I would really get scared if the outcome for money and credit
growth in the second quarter were in any material way above the
In other words, I really think of those "B"
alternative B numbers.
numbers as a ceiling. And if we got too far beyond them, I think we'd
have a very, very difficult problem on our hands--more difficult than
the problem we have on our hands today.
MS. TEETERS. What sort of velocity assumption are you
That's vital here to what you think the GNP is going
making, Jerry?
to be.
MR. CORRIGAN. Well, as I've said many times, Nancy, I think
the economy is likely to be stronger rather than weaker in the very
near term. Unfortunately, I also think if that's true, that the
longer-run implication is that the economy is going to be softer
because we're going to get more interest rate pressure coming from the
demand side of the economy. So, by implication I am suggesting that I
think the velocity factor in the second quarter could be larger than
what is implicitly built in here.
But if you rigidly take these numbers, you
MS. TEETERS.
It's not
begin to get all sorts of volatility in interest rates.
worth the price.
MR. CORRIGAN.

I don't want to do that, Governor Teeters.

VICE CHAIRMAN SOLOMON. When you say you want asymmetrical
wording, what you are really saying is that you want a stronger
interest rate response if there is continuing excessive strength in
the economy and the monetary aggregates.

-78-

3/26-27/84

MR. CORRIGAN.

That's correct.

In just a presentational sense, Jerry, if you
MR. BOYKIN.
accepted the numbers that I'm suggesting, the asymmetry is less
You could get it more the way it is worded if you just
important.
reduced the numbers.
MR. CORRIGAN. Again, I'm such an agnostic about these
numbers that I don't get visibly moved by 1/2 point differences in the
numbers.
The question that I'm concerned about, regardless of whether
What happens if we get
we use your numbers or the "B" numbers, is:
into the quarter and we're running ahead of them?
MR. BOYKIN.
MR. CORRIGAN.

Oh, you're talking substance now!
Yes.

It seems to me that the gut issue here is how
MR. BOEHNE.
much you load the dice in terms of higher rates. When you start
moving the numbers toward "C" and when you have an asymmetrical
presentation and an 11-1/2 percent funds rate limit, you might as well
vote for moving the funds rate up to 11 percent.
It wouldn't load it, though, toward a higher
MR. PARTEE.
I understood Jerry to say he was more concerned about getting
rate.
indications of a significant overshoot of these targets than he is
about a significant undershoot. And I think I agree with him on that.
VICE CHAIRMAN SOLOMON. Yes, but even if you're more
concerned as I think we all are--that's where the risks are--why does
that argue necessarily for an asymmetrical articulation in the
directive?
MR. PARTEE. We've often used it before.
would throw it out now.

I don't know why we

MR. GRAMLEY. There's good reason for asymmetry if the risks
That
are stacked on the side of stronger growth and more inflation.
way we don't expose ourselves to a circumstance in which, even though
the economy is going along fairly strongly, we for some reason have a
downward shift in money demand and overreact and let too much ease
take place. An asymmetrical arrangement makes very good sense under
present circumstances.
I would agree with you if we were
VICE CHAIRMAN SOLOMON.
simply going to react mechanically to an easing of money growth. But
I'm interpreting that there's not going to be a substantive change in
our policy [approach]--that we're still going to be looking at money
in the context of the business expansion and inflationary pressures.
If we were going to be reacting more to money
But I would agree:
growth in the future, then we have to word it asymmetrically for the
reasons that you just indicated, Lyle.
I think there is a subtle difference in how we
MR. BOEHNE.
phrase this. We can be quicker on the trigger on the up side or we
Where I come out is
can be slower on the trigger on the down side.
that I can't imagine a situation in the next month where one would
But at the
Well, I guess I could imagine it.
want to lower rates.

-79-

3/26-27/84

same time, I don't want to build in some automatic forces that are
going to push rates up.
MR. PARTEE.

I agree with that.

MR. CORRIGAN. I don't want the automaticity either.
But I
don't want to be sitting here in June looking at a second quarter in
which money, the economy, and everything else are stronger than we
think they are going to be--stronger than we know they should be.
MR. PARTEE.

You may well have to do that.

We can't really--

MR. CORRIGAN. I think we can try to minimize the risk of it.
We would really be in the soup then.
MR. PARTEE.
If that were the case, then I think we should
have moved.
But you could have a stronger money quarter, a stronger
GNP quarter, and everything, but-CHAIRMAN VOLCKER. Well, let's get back to these numbers.
I
would feel a bit reluctant, to say the least, to lower the M2 and M3
numbers any further.
We have said all along that we expected to be in
the top part of those ranges.
I think on M1 we can horse around
between 6-1/2 and 6 percent, but it makes little difference.
I think
it will make no practical difference in the way we operate, but this
gets to be a visual point.
MR. BOEHNE. What if for M1 we said something like "around 6
to 7 percent"?
That [includes] the 6 and the 6-1/2 but it doesn't
make it sound quite as precise as 6-1/2 percent.
MR. GRAMLEY. Do we mean 6-1/2 percent by that?
Would we
accept up to 7 percent before we would react?
Then what do we do
with-CHAIRMAN VOLCKER. That doesn't worry me terribly, but I
don't know whether other people like it.
VICE CHAIRMAN SOLOMON.
MS. TEETERS.
hit a target?

Just as a point of information:

CHAIRMAN VOLCKER.
MS. TEETERS.

I wouldn't.
Have we ever

We came pretty close this time.

Have we ever hit a target on a short-term

basis?
CHAIRMAN VOLCKER.

against

Within 1/2 of a percent?

MR. AXILROD.

On M1 do you mean?

MS. TEETERS.

Yes.

MR. AXILROD. Well, it's about 8 percent over the 3 months as
[a projection of about] 7 percent.
MR. CORRIGAN.

Well, the fourth quarter M3 has been--

3/26-27/84

VICE CHAIRMAN SOLOMON. I think there probably is a majority
for these numbers. Maybe you ought to get an informal showing.
CHAIRMAN VOLCKER. I was going to suggest that.
Let's assume that for the moment.
very close to that.

It seems

MR. AXILROD. Mr. Chairman, maybe I answered Governor Teeters
The weekly figures we're
wrong. We are within the long-run cone.
going to publish will be below the weekly figure consistent with the
[target].
If the number that we're not publishing--the one we have a
tentative estimate for at the end of March--holds up, it will be above
the long-run cone. But month-to-month, on average it's just below.
MR. MARTIN.

The 7 percent that you're estimating would take

us above?
MR. AXILROD. No, it's all right on the month; the end of the
It's just another way
month is ticking up, if that number holds up.
of saying that it's very near the top.
CHAIRMAN VOLCKER. Let me move to the borrowing level where I
I suspect that
think there is, in fact, a bigger range of opinion.
reflects in part that we don't know whether where we are is because of
contemporaneous reserve requirements or other expectational factors.
We have a classic case in this two-week period of the way one would
think things might happen frequently with a two-week reserve
adjustment period. Everybody thought that perhaps [markets] were
getting tighter earlier in the period and they borrowed a lot.
They
built up excess reserves and now they end up the period with big
In previous weeks, I
excess reserves and the market is getting easy.
This used to happen with the weekly
guess the opposite happened.
reserve pattern and now it can happen with considerably more amplitude
because [banks] have a two-week period before they get caught up
short.
So, those who would like to calibrate the federal funds rate
in their thinking down to a gnat's eyelash have a bit of a problem. I
don't know what this means for the level of borrowings this week and
for the federal funds rate, particularly during a period when it might
be higher [initially] and then turn out to be lower at the end or vice
versa, depending upon the pattern during the period.
Isn't what we're seeking a borrowing level that
MR. MORRIS.
will be compatible with a 10-1/2 percent funds rate?
CHAIRMAN VOLCKER. Well, I'm not sure.
the case just to get an analytic [framework].

Let's assume that's

MR. GRAMLEY. Could we just expand the range of estimation?
What is the borrowing level for 11 percent, too, so I know where
another option might be.
MR. PARTEE.
MR. GRAMLEY.

These are educated guesses of the staff?
Yes.

CHAIRMAN VOLCKER. That's what I'm about to ask.
sure I have a great deal of faith in them.

I'm not

-81-

3/26-27/84

MR. AXILROD. We think a billion and a half will get a funds
rate close to 11 percent, with all the uncertainty.
CHAIRMAN VOLCKER.

Without any change in the discount rate?

MR. AXILROD.
Without a change in the discount rate.
In the
Bluebook, we said borrowings of $1 billion or a little more get a
funds rate of 10-1/2 percent.
If you look at the experience in the
last couple of days, with the funds rate dropping off fairly
substantially, that will change market attitudes a little and I would
be inclined to say--Peter may disagree--that it might take a little
over $1 billion to get 10-1/2 percent. And if you used $1 billion in
borrowings, I would feel safe in thinking of a wider range in the
funds rate--10-1/8 to 10-1/2 percent or something like that.
MR. STERNLIGHT.
I agree with a little over $1 billion--say,
$1.1 billion--for 10-1/2 percent.
I think borrowings of $1-1/2
billion would produce more than 11 percent [on the funds rate].
MR. AXILROD.

Yes, that's what we said:

11 percent or over.

CHAIRMAN VOLCKER. Well, I would take just the opposite point
of view. The federal funds rate, with a billion dollars of excess
reserves--though not during the early part of the period and I don't
know what it will average--averaged well over 10 percent. And we will
have a billion dollars or slightly more borrowings and we happen to
have a billion dollars worth of excess reserves.
If we have $650
million of excess reserves, I don't know what we will get.
MS. TEETERS. What role do we see excess reserves playing?
Are they precautionary?
Or are they an accident because of CRR?
MR. AXILROD.
In this two-week period I think the market
created them on its own, not knowing they were doing it in effect.
That is, they borrowed. We were somewhat behind the NBR path much of
the time.
Now we're actually slightly over it and the market borrowed
and generated excess reserves in addition to the nonborrowed reserves;
and now if they end up with excess reserves they don't want, those
reserves have to come out.
Before, the level of excess reserves of
around $600 to $650 million was probably fairly close to what they
wanted, given the prevailing market conditions.
CHAIRMAN VOLCKER. During the introductory period of CRR--we
can go back before that because we had a little change in reserve
requirements there--the average level of excess reserves was around
$400 million.
MR. AXILROD.

I think it was a little higher than that.

MR. STERNLIGHT. It was $600 million in January and $500
million in November and December.
MR. MORRIS.

So we could see a low funds rate tomorrow?

CHAIRMAN VOLCKER.

Oh, I think it will be lower.

VICE CHAIRMAN SOLOMON. But won't they be influenced by the
carryover?
If they see that they have run very large excess reserves,

-82-

3/26-27/84

won't they be inclined to avoid such high excess reserves the
following period because of the carryover?
MR. AXILROD.

That's the idea, but we haven't seen much

effect.
MR. STERNLIGHT.

We don't have experience with that.

MS. TEETERS. Well, excess reserves ever since October of
1979 have been trending upward and I interpret that as security
against erratic Federal Reserve behavior.
It seem to have more to do, Governor
MR. AXILROD. No.
Teeters, with the fact that country banks now don't have with us the
required reserves that they need to hold. They leave their reserve
Some even hold
balances in there for a while for whatever reason.
excess clearing balances, which get into our excess. All that is a
little irrational, but we can account for $50 to $100 million dollars
of those sorts of things.
VICE CHAIRMAN SOLOMON. Weren't they also influenced by
widespread expectations that rates would rise or the possibility of a
discount rate rise?
MR. STERNLIGHT.

That probably induced some of the borrowing.

VICE CHAIRMAN SOLOMON. And I think that influenced the level
I don't think we should assume, Paul, that it's
of excess reserves.
going to continue at these levels.
CHAIRMAN VOLCKER. I don't assume that it is going to
continue at these levels; I don't know all the reasons that
contributed to it but I certainly would not assume that it will
continue.
I should be clear, Mr. Chairman, when we said a
MR. AXILROD.
billion dollars or more borrowing gets you a 10-1/2 percent funds rate
that we were, of course, assuming excess reserves on the order of $550
That was the assumption within that. We were
to $600 million.
assuming net borrowed reserves of $400 to $500 million.
MR. GUFFEY.

And that's consistent with the last two-week

period?
MR. AXILROD.

Yes.

Actually, I'm assuming it could even be

lower.
I would guess that as well as people can
CHAIRMAN VOLCKER.
understand this--and I don't think any of us can be very sure--that
what many people are talking about as a center point is a billion
dollar level of borrowing with that much lower excess reserve
I'll say $500 million just to put a round number down,
assumption.
which [unintelligible] for this past week in a total reserve position
sense is tighter than anything we have had by a considerable margin.
tighter than what we've had. You can
Let me take out the adjective:
I assume that's more or less what
interpret the adjective yourself.
people are talking about but I don't have any great judgment as to
whether that means a 10-1/4 percent funds rate or 10-1/2 percent or

3/26-27/84

-83-

10-3/4 percent. To some degree I care, but if it meant a greatly
easier federal funds rate, I don't think it is consistent with the
substance of what we're talking about and it would be inappropriate.
MR. AXILROD. As a technical point, I should mention that
quarter-end and mid-April we could get some fairly high rates relative
to even this average.
That's just in passing.
CHAIRMAN VOLCKER. Let me just try this:
With all the
uncertainties associated with it and subject to the risk that we may
find out we're crazy but within limits, we're talking a billion
dollars worth of borrowing and assuming something like $500 million in
excess reserves, which is less than we've had at any time since
contemporaneous reserves. That number may be too low.
[Unintelligible] Mr. Axilrod?
MR. AXILROD. It is less than we've had in quite a while.
That's a shade below the October-to-December average.
CHAIRMAN VOLCKER. Let me say $1 billion of borrowing, and
$600 million of excess reserves and see how that goes.
then?

MR. MARTIN. Isn't the federal funds rate under 11 percent
You quoted 10-3/4 and 10-1/2 percent.

CHAIRMAN VOLCKER. Well, I assume. But it's nothing more
than an assumption. I'll accept the notion just hypothetically that
if one had to guess, it means a federal funds rate in the 10-1/4 to
10-1/2 percent area.
MR. MORRIS.
And this would be revised to reflect any
discount rate changes?
CHAIRMAN VOLCKER. I'll get to that question.
Let's assume
just for purposes of discussion that it's in the absence of that.
Well, let me get to that.
I'll just raise a question:
If the
discount rate went to 9 percent, is that assumption still good?
MR. GUFFEY.

Not if you've mentioned borrowing at $1 billion.

CHAIRMAN VOLCKER.
opinions about things.

Different people may have different

MR. WALLICH. Only on the condition it seems to me that one
billion dollars borrowing is right.
For that reason I like your
paragraph.
MR. PARTEE. You were asking a technical question, weren't
you?
I don't know. The funds rate has gone up a bit relative to the
discount rate.
Technically, there would be room for it to move a half
point and not have a much different funds rate, I should think.
But
of course, there is the expectational [element].
We have an 8-1/2
percent discount rate as against a 10-1/4 to 10-1/2 percent funds
rate.
I would submit that a 9 percent discount rate would not-VICE CHAIRMAN SOLOMON.
funds rate?

It's not going to change the fed

3/26-27/84

MR. PARTEE.

-84-

It would not have to, except the expectational--

VICE CHAIRMAN SOLOMON.
MR. PARTEE.

Well,

I think it will.

Peter?

Let's get some views.

MR. STERNLIGHT.
I think that the funds rate did have some of
that expectational element.
But I still think that much of the
discount rate would be translated into a higher funds rate unless you
did something to borrowing.
MR. PARTEE.

Do you agree with that,

Steve?

MR. AXILROD. Given the gap we now have [between the two
rates], I would think it might have less effect than maybe Peter is
inclined to believe, but we will find out if the change occurs.
CHAIRMAN VOLCKER.
I think the answer is:
We don't know how
much of that expectational influence is in the funds rate already.
MR. AXILROD.
I think it got to 10-1/2 percent on the
expectation of a 9 percent discount rate.
So it may be that you will
have 10-1/4 percent and it will move a little.
CHAIRMAN VOLCKER.
I can't quantify this but I think it is
fair to say that at the minimum everybody around this table is not
talking about giving the market some false sense of easing at this
stage and that, whatever this [borrowing] number is, it ought to work
out that way. Maybe there will need to be a little flexibility to
assure that result.
MR. MARTIN.
I think you're right, Chairman. But isn't there
some difference of view here as to how much tighter or less
accommodative [we should be]?
CHAIRMAN VOLCKER.
I made the minimum statement that I don't
think anybody wants to misspecify here in the sense that it gives the
market some notion that, in the newspaper parlance, there is an easing
of policy.
MR. WALLICH.
confusing.

That would be contrary to expectations and very

CHAIRMAN VOLCKER. Let me just say that whatever [borrowing]
number we arrive at here, I think we need some flexibility to manage
things so that at the minimum that impression is not created.
MS. TEETERS.
On the other hand, with some exceptions, I
don't think there's strong sentiment to ratchet the rate rapidly.
CHAIRMAN VOLCKER. That is an entirely different question. I
don't want to disagree.
But could I at least assume by my very modest
statement that if by some development the borrowing turned out to be
quite consistent with a 9-3/4 percent federal funds rate, that we
haven't got enough borrowing?
MR. GRAMLEY.
this.

Well, I think the market is expecting more than

-85-

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CHAIRMAN VOLCKER.
to go beyond.

Now, that's the other question--how much

MR. GRAMLEY. I think we're in very serious danger of losing
credibility as an agency that is trying to hold down inflation.
It
seems to me that the numbers have been coming in very strong on the
real economy. We have been looking at money and credit numbers that
are very large in any kind of historical perspective. We are doing so
in the second year of a recovery when expectations have been greatly
exceeded. We are doing so in the context of a fiscal policy that is
the most stimulative we've ever seen. I just don't know how we can
talk about making sure we don't ease.
The situation calls for more
than that.
It calls for more, in my judgment, than just confirming
for the market the fact that interest rates have gone up in recent
weeks.
MR. MORRIS. Also, Mr. Chairman, with a 2 percentage point
spread between the discount rate and the funds rate, I think a
discount rate increase of only a half point would be interpreted by
the market as acting a little tentatively.
MR. PARTEE.

How about a quarter point?

MR. MORRIS.

I'm talking about 1 point.

We have a 2 point

spread.
VICE CHAIRMAN SOLOMON.
what the market is going to--

I don't think so.

A half point is

CHAIRMAN VOLCKER.
I will tell you:
In this particular city a
half point will be an explosion. It will carry a certain message.
MR. MARTIN.

And in some foreign capitals.

VICE CHAIRMAN SOLOMON.
In fact, a quarter point move would
carry an interesting message.
If we went back to quarter point moves,
it would be interpreted as meaning that we're not going to have a lot
of volatility in the next year--that basically we are thinking in
terms of more cautious moves and that that will be the likely pattern
over the next year.
I don't think we want that interpretation either,
for the reasons that Lyle has pressed so strongly.
I think a half
point is-CHAIRMAN VOLCKER.
I think I have established a bare minimum
on the substantive objective for the borrowing, but the question is
whether we start with this.
We certainly [can] raise it.
This may
well be consistent with a tightening.
It is the strongest net
borrowed reserve position we will have had.
VICE CHAIRMAN SOLOMON. And you do have the flexibility
you're going to need in case we are wrong on the borrowing and for
some reason the fed funds rate that falls out of the borrowing
assumption is on the down side.
I think that's pretty clear.
CHAIRMAN VOLCKER.
That is right. And
has the flexibility to raise the discount rate.

[the Board]

obviously

-86-

3/26-27/84

MR. WALLICH. Some tightening I think has to come or [the
funds rate will] fall below expectations.
It doesn't have to be a
very large one, and I could see that there would be another step some
time in the future. But I don't think we can just stabilize things
because the rates have gone up somewhat.
I don't think anybody is arguing that we should
MR. MARTIN.
do that, Henry. And that may be the bare minimum. I remind the group
that the staff forecast is still geared around a statement that the
risk of error is on the down side not on the up side, and there is
considerable merit in my view in that position. So, we do need
I haven't any problem with a
flexibility in both directions.
directive--either draft of the statement--that emphasizes the
tightening side and not the more accommodative side, but I think both
sides need to be in there.
MR. PARTEE.
I would agree with Pres.
I think this is
tending to go too far.
Who is it that we are trying to satisfy?
The
gnomes of Zurich?
There are a lot of people who don't want to see a
tightening.
As a matter of fact if you went out and took a poll, you
would find that a vast majority of the American public would be
opposed to a tightening.
MR. WALLICH.

But they expect it.

VICE CHAIRMAN SOLOMON. Chuck, I was telling Paul that my
board of directors had indicated already that we should not tighten -not raise the discount rate--in their view until we actually see
increased inflation. They argue that at this point it's too early to
They want us to wait until we actually see
take away the punch bowl.
it; I say we may be too late then.
MR. PARTEE.
We heard a lot of expressions like that as we
went around the table.
CHAIRMAN VOLCKER. Let me just suggest that there is going to
be no formulation that is going to take care of all the contingencies
that I see in the next two weeks much less in the period until we meet
again in 8 weeks.
In the interest of testing:
The minimum sense that
I have is that we don't want to convey any chance of easing.
We start
off with $1 billion on the borrowing assumption and something like
$600 million more or less as the excess reserve number. That could
bring some tightening in and of itself but I'm sure it doesn't bring
any easing.
We have the discount rate issue.
I don't know what [the
Board is] going to do but it is clearly an option and we don't make
any automatic decision here that we will reduce the borrowing simply
If things come in such that we
because we raise the discount rate.
want to reassess this in the next couple of weeks, we can.
MR. BALLES.

I think that makes eminent sense, Mr. Chairman.

VICE CHAIRMAN SOLOMON. Presumably, there is some sense of an
upward limit.
If the Board raised the discount rate and we found out
by not reducing the borrowing assumption that fed funds were trading
in the neighborhood of 11 percent--.
CHAIRMAN VOLCKER.

I'd be a little concerned.

-87-

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MR. BOYKIN. Technically, Mr. Chairman, can the borrowing
assumption be changed other than by the Committee?
CHAIRMAN VOLCKER.
MR. BOYKIN.

We change it all the time.

All the time?

We don't
CHAIRMAN VOLCKER. I say we change it all the time.
fiddle around with it from week to week, but we get a sense of what
the directive says.
This time we would change it if the money supply
were coming in stronger and business remained strong or whatever.
MR. BOYKIN. My point is that those of us who don't vote on
the discount rate would have nothing to say about what was done with
the borrowing assumption.
CHAIRMAN VOLCKER. Unless there were a consultation.
something drastic happened, presumably there would be.

If

MR. BOEHNE.
I think what you're saying is that you are going
to look through the borrowings to the funds rate--not that you would
be fixing the funds rate, but that with all this uncertainty one is
not oblivious to what happens to it.
If I had a
CHAIRMAN VOLCKER. Not oblivious, that's right.
sense that we were getting a lot more tightness out of this than I
That I can assure
judge we were really looking for, we would redo it.
you. You may certainly take it for granted that if there were a
little easing out of it, we would adjust it.
MR. GUFFEY. And that's starting from the benchmark of
accepting "B" with borrowing of a billion dollars and $600 million in
excess reserves and someplace between 10-1/4 and 10-1/2 percent on the
funds rate, as indicated in the Bluebook?
CHAIRMAN VOLCKER.
would accept the others.

Well, excepting your last statement.

VICE CHAIRMAN SOLOMON.
10-3/4 percent.

It could easily be between 10-1/4 and

MR. GUFFEY. No, I'm talking about
discount rate [increase].
VICE CHAIRMAN SOLOMON.

I

No.

[the funds rate] without a

Without a discount rate

increase.
MR. GUFFEY.
If you accept the commentary in the Bluebook,
it's 10-1/4 percent with $1 billion borrowing and some possibility
of--

CHAIRMAN VOLCKER.
target that narrow.
MR. GUFFEY.
though.

I'm not going to accept a federal funds

Well, no.

I'm just trying to get a benchmark,

-88-

3/26-27/84

CHAIRMAN VOLCKER. That's what we are told is the most likely
If we get less than that, I think the discussion says
outcome.
If we have a sense of easing, something
something is the matter.
ought to be tightened up; if we get a little above that, I'm not sure
I would have that sense.
I agree on the easing, but I guess I'm concerned
MR. GUFFEY.
about approaching that 11 percent rate--whether with $1 billion
borrowing without a discount rate increase or some other level with a
discount rate increase. That 11 percent triggers some real concern.
Let me see if I can restate it, Roger. The "B"
MS. TEETERS.
specification with the $600 million excess reserves, in my mind, has a
And if
federal funds rate that fluctuates between 10 and 11 percent.
it were persistently at 11 percent, you would adjust to bring it down.
If it were persistently at 10 percent or below, you would adjust to
bring it up.
If I assess this
I would modify that.
CHAIRMAN VOLCKER.
I'm not
discussion correctly, I would wait for it to be [persistent].
talking about [the funds rate on] a particular day but some judgment
It wouldn't be below 10 percent and I
about the whole atmosphere.
don't think it would be down to 10 percent.
MS. TEETERS.
and stay there.

But I don't want to see it go above 11 percent

CHAIRMAN VOLCKER.
above 11 percent either.

Well, I'm not talking about getting up

I join Roger if Roger is still where Roger was
MR. MARTIN.
after this discussion--no offense, Roger. To have 11 percent after
the number of weeks we were at 9-1/4 to 9-1/2 percent and to have it
hold any length of time at all I think would be an undue [increase].
CHAIRMAN VOLCKER. In the very short run if nothing else
I would
happens, I'm talking about misspecifying on the low side.
interpret that in the very short run as misspecification on the high
side.
MR. WALLICH. You said, Mr. Chairman, that in the case of a
discount rate increase [there would be] no automatic change in
borrowing.
VICE CHAIRMAN SOLOMON.

Depending on where the fed funds rate

is.
Obviously, it's consistent with what
CHAIRMAN VOLCKER. Yes.
If things were very tight, we would take that into
was just said.
We may want to change the
account in changing the discount rate.
discount rate but we might not want to do it without some offsetting
adjustment, and we could consider that at the time if it appeared
necessary. But I don't think there's any presumption that that's
going to appear necessary. If it seemed to be a little too easy, in
the wisdom of the Board we can raise the discount rate and that would
be one factor bearing upon that decision. Let's come back to that
funds rate question we left dangling--this 1/2 percentage point
question. My own preference, knowing that this presumably isn't going

-89-

3/26-27/84

to be published for a month or more, is to raise the funds rate range
a full percentage point to [7 to] 11 percent in the comfort that if we
wanted to go higher, we would. But I'm not sure I want the larger
headline implied unnecessarily, on the order of [another] 1/2
percentage point on the range [by going to 7-1/2 to 11-1/2 percent].
I might well want to go there, but I can go there without the extra
headline of saying we had that [in the directive but didn't implement
it.]
It's like that very asymmetrical directive that we had worked
out all right in December. Nothing happened; it never was triggered.
But it became a fact of life that the directive was written that way.
If, contrary to expectations, the economy began levelling off and we
never got to the 11-1/2 percent, I'd just as soon not have it in the
record.

sense.

MR. GUFFEY. I would agree that 7 to 11 percent makes more
It has never constrained us in the past.

MR. PARTEE. Are we back to talking about the funds rate?
thought we had decided that.
CHAIRMAN VOLCKER.

No, we left

I

[open] this 1/2 percentage

point.
MR. BOEHNE.

Things have a way of coming back to the front.

MR. MARTIN. And for those who feel there isn't room for
action, there is some some distance between 11 percent and 7 percent.
CHAIRMAN VOLCKER. I have a preference. It's not an
overwhelming one, but it is very relevant. My preference is purely
how it plays in the press.
If we exceed the 11 percent before the
next meeting, it won't make any difference.
We will have exceeded it
by the time [the directive is published].
MS. TEETERS.
You are proposing alternative B with the fed
funds rate range of 7 to 11 percent?
CHAIRMAN VOLCKER. Yes, but I could probably live with M1 at
6 percent as a round number.
But that's visual, too; it's not going
to affect operations.
VICE CHAIRMAN SOLOMON. As I said earlier, I can live with
either 7 to 11 percent or 7-1/2 to 11-1/2 percent.
I don't feel that
strongly about it.
And I think you have a majority for the numbers on
the three Ms as they are.
CHAIRMAN VOLCKER. I can live with any of them, but I am
expressing this vague cosmetic preference.
VICE CHAIRMAN SOLOMON.

percent.

And we have $1 billion on borrowing?

MR. PARTEE. I'd be inclined to vote against this 7 to 11
I just don't think there's enough room from where we are.

MR. GRAMLEY. Well, what you're trying to do is to hold the
funds rate in the 10-1/4 to 10-3/4 percent range.

3/26-27/84

-90-

MR. PARTEE. Well, I understood all that conversation to be
only the initial word.
CHAIRMAN VOLCKER.

That is correct.

What do we do if the
MR. PARTEE. And the question is:
I think we have to have some room to
aggregates come in stronger?
move the rates and ought to have enough room to move the funds rate up
above 11--in the 11-1/4 to 11-1/2 percent range.
MR. CORRIGAN.
I don't care about the numbers, but I surely
care about having a clear understanding--whether it's in the directive
or not--of a willingness to move in that direction if we have to move.
But arguing the other side, if we
VICE CHAIRMAN SOLOMON.
have a range of 7 to 11 percent and the funds rate persistently for a
week or longer goes above the 11 percent, then we'll have a
consultation. So, I don't know that we're really blocking any action,
Do you think there would be a
Jerry, if we use 7 to 11 percent.
significant public relations impact of having 11-1/2 percent as the
upper bound when it comes out?
It depends on what the rates are.

MR. PARTEE.
MR. RICE.

Only if we don't have to go that far.

CHAIRMAN VOLCKER.

Significant, I don't know.

MR. CORRIGAN. The only problem I see, Tony, with staying
with the 7 to 11 percent is that if we run into the [situation] where
we have to move and operate above 11 percent persistently, then we're
left with the decision of having to change it.
MR. BOEHNE. Well, the last time the range was 6 to 10
percent and that didn't in any way interfere with going over the 10
percent.
MR. CORRIGAN.

No, but we suspended it.

In some sense, the only difference it
CHAIRMAN VOLCKER.
makes is if we don't get up there.
MR. BOEHNE.

Right.

CHAIRMAN VOLCKER.
we're going to exceed it.

Because when we get up there I assume

MS. TEETERS.
There has never been any press comment when we
have exceeded the ceilings, at least as I [recall].
MR. ROBERTS.
MR. CORRIGAN.
MR. BOEHNE.

No, there was this last time.
You may see some on Friday.
Yes.

-91-

3/26-27/84

VICE CHAIRMAN SOLOMON. Yes,
They are going to see that we
suspended the ceiling a week before.
I had not noticed the market
paying a lot of attention to these changes in the range.
CHAIRMAN VOLCKER. The only thing I am reacting to is that
when they get the directive the press will say "Federal Reserve
tightens because they raised the federal funds rate range.
And this
says they would tighten a little more."
The only contingency I'm
guarding against is that we never get there and some article says,
"Oh, they were all prepared to go up; what they wanted to go to was
11-1/2 percent"--or whatever interpretation they put on it.
They
don't know whether that's-MR. FORRESTAL. There is the risk of the press reacting to
that 11-1/2 percent if we don't get to it.
If we have 7 to 11
percent, we still have the freedom within two weeks to have a
consultation.
CHAIRMAN VOLCKER.

That's why my preference is not all that

strong.
MR. FORRESTAL.

To me, 7 to 11 percent really makes a lot of

sense.
CHAIRMAN VOLCKER. It really depends I suppose in substance-forgetting about my point--on whether the Committee wants to have a
consultation if the rate gets there. That's what it mechanically
does.
MR. FORRESTAL.

It's a long time between meetings.

MR. PARTEE. Well, this seems to me an entirely different
matter than the December meeting vote, as I interpreted that. The
market was surprised to read that we would have been prepared to
tighten if business had been strong. And, of course, they were
reading this at a time when business was strengthening. Therefore,
it's not so unreasonable to assume that if we were prepared then, we
must be prepared now. That's quite different from a technical top to
a range before we have a consultation.
CHAIRMAN VOLCKER. Based upon all the experience, I don't
interpret it as a barrier anyway. But it is a mechanical point that
means we have a consultation.
So, where do you want the consultation?
MR. GUFFEY.
MS. TEETERS.

At 11 percent.
At 11 percent.

MR. MARTIN.

At 11 percent.

MR. PARTEE.

At 11-1/2 percent.

MR. GRAMLEY.
I'd rather have the consultation now.
I don't
think we will see anything in the next two weeks that is going to be
convincing on where the economy is going to go.
And two weeks more on
the money numbers is not going to tell us anything about longer-term
trends of money, which is what really matters.
I think we're pussyfooting. I think we've been sitting here for some months now looking

-92-

3/26-27/84

at an economy that continues to exceed everybody's expectations. This
And we
is going to come back to haunt us if we don't decide to act.
can't act by just confirming what happened in the market in the past
couple of weeks.
MR. FORRESTAL.
validating that?
MR. GRAMLEY.

Do you interpret alternative B as just

I do indeed.

That's what we're saying.

MR. BOYKIN. That was the question I wanted to ask:
If we
take "B" as specified and say 7 to 11 percent, have we done anything?
MR. GRAMLEY.

Not in my judgment.

MR. BOYKIN.

That's the way I'm reading it.

SPEAKER(?).

That's a matter of opinion.

MS. TEETERS.
We haven't done anything today, but the rates
have gone up 3/4 of a point in the past two weeks.
MR. BOYKIN.

Yes,

I know, but--

CHAIRMAN VOLCKER. Look, I think we've done something today-You keep looking at the federal
depending upon how one looks at it.
We are now operating on a directive that says we are not
funds rate.
that far over it; it says no free reserves and no net borrowed
We now say we are
reserves, basically. And we just changed that.
operating on a net borrowed reserve directive. Whether the market
But
really has anticipated that in its movement is the real question.
I don't think there's any question that we have tighter specifications
than we are now operating under.
MR. MARTIN & MR. GUFFEY.

That's right.

MR. GRAMLEY. I just don't translate net borrowed reserves as
I think the more relevant consideration is
restraint on the economy.
what happens to interest rates.
CHAIRMAN VOLCKER. Well, you can argue that interest rates
have already anticipated that.
MR. GRAMLEY. That's my view.
movement in interest rates.

What I want is a larger

We need some move and the only
MR. WALLICH. I agree.
visible thing is interest rates.
MR. MARTIN. But it has only been six weeks and rates have
gone up 125 points. How fast do you want to move?
I'm assuming that
VICE CHAIRMAN SOLOMON.
moving, with alternative B, is going to give us at
point further move, in addition to what the market
interest rates. And I think the Chairman is going
In other words, there
that it comes out that way.

the direction we're
least a 25 basis
has done in
to make darn sure
is going to be an

-93-

3/26-27/84

impression in the market that we have tightened if we come out with
alternative B.
CHAIRMAN VOLCKER. By no means would I say that it's not a
valid view that we should be tightening and that one might just want
to get interest rates up--period. But I don't think we can be in a
conceptual position of saying that every time the markets anticipate a
move we have to ratchet it up one step further.
MR. GRAMLEY.

I agree with that, certainly.

MR. MARTIN.
I would agree with Tony, but I don't think it's
25 basis points; it's more likely 50.
I think we're talking [about
going from] 10-1/4 percent to 10-3/4 percent.
VICE CHAIRMAN SOLOMON. Okay, we can't pin it down that much.
But I'm assuming that there will be some upward movement if we go in
this direction. Are you saying that you don't believe that or are you
saying that's too little?
MR. GRAMLEY. Well, if I interpret the Chairman's comments
correctly, he doesn't want to see the fed funds rate get down toward
10 percent and he would be uncomfortable with it getting up to 11
percent. And he's thinking about playing the net borrowed reserve
objective so that the federal funds rate stays in a 10-1/4 to 10-3/4
percent range. Now, that has a midpoint of 10-1/2 percent and we're
not far from that now, which means that I don't see much change.
CHAIRMAN VOLCKER. If the federal funds rate stayed at
10-1/2 percent, just to put it there [unintelligible].
A perfectly
good example:
I don't think it would be long before the prime rate
went up another half point.
MR. AXILROD. Mr. Chairman, the funds rate in this two-week
period so far is averaging just over 10 percent.
That's how it's
going to come out tomorrow--say, 10-1/8 percent or somewhere around
there. We only had a 10-1/2 percent rate in passing for a couple of
days.
I think if borrowing of $1 billion with normal excess reserves
gets you a funds rate of 10-1/2 percent, that will be viewed as a
significant tightening because it's sustained.
CHAIRMAN VOLCKER.
MR. MARTIN.

I think it will be too.

Of course it will.

MR. GUFFEY.
Just to reinforce that, last week the rate was
just about at 10 percent; it was 10.04 percent. And it has gone up
this week if it comes out to 10-1/8 percent.
Now you're talking about
10-1/2 percent. That's where you're going to get some-CHAIRMAN VOLCKER.
about this thing.

Yes, I think Steve is absolutely right

MR. GRAMLEY. It's just that I'm not trying to hide the move,
you see.
I think the economy needs to be told that monetary policy
has tightened because the economy is growing much too fast for
comfort.
I think we need to do something that's rather obvious and
decisive.

-94-

3/26-27/84

MR. GUFFEY.

As recently as two weeks ago it was at 9-3/4

percent.
CHAIRMAN VOLCKER.
instrument in mind.

I think maybe you have the wrong

MR. GRAMLEY.
Oh no, I have both instruments in my mind.
I
just haven't got the right forum to talk [about the discount rate].
It's way too fast for one quarter.

MR. MARTIN.

VICE CHAIRMAN SOLOMON. Well, why don't we presidents walk
out of the room while you fellows-MR. PARTEE.
If we were to have a discussion, I don't think
you'd get an immediate decision.
MR. GRAMLEY.
four weeks.

Well, we used to time these matters in three or

VICE CHAIRMAN SOLOMON.
Plantation.

We're all going to be at the Wye

CHAIRMAN VOLCKER. For these purposes, you are discussing the
wrong instrument, I think. I would reinforce what Steve said; I don't
have much question about it.
MR. CORRIGAN.
I agree with Governor Gramley. I still think
that when the decision of last week to suspend the federal funds rate
range is publicized this Friday, that in itself is going to be seen by
the market as-VICE CHAIRMAN SOLOMON.
MR. CORRIGAN.
looking for.
MR. PARTEE.
MR. BLACK.

As confirmation of what they suspect.

--symptomatic of the kind of thing they're
Why don't we leave it suspended?

That makes sense to me, but I didn't want to say

it again.
MS. TEETERS.
specifications for M1,
MS. HORN.
MR. BLACK.

Alternatively, we can take out the
M2, and M3.

Maybe.
No, that would be very bad!

CHAIRMAN VOLCKER. Look, as I think you know, there is not
much in this difference between 7 to 11 and 7-1/2 to 11-1/2 percent.
Which way do you want to make it?
MR. MARTIN.

7 to 11.

MR. GUFFEY.

7 to 11.

MR. BOEHNE.

7 to 11.

-95-

3/26-27/84

MR. PARTEE.

to

7-1/2 to

CHAIRMAN VOLCKER.
11 percent?

11-1/2.

Just Committee members:

MR. BERNARD.

Five.

MR. GRAMLEY.

I currently get

CHAIRMAN VOLCKER.

it 7

seven.

Hold up your hands again.

VICE CHAIRMAN SOLOMON.
CHAIRMAN VOLCKER.

How many want

I'm going to vote for both sides.

How many want it 7-1/2 to

11-1/2 percent?

It can't be much closer.
Can we live with 7-1/2 to 11-1/2?
Let's
hope we can. Now, we have this other number to worry about.
I think
the only one that's relevant to worry about there is M1.
How many can
live with or want it just the way it is:
6-1/2, 8, and 8-1/2 percent?
MR. BERNARD.

Five.

CHAIRMAN VOLCKER. You're only going to get two choices here.
The other side is:
How many want 6, 8, and 8-1/2 percent.
I came out
that it goes the other way--6-1/2 percent.
MR. PARTEE.

Let's try again.

CHAIRMAN VOLCKER.
I think the 6-1/2, 8, and 8-1/2 percent
had the majority.
It's a perfect balance. Those who wanted the
higher federal funds rate won, and those who wanted the higher M1 won.
How can we get a better consensus than that?
Now we can return to the
language of the directive.
VICE CHAIRMAN SOLOMON. The trouble with this whole process
is that there's no quid-pro-quo bargain. I would trade my vote on
some of those last votes for the wording of the directive you're
saving. The way you're slicing us off, it's a salami tactic.
MR. PARTEE.

Paul's saying no salami goes with it!

CHAIRMAN VOLCKER.
I don't know how to word this directive
with reserve pressures [unintelligible].
I'm not opposed to it in
principle; after listening to this other discussion, I just don't know
how to do it.
MR. BOEHNE.

I'd like to suggest that we use Variant II on

MR. PARTEE.

Variant

MR. BOEHNE.

Yes.

MR. GUFFEY.

Well, that's misleading to begin with.

page 4.
II on page 4 of the draft directive?

CHAIRMAN VOLCKER. I don't know what it means.
I literally
do not know what that means.
If I had to explain that in public, I
would be absolutely lost.

-96-

3/26-27/84

MR. GUFFEY.

It's misleading.

CHAIRMAN VOLCKER.
don't understand it.
MR. MORRIS.

My only problem with it is that I just

We've been using this language for quite some

time.
CHAIRMAN VOLCKER. Yes, but I didn't have this problem when
excess reserves were going up and borrowings were going up at the same
That's why I say it's just a little technical problem.
time.
VICE CHAIRMAN SOLOMON.
under net borrowed reserves--.

But if you thought of it that we are

CHAIRMAN VOLCKER. Well, we're not talking about that.
saying there's a significant increase in net borrowed reserves.

We're

It goes from 0 to $400 million, so we have to
MR. PARTEE.
say that we're going to tighten.
VICE CHAIRMAN SOLOMON. We'd have to say Variant I, then.
Would you have the same problem with not knowing what Variant I means?
CHAIRMAN VOLCKER.

Yes.

VICE CHAIRMAN SOLOMON.

"To increase."

MR. MARTIN. "Increase somewhat."
CHAIRMAN VOLCKER. Well, I think that's a little better, but
I obviously interpreted it in terms of net borrowed reserves.
MR. WALLICH.
I think there's some merit in referring to the
But it
increase in reserve positions that has recently emerged.
I think it should be increased
doesn't swear that we'd maintain that.
above that recently emerged level.
CHAIRMAN VOLCKER. Well, what has emerged recently in the net
borrowed reserve sense is no different than what it was beforehand.
MS. TEETERS.
MR. PARTEE.

"Emerged" is the problem.
That's the problem.

CHAIRMAN VOLCKER.
MR. MARTIN.

That is the problem, I think.

Because it moved from 0.

Actually, it has been fluctuating
Well, no.
MS. TEETERS.
between plus and minus $200 million; it averages out to 0.
CHAIRMAN VOLCKER.
MS. TEETERS.

That's because we don't hit the--

I know.

CHAIRMAN VOLCKER. In a borrowing sense it's going up, if it
is interpreted as borrowing.

3/26-27/84

MS. TEETERS.

-97-

In a net borrowed reserve sense it is going up.

VICE CHAIRMAN SOLOMON. Since you can live with Variant I,
then the real issue, it seems to me is:
Do we stay with that kind of
What I'm
wording in the directive or do we go to the new wording?
concerned about is that this new wording leads us in a direction of
more automaticity in the monetary aggregates.
MR. MARTIN. I would share that concern. I think we need to
move up front the language with regard to the economy.
That's what
we've been discussing here--the economy.
MR. PARTEE. Well, we certainly ought not to keep M1 at the
I would buy your proposal
end of the list, as M2, M3, and then M1.
that we can make it M1, M2, and M3 as just a more logical way to
express it.
CHAIRMAN VOLCKER. This is to me almost a purely cosmetic
point, but I think we're walking into difficulties. The whole attack
on the Federal Reserve is that we're trying to manage a good growth
situation and that leaves us extremely exposed.
MR. PARTEE.

Because we've tightened.

We say here "to

retain."
CHAIRMAN VOLCKER. We say we're tightening because the
I'm not talking substance now; I'm
economy is growing too fast.
saying that we are walking into--.
MR. CORRIGAN.

I'm very sensitive, Tony, to your concerns

about-CHAIRMAN VOLCKER. Well, he may have this great concern about
the market; I have a very considerable concern that we are walking
directly into the trap of our most vociferous critics.
VICE CHAIRMAN SOLOMON.
But there's also going to be a heck
of a lot of concern if people think that we are going back to the kind
of volatility we had in interest rates, which I think is damaging both
substantively and perception-wise.
MR. MARTIN.

And may have interest rate effects itself.

MR. ROBERTS.
I think it's a very great leap to say we're
going back to volatility. My impression of the market is that it
would receive this favorably, Tony. In fact, the market has already
discounted an increased emphasis on M1, which it monitors very, very
closely, as you know. I think all these arcane issues of the
placement of one thing somewhere else are viewed by the market as
rather silly.
VICE CHAIRMAN SOLOMON. If we follow the Chairman's
suggestion on the directive as shown on the paper he passed out, we
would be encouraging an increased emphasis on weekly volatility.
Moreover, I think the impression that we are going to be more
influenced than we have been by money growth is going to lead to
expectations that maybe by the end of the year we won't have seen just

3/26-27/84

-98-

a point or point and a half move, but something significantly larger
than that.
MR. ROBERTS.
Of course, the real question is:
Suppose we
have 10 percent money growth--pick your own aggregate--for a while.
What would we do except to let interest rates go up if the market was
demanding that level of credit?
Since that's all we can do, why is
that such a concern?
VICE CHAIRMAN SOLOMON. I feel that we did a lot of damage to
the economy by the enormous swings [in interest rates] from 8 percent
to 20 percent and then down again.
I think if we had stayed longer at
tighter levels, we wouldn't have had to go up to 20 percent. Now, I
understand the rationale, but I think the notion that we don't
influence interest rates--that all we are doing is targeting money
growth--has gotten very thin in the country. We moved away from that
and we used the excuse that the velocity of circulation was no longer
in a typical traditional relationship. What would you say?
You have
to say that we're back again in a period where the velocity of
circulation is a little more dependable. And this all fits in with
the feeling that we would get in the market that we're returning to
the pre-summer of 1982 [approach to policy].
MR. ROBERTS. Well, in fact our language has been suggesting
just that:
that we have been assuming we would get a more normal
pattern of velocity.
It does appear to be emerging. We are charged
legislatively with managing the aggregates. This takes us away from
this accusation that we're trying to downplay the growth in the real
economy.
I think this is an excellent statement in the right
direction.
MR. BOEHNE.
I think Tony is right that it is wearing thin in
the country.
I don't think the rationale that interest rates are
going up because of the money supply cuts much ice anymore.
It served
a useful purpose in the late '70s and early '80s, but I don't think it
will fly to try to go back to using that as a rationale.
MR. ROBERTS. We don't in fact use it as a rationale. We say
that is our policy--that what we control is the money supply and if
demand rises, the effect of that is that interest rates move--instead
of saying that we set an interest rate independent of its response on
the aggregates.
[The latter] doesn't seem to be very rational in a
period when we all agree that the inflationary danger is rising.
MS. TEETERS. We were legislatively instructed not only to
watch the aggregates but interest rates, real growth, inflation, and
unemployment. And the sentiment on the Hill is toward managing the
real economy, not the monetary aggregates, at the present time.
I
agree with Tony.
If we go back to emphasis on M1 and put it up front
and at the beginning of the road, we could create very unstable
conditions in the economy. And interest rates will be transferred
into the economy.
MR. GRAMLEY.

I don't think anybody's--

CHAIRMAN VOLCKER.
both sides.

I think our theology is in full swing on

-99-

3/26-27/84

MR. PARTEE. Everybody so far has taken a predictable point
of view--100 percent predictable. I was wondering whether we could
fuzz this up a little.
CHAIRMAN VOLCKER.

Let's fuzz.

MR. PARTEE. In the first place, we could make it "broadly
consistent" as a way to fuzz the annual rates of growth in M1, M2, and
M3.
That's what has to be done--make it broadly consistent--because
we don't know what those multiplier changes are or what excess
reserves are going to be and all that.
CHAIRMAN VOLCKER. We could take the radical step of putting
a range around all the aggregates.

"around."

I was thinking we could say annual rates of
MR. PARTEE.
That would be one other way.
MR. MARTIN.

We could actually use ranges.

MR. PARTEE. The trouble with that is that it makes the edge
points of the ranges pretty sensitive.
CHAIRMAN VOLCKER. You know, we're really exaggerating the
difference between these two languages. The first says "maintain/
increase somewhat/ decrease" and that gets into this problem of what
it is now. It is possible to say in variant I "anticipating that this
This says "consistent".
approach will be consistent."
MR. BALLES. Mr. Chairman, apart from the possibility that
you may for some reason I didn't understand release this prior to the
By the
normal time, I don't understand what all the fuss is about.
time the directive comes out at the normal time it is all history.
The May meeting would have
The next meeting has already been held.
been over by a week. Am I missing something?
CHAIRMAN VOLCKER. The argument is what people will read into
that for the next meeting. But there must be some language that
doesn't raise the sharpness of the concerns on both sides.
MR. WALLICH. Well, putting a range around these short-term
I'm not very happy with
money aggregates I think would make sense.
going back to M1 in first place.
CHAIRMAN VOLCKER.
the other.

I have no feeling about that one way or

I don't know, Henry.
MR. PARTEE.
somewhat more difficult.
MR. WALLICH.

I think the range makes it

Because we might miss it?

MR. PARTEE. Yes.
There's a pretty fair chance that M1 is
And if we set a
going to be at 10 percent or something like that.
range of 5 to 7 percent, 10 percent is way above the range.
MS. TEETERS.

It's going to be above 6-1/2 too,

if it's 10.

3/26-27/84

MR. PARTEE.

-100-

I know, but the range makes it--

CHAIRMAN VOLCKER. Does it help anybody to say "In the short
run the Committee seeks a degree of pressure on bank reserve positions
consistent with..."?
MR. GRAMLEY.
I was just hunting for something like that too:
"The Committee seeks to maintain pressures on reserve positions
consistent with..."
MR. BOEHNE.
fuzziness!

Well, I think that has a lot of merit toward

MR. PARTEE.

It even has the great word "maintain" in it.

MR. WALLICH.

"Maintain" suggests that there was no change.

VICE CHAIRMAN SOLOMON.
"maintains."
MR. PARTEE.
than "maintain."

[Unintelligible]

the plural:

I really think "seeks a degree of" is better

CHAIRMAN VOLCKER.

"Seeks a degree of pressure"?

MR. PARTEE.

Yes, because we have to test, to probe.

MR. BOEHNE.

And then if we put in "broadly consistent"--

MR. PARTEE.

And "over time."

MR. GUFFEY.

"As may be modified."

CHAIRMAN VOLCKER.

"Over time" sounds a little funny when we

talk about--

SPEAKER(?).

"Broadly consistent."

CHAIRMAN VOLCKER.
"Broadly consistent" is all right but that
makes it [a change].
Last month we were consistent. This month we
will be broadly consistent.
MR. PARTEE.

"At annual rates of around..."

MR. GRAMLEY. Or we could go even so far as to say "during
the period from March to June."
We don't hit it from June to July.
CHAIRMAN VOLCKER. We have to leave out the "broadly" and put
in the "around 6-1/2, 8, and 8-1/2 percent."
Is that what we have?
In the next sentence, though, do we want to clarify precisely what
we're doing initially on borrowings?
MR. GUFFEY.

The sentence in parenthesis?

CHAIRMAN VOLCKER.
that.

Yes.

I think it reads all right without

3/26-27/84

-101-

MR. PARTEE.
I have trouble understanding just what that
means when I read it.
VICE CHAIRMAN SOLOMON. Well, I don't have any trouble
understanding it in view of our discussion.
I think it is going to
look a little strange because, after all, it's not unusual for there
to be fluctuations of borrowing in one direction somewhat
unexpectedly. And yet I don't think we have noted that before in
directives, have we?
CHAIRMAN VOLCKER. Well, I think we have used reserve
pressure or reserve restraint as a synonym for borrowing. This just
says borrowings because of the confusion about what the heck we mean.
It raises questions, I suppose, but it depends upon how fully we want
to describe what we decided.
It reads perfectly well without it.
MR. CORRIGAN.
MR. BOEHNE.
MR. CORRIGAN.

I'd just as soon take it out.
So would I.
It gives us more flexibility without it.

CHAIRMAN VOLCKER.
these problems in the text
handling it.

We can leave it out and point out all
[of the policy record].
That's one way of

MR. PARTEE. Yes.
It's just that when we say we're seeking
the degree that allows for changing that pressure-CHAIRMAN VOLCKER. Yes, but it's kind of funny when you look
at it.
Maybe it will have to be changed. We say "The Committee seeks
a degree of pressure."
That's a perfectly general statement. Then it
says "greater reserve restraint."
Well, that's implied already.
There is something logically lacking when you leave out the second
sentence. I have no great desire to leave the second sentence in, but
it raises a question about the next sentence.
MR. CORRIGAN. Could we change the parenthetical statement to
read "should take account of" rather than "be consistent with"?
It
says "initially the reserve path and the associated ranges should be
consistent with."
Instead of that say "would take account of."
CHAIRMAN VOLCKER.
MR. PARTEE.

I don't know what that means.

I don't know either.

MR. CORRIGAN. Well, I'm concerned with the way the sentence
reads now. It's subject to the interpretation, indeed the meaning,
that all we are doing and are prepared to do is ratify what has
already happened. And I understand this discussion to say something
more than that.
CHAIRMAN VOLCKER. What it's saying is that all these people
have raised questions.
I think what we understand it to mean is quite
clear:
a billion dollar borrowing assumption.

3/26-27/84

-102-

MR. CORRIGAN. I think it's a little more than that.
It's a
billion dollar borrowing assumption in which we go to $400 to $500
million of net borrowed reserves.
CHAIRMAN VOLCKER.

That's right.

VICE CHAIRMAN SOLOMON.
I think there is going to be a
variety of reactions in the market as to what that sentence means-CHAIRMAN VOLCKER.

before.

I think that is true too.

VICE CHAIRMAN SOLOMON.
--because they haven't seen it
Therefore, they are going to have a field day with it.

CHAIRMAN VOLCKER.
I just have a small logical point.
are we starting from when we say "greater restraint or lesser
restraint"?

Where

VICE CHAIRMAN SOLOMON. We know what we're starting from; we
haven't told them before anything about whether the initial borrowing
assumption is-CHAIRMAN VOLCKER. Well, what is the meaning of the next
sentence:
Greater reserve restraint than the degree of pressure on
bank reserve positions consistent with?
We're not saying that.
MR. BOEHNE. Well, you could leave out the word "reserve."
We could just say "greater restraint would be acceptable in the event"
and so on.
CHAIRMAN VOLCKER. I think we are better off to make the
sentences hang together. Let's go back to Lyle's language:
In the
short run the Committee seeks to maintain pressure on bank reserves
consistent. .."
MR. GRAMLEY.

But use "anticipate will be consistent."

CHAIRMAN VOLCKER.
consistent with."
MR. GUFFEY.

That's right--"anticipate will be

That's just an alteration of variant I.

VICE CHAIRMAN SOLOMON. So that's what we're ending up with.
Would you put M1 last in the order?
Do you want M2, M3, and Ml?
MR. WALLICH.
I would prefer that, although it's very small
symbolism. To put M1 first has some meaning.
VICE CHAIRMAN SOLOMON.

and M1?

Every little bit of symbolism counts.

CHAIRMAN VOLCKER. Should we start with M3 and say M3, M2,
Is that what you're saying?
SEVERAL.

No.

M2, M3, and Ml.

CHAIRMAN VOLCKER. That just looks so peculiar.
leave it as separate sentences, I guess.

We could

3/26-27/84

-103-

VICE CHAIRMAN SOLOMON.
MR. PARTEE.

Once we had it in there like that.

CHAIRMAN VOLCKER.
say M3, M2, and Ml.
MS. TEETERS.

MR. GRAMLEY.
SPEAKER(?).

I think we ought to leave it this way or

If you do it backwards--

CHAIRMAN VOLCKER.
MR. MARTIN.

That's the way we've been doing it.

Why don't we leave it this way.

You could say M1 from a range of 1 to N!
M1 from 1 to

[unintelligible].

Just say consistent with the various Ms.

VICE CHAIRMAN SOLOMON.
Let me ask this:
Are you saying that
if you were asked by a Congressional committee whether we are giving
equal weight to M1 these days with M2 and M3, you would say yes?
CHAIRMAN VOLCKER.
meeting "Broadly, yes."

I think I would say at this particular

MR. MARTIN. That's the fact of the matter. That's the way
we've been discussing it.
We have been talking about M1 all the time;
we haven't been talking about M3 much.
CHAIRMAN VOLCKER. That's because the market gives 90 percent
of its attention to M1; and I don't think it is going to change much.
MS. TEETERS.

Aren't you just encouraging that after-hours

trading?
CHAIRMAN VOLCKER.
of difference.

I don't think it makes the slightest bit

VICE CHAIRMAN SOLOMON.
They are now trading U.S. government
securities in London on an increasingly large scale, so in New York
offices are now opening at 4:00 in the morning, as soon as the London
market opens.
There is around-the-world trading in government
securities.
MR. ROBERTS.

They can take the time they gain on Fridays!

CHAIRMAN VOLCKER. I now have "In the short run the Committee
seeks to maintain pressures on bank reserve positions judged to be
consistent with growth in M1, M2, and M3 at annual rates around 6-1/2,
8, and 8-1/2 percent respectively during the period from March to
June."
Skip the next sentence.
Now we go to the next sentence.
There is a slight bias in this thing.
MR. PARTEE.
You could make it a little more by making the
second one "might" instead of "would."
MS. TEETERS.
If you want to make it absolutely symmetrical
take out the word "significant."

-104-

3/26-27/84

MR. CORRIGAN.
MS. TEETERS.

I don't want it to be symmetrical.
It's already symmetrical the way it is.

CHAIRMAN VOLCKER. Put a comma after "business expansion" and
take out the big substantive change.
MR. PARTEE.
here, do you?

You really don't want this last sentence in

CHAIRMAN VOLCKER. I think we can take out the last sentence.
We have a two sentence directive.
Put in the word "might."
MR. MARTIN. Isn't the rate of credit growth the end of the
parade here?
We've been bringing it up in our consideration a good
deal more, it seems to me, at this meeting.
CHAIRMAN VOLCKER. Well, I guess the question is whether to
put a separate sentence in about it.
I don't know whether that's good
or bad.
I don't know exactly what the sentence would be but I thought
it might depend on whether we put another sentence in up above.
MR. MARTIN. In our discussions we certainly have given it a
good deal of consideration.
VICE CHAIRMAN SOLOMON. If you don't think this gives it too
much importance, we could simply say "more substantial growth in the
monetary aggregates and the rate of credit growth" in that second
sentence.
MR. CORRIGAN. If there is a difference, any more substantial
credit growth from where we are now is different from even-CHAIRMAN VOLCKER. We get in trouble if we put it in the
first half of the sentence.
It's logical in the first half of the
sentence, but you have to put it in the second half too, I guess.
SPEAKER(?).

Yes.

CHAIRMAN VOLCKER.

Monetary and credit aggregates.

MR. WALLICH. Shouldn't it be "or credit aggregates"?
Otherwise you're diluting it; everything has to go up if you say
"and."

MR. PARTEE.
I think it is fairly highlighted where it is.
We could use the technical term for it, "the rate of growth of
domestic nonfinancial debt" to show that we're really looking at that.
CHAIRMAN VOLCKER. Somehow that makes it sound so technical.
I think it would be the first time we've had that in the directive; it
has some significance just putting it in.
VICE CHAIRMAN SOLOMON. The market knows that we don't get
data on the technical classification--total domestic nonfinancial
debt--until after a considerable lag. We get some indications of
various types of credit growth with less of a lag and, therefore, by
leaving the rate of credit growth we are making it a little more

-105-

3/26-27/84

general and a little more operative. Otherwise, they know it's not
that operative since we don't get that particular data.
CHAIRMAN VOLCKER. I think it's better that way.
If we want
to highlight it more we could say "the rate of credit growth, which
has been excessive recently."
Are we ready to vote?
We have a
sentence here with the federal funds rate range of 7-1/2 to 11-1/2
percent, the standard sentence for that.
MR. BERNARD.
Chairman Volcker
Vice Chairman Solomon
President Boehne
President Boykin
President Corrigan
Governor Gramley
President Horn
Governor Martin
Governor Partee
Governor Rice
Governor Teeters
Governor Wallich
CHAIRMAN VOLCKER.

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

Okay.

VICE CHAIRMAN SOLOMON. You are going to let Lyle
[unintelligible] your explanation and you are going to be set free.
MR. BALLES. May I ask one question just so we don't
misunderstand the new ground rules here on access to this material?
Do I understand now that we are not to inform even our economic
advisors of the numbers in the directive?
This is for the Presidents
only?

rule.

CHAIRMAN VOLCKER. I think you can inform them and follow the
The numbers in the directive are all right, I think.

VICE CHAIRMAN SOLOMON. The recommendations of our Committee
said specifically a "normal" type of meeting. We didn't get into any
recommendations on what is executive only [material].
The Chairman is
saying handle it in the usual way.
SPEAKER(?).
It's all right to tell them?
the Presidents receive the directive.
MR. PARTEE.

The directive.

SPEAKER(?).

The written directive.

CHAIRMAN VOLCKER.

Your memo says only

That's true.

Whatever the rule on that says.

MR. AXILROD. Mr. Chairman, the rule says that the directive
should only go to the President, so the other people who would have
been here won't know the specifications.
Unless they see the
directive, they will not know the specifications.
SPEAKER(?).

Unless the President tells them.

-106-

3/26-27/84

MR. AXILROD.
MR. PARTEE.

have

What

saying is to act--

Do you want to do that?

CHAIRMAN VOLCKER.
[this information].
SPEAKER(?).

I assume you're

I'm not sure I would say that

You can reproduce the Bluebook.
END OF MEETING

they have to