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

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

Meeting of the Federal Open Market Committee
November 5, 1991
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System in
Washington, D.C., on Tuesday, November 5, 1991, at 9:00 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Greenspan, Chairman
Corrigan, Vice Chairman
Angell
Black
Forrestal
Keehn
Kelley
LaWare
Mullins
Parry

Messrs. Hoenig, Melzer, and Syron, Alternate
Members of the Federal Open Market Committee
Messrs. Boehne, McTeer, and Stern, Presidents of
the Federal Reserve Banks of Philadelphia,
Dallas, and Minneapolis, respectively
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

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

Messrs. Broaddus, R. Davis, Lindsey, Promisel,
Scheld, Siegman, Simpson, Slifman, and
Ms. Tschinkel, Associate Economists
Mr. Sternlight, Manager for Domestic Operations,
System Open Market Account

Mr. Ettin, Deputy Director, Division of Research
and Statistics, Board of Governors
Mr. Madigan, Assistant Director, Division of
Monetary Affairs, Board of Governors
Ms. Low, Open Market Secretariat Assistant,
Division of Monetary Affairs, Board of
Governors
Messrs. Hendricks and Salvaggio, First Vice Presidents,
Federal Reserve Banks of Cleveland and Dallas,
respectively
Messrs. Balbach, J. Davis, T. Davis, Ms. Greene,
Mr. Lang, Ms. Munnell, and Mr. Rolnick,
Senior Vice Presidents, Federal Reserve Banks
of St. Louis, Cleveland, Kansas City, New York,
Philadelphia, Boston, and Minneapolis,
respectively
Mr. Judd and Ms. White, Vice Presidents, Federal
Reserve Banks of San Francisco and New York,
respectively

Transcript of Federal Open Market Committee Meeting of
November 5, 1991
CHAIRMAN GREENSPAN. We need to approve the minutes. Without
objection. Today, in lieu of Sam Cross, who as all of you know is
retiring on December 2, we have Gretchen Greene.
I suspect that were
Sam here we all would have wanted to wish him well and, Gretchen, if
you wouldn't mind, by proxy please give him our best.
MS. GREENE.
I certainly will.
And I'm sure that I speak for
him when I say that he has enjoyed working with you and will miss the
associations he has had by being in this job for the last 10 years.
CHAIRMAN GREENSPAN. Well, I think Sam is going to be quoted
around here for quite a long time. He has made an impression, which
is quite rare for somebody at the FOMC. And it's not superfluous to
say that we will miss him. Having said that, I can think of no one
better qualified to sit in for Sam today than you. Would you start?
MS. GREENE.

[Statement--see Appendix.]

CHAIRMAN GREENSPAN. Thank you. Questions for Ms. Greene?
If not, it would be interesting to us if Ted would discuss the most
recent events regarding our relationships with the Soviet Union and
certain pending negotiations.
MR. TRUMAN.

[Statement--see Appendix.]

CHAIRMAN GREENSPAN.
Questions for Ted?
If not, Gretchen,
would you update us on the annual extension of the swap agreements?
MS. GREENE. Certainly, Mr. Chairman. As you know, this is
the time of year when we start the process of discussing our swap
arrangements with other central banks.
We have no changes in the
terms and conditions to suggest at this time and would request the
Committee to give us the authority to begin those negotiations.
The
swap arrangements actually will come up for renewal at various times
during the month of December and should be completed before year-end
whereupon we'll come back at the first meeting in 1992 to bring you
the results of those discussions.
CHAIRMAN GREENSPAN.
move authorization?

Any questions?

VICE CHAIRMAN CORRIGAN.
CHAIRMAN GREENSPAN.
SPEAKER(?).

Would somebody like to

Move it.

Is there a second?

Second.

CHAIRMAN GREENSPAN. Without objection.
Domestic Desk. Mr. Sternlight.
MR. STERNLIGHT.
my report, Mr. Chairman.
leeway.

Let's move on to the

That concludes
[Statement--see Appendix.]
I do have a request on the intermeeting

11/5/91

CHAIRMAN GREENSPAN. Questions for Peter? We have a very
uncurious group this morning! Why don't you go forward, Peter.
MR. STERNLIGHT. Thank you, Mr. Chairman. [Secretary's note:
Mr. Sternlight recommended a temporary $2 billion increase in the
leeway. His remarks are included in his statement in the Appendix.]
CHAIRMAN GREENSPAN. Questions? Would somebody like to move
the authorization for the [leeway] increase?
MR. SYRON.

So move.

VICE CHAIRMAN CORRIGAN.

Second.

CHAIRMAN GREENSPAN. Without objection. We also have to
ratify the transactions since the October meeting. Would somebody
like to move those?
SPEAKER(?).

So move.

MR. FORRESTAL.

Second.

CHAIRMAN GREENSPAN. Without objection.
the economic situation and Mike Prell.
MR. PRELL.

Let's move on now to

[Statement--see Appendix.]

CHAIRMAN GREENSPAN.

Questions?

MR. SYRON. Mike, I have two questions.
Is it fair to say,
looking at the probability distribution in your forecast now, that you
still would consider the negative tail fatter, even after your
revision?
MR. PRELL. Given the direction things have been going, my
gut reaction is to say "yes." But I think also that the tail isn't
quite so long and so thick as before. As I said, what we've done now
essentially is that we have realized some of the risks we perceived
earlier [by lowering our forecast] and I think the risks may be
somewhat more balanced in this forecast than before.
MR. SYRON. And just a clarification question: Did you say
that in putting together the [forecast] for this Greenbook you changed
the procedure regarding your assumption on where the funds rate would
be? Was that before the most recent confirmation?
MR. PRELL. That's right. Our strategy normally is to take
the prevailing funds rate as a neutral base for the projection. What
we were looking at with that funds rate path, though, was an economic
forecast that in our judgment strayed farther perhaps from the
Committee's objectives than one might like in terms of presenting you
with a reasonable framework for discussion. Indeed, the unemployment
rate at the end of next year might have been a shade higher than it is
currently rather than the level we have. So we returned to a
procedure that we have used in the past of putting in policy
adjustments so as to try to get closer to something we thought would
be acceptable to the Committee.

11/5/91

MR. SYRON. Well, I thought it was very useful. But a
question came out of it, in a sense:
Since you assumed a 50 basis
point cut, essentially-MR. PRELL.

That's correct.

MR. SYRON.
--and we have gotten 25 basis points of it so
far, do you consider the forecast that you have now as centered,
leaving the previous question alone on the tail, with another 25 basis
point cut?
[Would that be] your answer as compared to another 50
basis points?
MR. PRELL. Right, but obviously 25 basis points is a very
fine reading. But that is [the thought] we went into this with.
CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Looking at the forecast once we get beyond the
next two quarters, short rates certainly would be considered
acceptable, I think.
It seems to me that one of the things that has
changed rather dramatically is the thinking with regard to inventory
investment.
I wonder if you could comment on how you reached these
conclusions because, clearly, if you had some of the previous thoughts
about inventories, you probably would have shown a bit more strength.
MR. PRELL. Well, there are two things, I would say. One is
that the swing in inventory investment in the quarter just ended in
September was considerably larger than we had anticipated. And with
the potential revisions of those data, it goes even further.
In a
sense we got ahead of the game that we were anticipating businesses
would play here.
The second factor is that as we look at the
prospects for final demand and what we think businessmen might be
anticipating at this juncture, we have a hard time conceiving of
businesses wanting to move further in the direction of inventory
accumulation at this point.
So, we stretched the process out here.
We have an inventory/sales ratio path that is downward through this
forecast. We think that implies that at some point in the coming
year, if we can just get through this period and sustain growth, there
is going to be some further movement in the direction of inventory
accumulation. And by the end of next year we have businesses adding
to their stocks at a gradual pace. This might be regarded as a quite
conservative inventory forecast. Certainly, we have model results
that would suggest that that is so.
But we think businesses are being
very conservative in their inventory management. And to the extent
that there is still stringency in credit markets affecting some
businesses, I think it just encourages them even more to try to keep
their inventories down to avoid having to finance a lot of stocks.
MR. PARRY. Did you suggest that there would be a possibility
of that third-quarter number being revised?
MR. PRELL. Right.
As I mentioned, the manufacturers
inventory numbers were much higher for September than we had expected.
They were also much higher than the Bureau of Economic Analysis built
into their estimate of third-quarter GNP.
Relative to their
assumptions, there were additional manufacturers inventories of about
$10 billion, in 1982 dollars at an annual rate. And that inventory
investment in the third quarter is essentially equivalent to a

11/5/91

percentage point of GNP. Whether that will be the ultimate adjustment
of the GNP numbers and whether we'll see some weaker wholesale and
But, clearly,
retail figures than they anticipated, one can't say.
it's a substantial surprise for BEA.
I would assume that they would have incorporated
MR. PARRY.
I think
fairly fully what happened in the auto industry in September.
auto inventories were very high in August; I had assumed they'd be
down somewhat in September.
MR. PRELL.

Are you talking about auto dealer inventories?

MR. PARRY.

Yes.

MR. PRELL. Well, actually, they've been running very low,
for autos in particular. Truck inventories were heavier, but they
undoubtedly came down in September with the big surge in light truck
financing.
MR. PARRY.

But wouldn't they have taken that into

[account]?

MR. PRELL. It's always a bit murky as to exactly what data
they are using in estimating the retail auto component of inventories.
But, yes, presumably they had a handle on what was happening in
vehicles.
MR. PARRY.

Thank you.

CHAIRMAN GREENSPAN.

President Stern.

I have the
MR. STERN. Yes, a couple of things, Mike.
impression that one of the things that may be going on here is a lack
of pent-up demand relative to previous recoveries, particularly in
Is
autos and in housing, in part because of the strength of the '80s.
there anything to that?
MR. PRELL. Well, I think I showed in a chart show earlier
this year our estimates of the number of unoccupied dwelling units
The buildup was much more marked in the multifamily
during the '80s.
But those are housing units and
area than in the single-family area.
I think there is something of an
people can choose among these.
overhang in the housing market. Certainly, at this point with the new
homes sales at the pace they're running, the months' supply of new
So, yes, that is a factor.
homes on the market is very sizable.
Sorry, I forgot the other-MR. STERN.

Autos.

MR. PRELL. Auto sales were quite high through much of the
1980s and the stocks looked to be fairly sizable per household, for
In the last couple of years the average age [of the auto
example.
stock] has leveled out; it's fairly long. As I look at the forecast
going forward, I think perhaps we're beginning to develop a movement
If car sales stay as low as we have them
back in the other direction.
in this forecast, as we look ahead another year or so the demands may
begin to reflect some pent-up buying desires. But at this point we
don't think those desires are very intense.

11/5/91

MR. STERN. My second question: Do you have a reaction to
the report on the news last night and in The Wall Street Journal today
about expected downward revisions in the payroll data?
MR. PRELL. Well, Janet Norwood called attention to this in
her testimony before the Joint Economic Committee last year. This is
a procedure that is followed routinely every year to utilize the
unemployment insurance data to benchmark the payroll employment
series.
The data evidently did show a very abrupt drop relative to
the payroll employment series estimates early this year.
She
cautioned against taking this as gospel at this point; these are
But it is conceivable that ultimately, when the
preliminary readings.
revisions are made, payroll employment growth will appear less robust
than before. I think the feed-through to GNP that has been implied by
Certainly, in the short run
some of these reports is a bit tenuous.
we expect that BEA when it has a lot of data missing may give some
attention to the hours input, but I wonder how important that would be
It could be, if the employment is slower and
looking back at history.
hours commensurately lower, that productivity growth will look better
than it currently does.
MR. STERN.

Thank you.

MR. PRELL. It could also be that this will lead them to
lower their estimates of labor income until the data from tax returns
are available.
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. Mike, you substantially lowered your forecast
for this quarter and the next couple of quarters and you have
expressed in the last few minutes a concern that that still may be a
bit too strong. If for balance you wanted to sketch out a possible
case on the up side--that the situation could develop a little more
strongly than you have in the Greenbook now--what would be the
elements of that positive case?
MR. PRELL. Well, I wouldn't want to leave the impression
that we feel there aren't any upside risks here. We continue to
return to the notion that, in the absence of absolutely clear evidence
that we are back into a second dip, recoveries often surprise one in
their strength. So there could be unexpected areas of greater
increase in expenditures. It is conceivable that the decline in
mortgage rates, which seems to be inspiring a lot of refinancing-suggesting that people think these are good rates--perhaps will
stimulate some additional home buying beyond what we have. My concern
is, though, that people are just so worried about whether they are
going to be employed that that [rate decline] may not be as powerful
as it might otherwise be.
It's a possibility. We don't have any
clear index of what desired inventory/sales ratios are in various
sectors of the economy. We can guess by the historical patterns and
apparent response what that is.
But maybe this goes to the earlier
question:
Getting a more rapid buildup of inventories could be an
indication that we underestimated where businesses want [their
inventories] to be and that they won't continue this kind of
liquidation but rather will stay even or move into some accumulation
in the near term. That could be worth a point or two, conceivably, on
GNP growth in the short run.
Business investment is another area,

11/5/91

conceivably, that could be stronger, but the orders and anecdotal
evidence just don't seem to suggest a lot of upside potential there.
And we have consumers not spending a whole lot in the quarter. The
personal saving rate ticks up. Maybe consumers, despite the worries
they're expressing, will behave as they seem to have behaved
throughout this recovery and spend practically every dollar they get
their hands on. Maybe that's simply because many of them have their
backs to the wall and they really don't have a lot of leeway, and if
there is this additional income, it actually will flow into the
spending stream. Those are possibilities, and cumulatively they would
add up to a materially different picture.
recently:
exports?

MR. KELLEY. Let me ask, Ted, with the dollar having fallen
Could that be reflected in time in further recovery of net

MR. TRUMAN. Well, we have incorporated into the forecast a
dollar at essentially the level that we have today, though there
always are uncertainties, as Gretchen has said, about how that will
end up playing out in terms of the fundamental competitiveness and
perceptions thereof and, therefore, export sales and import purchases.
So, there is certainly some looseness to the translation between the
exchange rate and everything else that goes along with it and the net
export picture. And, of course, there is some uncertainty on both
sides--on the up side as well as on the down side as far as growth
abroad is concerned. We have a modest expansion abroad; it would
certainly be easy to sketch out a scenario that is weaker than that.
It's also possible to sketch out a scenario that is stronger either in
its own right or to some extent stimulated by maybe a somewhat
stronger picture here than we or others are currently thinking about.
But there's some [uncertainty] on both sides, I'd say.
CHAIRMAN GREENSPAN.

President Melzer.

One has to do with
MR. MELZER. I have two questions, Mike.
I don't know whether
layoffs and quarterly earnings announcements.
you ever look at that, but often those two actions might be linked.
Is there a possibility that this spate of bad news we have gotten on
the job front in terms of certain layoffs is simply a seasonal thing
associated with the announcement of the third-quarter earnings?
MR. PRELL. Well, I suppose there could be something there.
It may be that managements
My sense is that this is an ongoing story.
feel the ongoing negative earnings reports require some action to
convince the security analysts that this is not going to be repeated
in the future. Some people have noted that there seem to be a lot of
layoff announcements pertaining to the fourth quarter and that this
cuts against some tradition in business of not laying people off just
before Christmas. My sense is that a lot of restructuring is going on
in industry where this recession has revealed the need for some costcutting in order to get reasonable profit margins in an environment
where inflation is not going to offset any looseness of management.
There's this sense, too, that the layoffs are occurring in places
where people thought jobs were once fairly secure. And that
undoubtedly adds to the feeling among many people who would seem on
the face of it to be in pretty good shape that even they could be
vulnerable to some structural adjustment that seems to be going on,
particularly in the service-producing sectors.

11/5/91

MR. MELZER. My second question relates to the statement you
made about real interest rates.
Just as a general matter I'm somewhat
skeptical about our ability really to set those over time.
In any
case, I was surprised to hear you say that you felt there was
considerable scope for further reduction. I'm curious as to how
you're measuring that. A look that we took would indicate that on an
ex ante basis using, say, [unintelligible] the CPI and a 3-month
Treasury bill rate, we're beginning to get to levels that, if
sustained, were associated in the '60s and '70s with periods of rising
inflation.
I just wanted you to expand on that if you could.
MR. PRELL.
I think that's a fair statement. The rough cut I
made, just looking at short rates, was perhaps the conjecture that
inflation expectations might be viewed as a little less tenuous than
thinking about 10- or 20-year horizons.
By this assessment the shortterm rates have come down considerably. One calculation I have looks
very similar to the general level during the 1960s.
My point really
relates more to that cyclical stage typically reached toward the end
of a recession when real rates quite regularly have been decidedly
negative. The point is, though, that perhaps there wasn't a movement
to tighten soon enough as the expansion progressed to avert that
building up of inflation pressures.
This isn't to say that a sharp
move of the sort I suggested might be necessary in order to achieve
the Humphrey-Hawkins central tendency as a rate level you want to hold
for a long period. There might well be some need to move back up
within a year or so.
But historically, the lows in this cycle don't
look at all like the lows we have seen in short-term real rates in
previous cycles, certainly in the postwar period.
CHAIRMAN GREENSPAN.

Other questions?

Tom.

MR. HOENIG. May I ask a follow-up to Tom's question?
As you
described the economy, there were some fundamentals in terms of real
estate and some adjustments in leverages and so forth that are going
to be constraining.
If we ease now, what in your judgment is the risk
of pushing inflation [up] and compromising our ability to bring it
down in the future, given these fundamental adjustments that probably
should continue regardless?
MR. PRELL.
The real estate is an easier factor to consider.
The leveraging gets to be a little more difficult to pin down--i.e.
whether firms really are cutting back their investment because of
their debt loads.
There's some anecdotal evidence that would suggest
that, but I don't know how powerful a force that is.
And we can see a
significant amount of restructuring going on, with some of the firms
that have leveraged themselves up to the hilt being able in the
current environment to reduce their interest burdens and to alter
their debt/equity ratios in ways that ought to give them a little more
room to maneuver. I think the real estate problem is going to be
there for some time and will weigh against a strong surge in the
economy. The fiscal policy picture--just the total setting aside from
the current budget program--will remain less than stimulative, of
course.
So, there are some things that [appeared] in the past in
recoveries and early expansions that aren't going to be there this
time. But the higher the growth rate, the lower the unemployment
rate; and the less slack in the economy, the greater the risks are
that you're not going to make the kind of progress toward lower rates
of inflation that we have in this forecast. And that even might just

11/5/91

So, these
be cut off entirely if we get a strong enough [trajectory].
are the risks one has to weigh at this point as to whether the economy
is going to prove weaker than is acceptable and whether the inflation
I must say there
rate might be more stubborn than we've anticipated.
seems to be a lot skepticism among forecasters with outlooks for
economic activity that don't differ greatly from ours about whether
the disinflation trend can be sustained well into the expansion
There is a sense that in the past
period--say, getting out into 1993.
the decline in inflation has stopped or has become very meager as
people have sensed that the economy was on a solid growth track. And
that might be a concern.
CHAIRMAN GREENSPAN. Further questions for Mike?
If not,
Bob Parry.
would somebody like to start the Committee's discussion?
MR. PARRY. Mr. Chairman, economic conditions in the Twelfth
District reflect widespread weakness. Recent employment data for the
western states have been disappointing. Total employment fell at an
annual rate of 1-1/2 percent in September. California continues to
Employment in California fell at an annual
show particular weakness:
rate of 4-1/4 percent in September and at a 1-1/2 percent rate in
October.
I might note parenthetically that this issue about the
reliability of the payroll series is a very controversial one in
California. The Department of Finance is estimating that the peak-totrough decline in employment in California is in excess of 300,000 as
So, it's a very hot issue;
opposed to the published data of 100,000.
and politically it's quite an issue because tax revenues are coming in
at a very low level and seem to be more consistent with the more
Even in states where
pessimistic outlook that we have for employment.
growth has been robust in the recent past--particularly I'd cite Idaho
and Utah--employment has shown lower growth or even declines in recent
months. Weakness is also widespread across sectors of the western
economy as well as in states. Manufacturing and construction continue
In addition, the growth in the services
to lose jobs in the District.
sector, which has been the region's primary source of strength in
recent months, has slowed to a crawl.
Anecdotal information also suggests deterioration, as
pessimism about poor economic conditions has spread from California to
We conduct a business sentiment
most other parts of the District.
survey which, among other things, asks whether or not a recession is
anticipated during the next year. The last time we conducted it
before this most recent period, 7 percent said they thought there
would be a recession in the next year; that has risen to 17 percent.
If I can turn to the national outlook, the data that we've
all seen since the last meeting have certainly led us to revise down
significantly our forecast for real GNP for this quarter and the next.
Our forecast for growth in the fourth quarter is that it will be
slower than in the third quarter, although we do not have a double-dip
recession and we don't think that is likely. Like the Greenbook, we
expect growth to rebound to a much more satisfactory rate throughout
most of 1992, and the major sources of strength are the interestsensitive sectors of the economy and inventories as well. As far as
inflation is concerned, I'd have to say that the news on that front is
somewhat encouraging. The low fixed-weight GNP price index in the

third quarter and the moderation of the employment cost index,
especially wages, are encouraging. Overall, our expectation is that

11/5/91

there will be some reduction of inflation in 1992 compared to this
year, which is a bit of a difference from the Greenbook. Thank you,
Mr. Chairman.
VICE CHAIRMAN CORRIGAN.
CHAIRMAN GREENSPAN.

Could I ask Mr. Parry a question?

Sure.

VICE CHAIRMAN CORRIGAN. Bob, just in the past few weeks I've
heard a couple of people, including a really large national real
estate developer, sounding very dire about the real estate outlook on
the West Coast and in California particularly--much more so than
anything I've heard before. Is there anything to that?
MR. PARRY.

In the commercial real estate area there is.

VICE CHAIRMAN CORRIGAN.

Yes, this is--

MR. PARRY. And I think if you were to focus on southern
California, particularly Los Angeles, there's quite a serious problem.
Vacancy rates are quite high and they're going to rise over the next
year because there is an awful lot of building that will be coming on
line in the next 12 months. Another area is Orange County, which is
suffering as well. Those two areas are significant enough to make the
general picture of the state with regard to commercial real estate
look quite negative. When you look at some other areas, such as San
Francisco, it's not nearly as bad. They put a moratorium on building,
which has kept building at very moderate levels for the last several
years; so I don't see that [area] as a problem. The other point is
that the [situation in] residential real estate is quite different
from the commercial. Residential, at least in terms of prices, has
held up quite well, although clearly the sales of new houses are weak.
It's a problem.
CHAIRMAN GREENSPAN.

President Keehn.

MR. KEEHN. Mr. Chairman, in the District some signs of
weakness have developed since the last meeting. Attitudes have
certainly deteriorated. Anecdotal reports are coming in very much on
the negative side. As always, the auto sector is the major swing
element in the District and in that area the news seems to be coming
in more negatively. The company that I've talked to has reduced its
fourth-quarter production schedule by 8 percent from the time of our
last meeting, and the production risks are still on the down side. In
part, the fourth-quarter production rate is based on a dealer order
rate of about 66,000 units a week. The order rate is in fact coming
in substantially under that; it has averaged 52,000 units over the
last five weeks and most recently it was only 43,000. In the retail
auto sector, inventories are turning out okay and maybe a little on
the low side. If this gap between orders and production [widens] as
we get into the quarter, we're probably going to get some further
production cuts. In turn, that will result in cuts in orders from the
suppliers. While earlier we expected that the auto sector might have
a positive effect on fourth-quarter GNP, perhaps by as much as 1-1/2
percentage points, it now seems much more likely that the sector will
be flat at best and perhaps a bit negative. The production of medium
size and heavy-duty trucks in September of this year was down 22

11/5/91

-10-

percent from last year. And in terms of a comparative year, sales
were pretty weak last year.
District employment has moved sideways since April; it's up a
bit in manufacturing, offset by a decline in nonmanufacturing. Retail
sales came in very much on the weak side, particularly in Detroit.
And one Chicago retailer told me that sales of autos in Chicago since
Labor Day have begun to trail off and currently are running about 7 to
10 percent under the same [period] last year, particularly
[unintelligible].
Sales of new and existing homes in the District
have declined quite substantially and housing starts have dropped as
well.
Plant closings in the District--and I'm not talking about just
temporary shutdowns but permanent closings--are continuing at what
seems to me to be disturbingly high levels, with announcements day-in
and day-out.
Offsetting what may seem like gloom, here and there are some
bright spots.
The steel business, for example, is something of a
mystery.
The industry is now running at about an 80 percent rate [of
capacity utilization] and the estimated shipments for the year have
been increased a little--from 77 million tons at the time of the last
meeting to 79 million tons now--and the outlook for 1992 is even a bit
better.
Though the steel companies do expect some more cancellations
coming out of the auto industry, steel inventories of manufacturers
It should
and also in the steel centers really are very, very low.
mean that even if there are some cutbacks in orders from the auto
companies, the steel production levels ought not to be hit too hard.
I
On the price front, the outlook continues to improve.
think the better conditions are centered perhaps in the manufacturing
sector; the major manufacturers are able to hold down the cost of
their purchases.
Indeed, in some cases they really have achieved some
good reductions.
I have no sense that direct labor costs are
increasing more than productivity gains.
Deere, for example, very
recently settled their contract; financially it is a little more
expensive than they wanted. Nonetheless, they got very good work rule
changes and they feel that they can overcome the financial aspects
through productivity. And a word of caution:
Caterpillar is in their
negotiations and those have broken down.
It looks as if they might
have quite a tough strike and the settlement of that could set
something of a pattern for the UAW at least [unintelligible].
Turning to the national economy, the Greenbook revisions plus
the staff forecast for this year are much more in line with where we
have been. But the staff forecast still seems to us to be a bit on
the high side as we get into 1992.
The main difference, first of all,
is in consumption, particularly for durables. While the increases in
the staff forecast are in reasonable alignment with the historical
record, nonetheless in a current context they still seem to be a
little on the high side.
Net, I think we have something of a
[unintelligible] on our hands, which I think we will need to address
as we get into the policy deliberations.
CHAIRMAN GREENSPAN.

President Forrestal.

MR. FORRESTAL. Mr. Chairman, I think the best descriptive
term to use for the Sixth District economy is "quite soft," although
there are still some signs of recovery out there. Several

11/5/91

-11-

manufacturers have added to their inventories intentionally. Activity
on the export side continues to be fairly good, although it's off a
little from what it had been. Textiles have improved, and we've also
seen some evidence of a few new capital projects.
Retailers, on the
other hand, are reporting flat to only very modest increases in sales.
Caution by consumers, of course, is very much in their minds and they
are very, very pessimistic and fearful about the Christmas season;
they don't expect business to be good at all.
Tourism and business
travel were up slightly in October and in fact are running even a
little ahead of a year ago.
Our bank contacts are reporting very weak
loan demand; on the other hand, we have potential borrowers who are
continuing to complain about difficulty getting credit.
We continue
to receive that information from people on our small business advisory
group, for example.
But overriding all of the statistical data about the economy
is the anecdotal information, which continues to be very, very poor
indeed and is quite worrisome. Everywhere I go both in business
meetings and even at social affairs--cocktail parties and so on--there
is a real sense of doom and gloom. In fact, I went to two functions
over the weekend and I was sorry I went because people are just
describing business as terrible or dismal, or words of that kind.
Interestingly, though, if you ask a lot of these people if they think
lower interest rates would help their business or help the economy
generally, you don't get a uniform answer that "Yes, [the Federal
Reserve] ought to be lowering rates."
Some people think that is not
the answer. They don't have an answer, but they don't necessarily
think that lower interest rates are the solution. There is, of
course, continuing concern about job loss, concern about consolidation
in the services industry. And while unemployment hasn't risen in the
District, companies are reporting an unprecedented flood of
applications and resumes from people who are anticipating layoffs in
their business.
On the inflation side, there's no evidence of any price
increases in the District from the people we talk to.
The
agricultural side looks fairly good and that probably is the only
substantially bright spot in the District.
This confidence issue is
very perplexing to me; I'm very confused about it because it doesn't
really seem to stack up against the statistical data and the hard
facts that are coming in.
So, I guess the question that we need to
ask is:
Is it just disappointment that business is not as good as
people expect or does it really indicate that there is a slowing in
the economy and we need to take that into account?
With respect to the national economy, our forecast is a bit
stronger in the near term, that is, for the fourth quarter and the
first quarter of next year.
But then we have growth decelerating a
bit and are somewhat below the Greenbook forecast for the balance of
1992.
If there is going to be a faltering in the economy, it seems to
me that it's going to come on the consumer side as opposed to
inventories. That is, I think consumers may well attempt to shore up
their savings and to reduce their debt throughout 1992, given their
concerns about the employment situation. So, in general, Mr.
Chairman, I think the Greenbook forecast is not a bad forecast, given
all of the uncertainties in the economy, but I continue to think that
the risks are on the down side and that the economy is subject to some
vulnerability. And for that reason, I would be in favor of some

11/5/91

-12-

immediate easing of policy, though not anything dramatic.
get into the details of that a little later on.
CHAIRMAN GREENSPAN.

But we can

President Syron.

MR. SYRON. Thank you, Mr. Chairman. Both in terms of the
District and nationally, I think that in the midst of all these
problems we're on the edge of some really favorable long-term
developments.
I don't think we should panic in the midst of the very
worrisome intermediate term, but there are a lot of reasons to be
concerned.
In that regard, I said last time that New England had a level
of pessimism that bordered on panic.
I think it's fair to say that it
has passed over into the zone of panic now. One is tempted now when
going to a social event to say to folks [unintelligible] because
people start to berate you so much about the employment situation if
you tell them what you actually do.
MR. KELLEY.

Some think you haven't got a job!

MR. SYRON. That's right, and then they sympathize with you!
I'm not sure that the fundamentals have changed that much but
confidence seems to have fallen just dramatically, as other people
have said.
When one talks to the relatively small number of major
newspapers in our District, one hears about a very interesting and
unfortunately worrisome trend in year-over-year retail sales--and last
year was not a good year in New England. Our major newspaper is
seeing a 30 percent decline in their normal ad lineage for retailers
going into the [holiday] season. If you follow that up by calling a
few of the larger retailers, they have had quite weak performances
I think the long and the
recently and they expect a weak Christmas.
short of it is that they're trying to cut their expenses and cut their
way through this whole period; they figure that a lot of their
competition isn't going to make it and they want to be there on the
other side but they're not going to try to boost sales in the short
run by advertising. That's very true in the auto sector where auto
sales have been very poor.
Inventory levels generally are not
something that people express concern about but, coming back to what
Mike said, we really don't know a lot about the desired inventorysales ratio now because of these just-in-time changes.
Loan demand
continues very weak at our banks and even in the mortgage refinance
area there has been some weakness as people expect that the economy
will continue to slide and that rates will decline, so they are
waiting to refinance later. Actually, in terms of fundamentals, if
you look at the rate of deterioration of employment in the District,
things are not getting worse as fast as they were earlier.
In fact,
even in the computer sector there has been some slight sign of
optimism, although that is offset by weakness in manufacturing
elsewhere.
There is a great deal of concern in the defense sector,
particularly in three of our large firms:
Raytheon, United
Technology, and General Electric. Wages have been very well behaved.
We still have a real benefits cost problem, which is an inexorable
rise in medical care costs.
As far as the national outlook goes, I agree with the
Greenbook and also with Mike's characterization of where the risks
lie.
On that score, I must say in talking to a number of money

11/5/91

-13-

managers in the city that one does start to have a concern, with these
disappointing corporate profit figures, about what would happen if in
the midst of all this we were to have another 10 percent break or so
in the stock market. People are talking about that as not being at
all out of the realm of possibility. There is continued concern about
banks but, as I say, I think a lot of this is on the edge of a longterm favorable trend [stemming from] restructurings and, while it is
temporarily a drag, we're going to see more productivity later on.
So, the bottom line is that in many ways this fear that has been
generated by a lot of people is partially because of the decline in
asset values but also it's a cumulative awareness by corporations and
even more so by individuals that their consumption levels of the '80s
were not consistent with their long-term income prospects. And this
is an attempt to make up for that in a quite short period of time.
That is being reflected in what producers are saying as well, which is
that this is a correction that we have to go through in the economy
and we have to hunker down to get through it.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. Mr. Chairman, the Eleventh District remains
sluggish--"stuck in the mud" is a phrase one hears, or phrases similar
to that--although in the third quarter we actually experienced
employment increases. That's primarily the result of state and local
government employment increases. We have the same fiscal problems as
everybody else, but a number of our areas are under court mandate to
expand and to raise taxes to do that. The Dallas Fed's index of
coincident indicators has been declining fairly steadily but our
leading indicators have been fairly flat. I don't have an explanation
for that. Low natural gas prices continue to depress drilling
activity in the District. A national retail chain headquartered in
Dallas expects a weak Christmas, following a weak Christmas last year.
Prospects for defense industry spending are adding to the uncertainty
in our area, given all the concentration that we have [in that area].
Our directors and other local business people perceive the economy to
be weak, but we don't hear as much as we used to about the need for an
easier monetary policy. A typical comment is that it's not the level
of interest rates that is causing the problem; it's the inability to
borrow any money from banks at any interest rate. I believe Bob
Forrestal mentioned that. Texas, of course, has had a credit crunch
longer than the rest of the economy and, therefore, just about
everybody you meet knows someone personally whom they consider a
worthy and dependable borrower who cannot get credit. And some of our
directors have had fairly close experiences with that. So, they're
very preoccupied with the fact that banks are not making [any] loans.
We actually, at their request, have scheduled a special meeting at the
time of our November board meeting in which we're going to deal with
the credit crunch--and possibly solve it. We'll be sure to notify you
if we do! In that regard, I do think that since the business
community is absolutely convinced that there is a credit crunch, they
don't have a lot of patience with trying to define it or to talk about
the nuances of that. And I think it behooves Federal Reserve
policymakers to go ahead and accept that terminology. I don't think
it does us any good to poke around it and act as if it's not there if
everybody out there really believes it is.
On the national scene, our research people agree generally
with the staff here. They see further weakness and they're about

11/5/91

-14-

evenly divided as to whether that has any implications at all for
monetary policy.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. Thank you, Mr. Chairman. In the District, there
In the
is really little new to report; recent trends are continuing.
rural areas, activity remains fairly decent and attitudes are okay, I
think, at least compared to what I encounter in the Twin Cities where,
Of course, that's
as I've reported before, attitudes are quite bad.
because there is a different mix of businesses both in terms of their
diversification and their scope of operations. And they pick up a lot
of bad news from their other operations both domestically and
internationally. The Twin Cities situation is really rather
interesting. Unemployment in the Cities remains in the neighborhood
The
of 4-1/2 percent as the computer industry [unintelligible].
problem with that was that the medical technology business has
exploded, so the adjustment has all occurred without a great deal of
dislocation. But despite that, attitudes among the business community
--or the preponderance of the business community that I have
encountered--are quite negative. And the Twin Cities do account for a
In the
good bulk of the nonfarm economic activity in the District.
Twin Cities we have come up with a couple of new forms, though not
One is hosting major
altogether new forms, of economic stimulus.
sporting events.
We still have the Super Bowl and the Final Four to
But in addition, more recently we have snow removal. And that
go.
looks as if it's going to be affecting the economy for some time!
On the national outlook, I continue to think that a modest
I have a suspicion
recovery is certainly the most likely outcome.
that we might do marginally better than the latest Greenbook forecast.
But I think the real developments on the national level are on the
I've become increasingly
inflation front or the disinflation front.
optimistic that we really are making progress there. The balance of
the latest statistical evidence certainly suggests that, but I've also
become more and more impressed by the anecdotal evidence that I get.
It's very hard to find any evidence of price pressures and wage
That
pressures to speak of, at least among the people I've talked to.
has been going on for a while and it has now gone on long enough that
I think it really is significant. There is, of course, some ongoing
carping about health care costs and about the cost of [meeting]
various regulations, but there's nothing new in all that. And I don't
have any sense that that situation is getting worse. So, I do think
there is clearly a positive development on that side.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. The Tenth District continues to outperform the
nation to some extent, although if we keep talking about it we may
It's doom and gloom from a
talk ourselves out of any improvement.
number of people, although the numbers continue to show some
improvement. For example, most of our automobile plants continue to
operate at capacity. Now, in aviation manufacturing, there has been a
decline in production over [the level] a year ago and that's primarily
due to a drop-off in foreign demand. The District's oil and gas
exploration activity remains lackluster, as it does elsewhere.
Drilling rigs were up very slightly in October over September and are
In
still well below--about 23 percent below--year-ago levels.

11/5/91

-15-

agriculture, cattle prices have turned [up] and are now back to the
break-even point.
And in the grain area, prices have increased, which
has been a help in that sector. Finally, the indicators of
construction activity in our District quite frankly have been
improving. Building contracts awarded in the District in August were
up 11 percent over year-ago levels. Residential awards are increasing
in most of our states. And we're even seeing some improvement in nonresidential contracts in Colorado and in New Mexico.
So, the
District's economy is consistently showing improvements.
As far as the national economy goes, we continue to forecast
sustained growth although slightly weaker, as the staff is projecting.
Our forecasts are for a little better growth than the staff has in the
first half and a little more moderate growth in the second half. We
see a little stronger inventory investment and some continuing
strength in consumer spending; even though the attitudes are down, we
don't see that dropping sharply. As for inflation, we anticipate the
inflation numbers will stay modest and actually fall somewhat below 4
percent.
So, that is how we are viewing things right now. Thank you.
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE. Well, this is all getting a bit much, I must
say, with all the gloom and pessimism around the table. But I think
it is quite reflective of what one hears in conversations almost
wherever one goes--in business, socially, and otherwise. And my
District is no exception to that.
I think the economy has
deteriorated over the last couple of months, and certainly sentiment
has become sharply more bearish. Manufacturing had been a relative
bright spot in our area, but it has slowed rather dramatically and I
think the sentiment is in the process of changing about 1992.
I would
guess that as our future surveys come in they will reflect that,
judging from the conversations one has.
Retailers are about as
pessimistic looking toward this Christmas season as they have been
probably since the '81-'82 recession. Our commercial real estate
market is typical of what you have heard elsewhere in the country.
And loan demand is still declining at banks.
I do sense, however,
that price pressures have diminished and I think that is an optimistic
part of all this.
As far as the national economy is concerned, I think the
risks are decidedly on the down side.
We have an anemic outlook at
best and I suspect that if I'm wrong it will be on the down side.
Clearly, we have something going on here that is more than a normal
cyclical downturn; you can have your own list of favorites. My sense
is that we're going to see a longer period of weakness in the economy,
but I think most of us are going to be surprised at how much progress
we're making against inflation. In this kind of situation where the
resiliency of the economy is under stress, I think we're quite
vulnerable to some kind of shock. I don't know what the shock will
be; if we knew, it wouldn't be an unpredictable shock. But we're in a
situation where some event could really turn this from a bad situation
into something more serious.
There are not very many good policy options out there, but
the way I look at it the only available policy tools are in this room.
And I think that we simply have to ring the monetary "gong" to
demonstrate that somebody somewhere is at least trying to do something

11/5/91

-16-

positive to try to arrest this sharply deteriorating sentiment.
I
don't sense any real cost in doing that.
In the unlikely event that
we ease too much, I think we can reverse course. We tightened in
1980; we tightened in 1988; we can tighten in 1992 if we have to.
But
now we need a loud and clear easing signal to try to undercut this
deteriorating sentiment that we have out there, which is making us
quite vulnerable.
CHAIRMAN GREENSPAN.

First Vice President Hendricks.

MR. HENDRICKS. Thank you, Mr. Chairman.
The District's
economy reflects the sluggishness that we see in the data at the
national level. Employment growth has stalled. Weakness in auto
sales has led to some cutbacks in production schedules. And this
weakness in demand for autos has led to a more sluggish recovery in
the tire industry as well.
On the other hand, the steel industry--and
Si reported on this--is one of the brighter spots in our District.
Steel producers report that this will be the best quarter of the year,
supported especially by a pickup in auto and steel warehouse business.
Producers of flat-rolled steel are operating at 85 to 90 percent of
capacity. But prices are weak, profits are down, and the mood
certainly is not buoyant. We also were pleasantly surprised recently
with the outlook for inflation that was developed by a panel of
economists from firms around the Fourth District. Their projection,
which had been running at about 3-1/2 to 4 percent, has been revised
downward to 3 percent.
In brief, we see the growth of the economy stalling in recent
months but we have no reason to believe that the recovery will not be
sustained. And we are hopeful about the outlook for inflation.
That
concludes my report.
CHAIRMAN GREENSPAN.

President Black.

MR. BLACK.
It seems obvious to us that in our District
people now think everything is pessimistic; whether they're consumers
or business people, [they have] very low expectations. A particularly
striking [example] came at our last meeting, which was a joint meeting
of our Baltimore/Richmond boards, when I heard the most pessimistic
statements of the economic conditions I think I've heard in the 36
years or so that I've been attending these meetings. And virtually
all the reports we've gotten since then have been along that line.
From what I read and what I've heard around the table, it's
pretty clear that for the most part that pessimism is equally
widespread in the rest of the country and may be even more widespread
in certain places. And then we got--to use Mike's term from a while
ago--"a stunning confirmation" of this when we received this downward
revision in the Conference Board consumer confidence series.
But
having said all this, I think the question we have to answer this
morning is:
Exactly what does this mean in terms of the near-term
prospects for the economy?
I certainly think it tells us something:
namely, that the recovery has been weaker up until now and probably
will be weaker in the immediate future than any of us thought it was
The current quarter and probably the first quarter are
going to be.
certainly going to reflect this.
So, the downward revisions in the
Board staff's figures are clearly indicated. But I think it would be
premature at this point to conclude that this apparently declining

11/5/91

-17-

confidence means that the economy is necessarily going to go into a
double-dip recession as some people have been assuming. Sentiment
frequently remains bearish in the early stages of an economic upturn,
and it's clearly even gloomier than usual this time if I remember
correctly.
I think the media has added a lot to this because there
has been so much more hype on this than in the past.
Now, I know there are differences of opinion about what these
consumer surveys show, but three studies done by different Federal
Reserve Banks have suggested that they are not really very good
predictors.
I would say they probably are a coincident indicator at
best.
So, while we have this October drop in the survey of the
Conference Board and this obvious pessimism in the form of anecdotal
information, I'm not ready to push the panic button at this point.
Some of the recent data are a bit on the favorable side at least.
We
had some upward revision in the payroll employment figures for August
and September and the M2 numbers have turned around--not as much as I
would like, but they've certainly turned around recently. And the
orders and production components of the National Association of
Purchasing Managers [survey] in October were generally favorable. So,
I think the staff's revised forecast is reasonable. And the risks on
their projection are probably equally divided, although like Gary
Stern--who I believe is the only other one who said this--I think they
might even be tilted a little toward the up side.
So, we ought to
approach this policy issue today very cautiously before we make any
kind of major move toward ease.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. In terms of our District, I would say it is
still expanding but the expansion is sluggish. We have employment
growth in both manufacturing and non-manufacturing; it's somewhat
stronger in manufacturing. Residential construction over the most
recent three-month period is up over last year; commercial
construction is still down, but down considerably less than
nationally, particularly year-over-year.
On a broader prospective, my view is that certainly some of
the numbers that have come out on the national economy recently are
disappointing in relation to what we expected.
But they really are
not all that bad, as others have observed.
Clearly, confidence is
very sour.
I guess I'm influenced by what Mike said earlier and this
was confirmed by people on our staff:
that confidence really has not
proven to be a very good forecasting tool.
I get a sense that we're very much caught up with a very
short-term orientation toward policy right now. There's considerable
ease in train, whether you look at money or whether you look at
interest rates.
Clearly, there has not been enough time for all the
effects of that to be felt.
And, following up on my question to Mike
Prell, I just don't see--whether you look at money or at interest
rates--that there's all that much more scope for further easing. Now,
certainly we can try to force interest rates down further.
But I
don't see why it is that we think we can step into the same trap that
we have stepped into in virtually every postwar recovery and then be
good enough and strong enough and smart enough to turn that around and
not end up in the same position we've been in before.
I think we have
been approaching this whole period of the last four years considerably

-18-

11/5/91

differently than in the past and I hope we can continue to do that.
In my view, that argues for considerable caution at this juncture, in
line with what Bob Black said.
CHAIRMAN GREENSPAN.

Vice Chairman.

I'm not going to add anything in the
VICE CHAIRMAN CORRIGAN.
anecdotal area; it would be more of the same. But, like everyone
else, I spend a lot of time these days scratching my head a little and
asking why the recovery hasn't really taken hold and what is going on
out there. The more I look at it and think about it, the more clear
it becomes to me that there are a number of structural or semistructural forces at work. A lot has been said about inventories, and
that's good news and bad news; it makes the recession itself
One thing
shallower, but it also means the recovery has less "pop."
about inventories that I hadn't really focused on until yesterday is
that the sense of comfort that inventories are in good shape is okay
as a generalization, but I was surprised to see when I looked at it
that in the non-auto retail sector inventories are not in all that
great shape. Now, maybe that's just because there are a lot more
stores and maybe even a greater variety of goods; nevertheless, it's
there.
But beyond the inventory situation, one of the longer-term
I think Dick
things we all talk about is this real estate overhang.
Syron is right when he points to the fact that it's not just the
overhang itself but the spillover effect it has on perceptions about
asset quality prices that has an impact on confidence. Mike Prell
I've
touched on debt burdens with a bit of a question in his mind.
had a question in my mind, but the more I think about it, the more
important I think it is in terms of attitudes and financial fragility
that we all have talked a lot about. The fiscal situation is ugly not
just because the deficits are big but because the process is basically
immobilized.
But when I think about those things, with the exception of
inventories, one of the things that strikes me is that in a sense
They're
they're all symptomatic of the chickens coming home to roost.
all symptomatic of earlier excesses of one kind or another. But I
I just handed some charts to
What do they mean?
still ask myself:
the Chairman that are based on work I had staff at the Bank do in
trying to look at some of this in a much longer perspective. Just to
When you look at the
cite a couple of examples that come out of that:
default rate on corporate bonds--this is the default rate on all rated
issues, so a lot of the junk bonds aren't even in this calculation-it's currently 3 percent of all rated issues, which is by far the
largest it has been in the postwar period. We did one calculation on
office space that may or may not be right, but it's pretty dramatic
because it says that it would take six years of service-sector
employment growth at the very rapid rates of the 1980s to absorb the
overhang in service-sector office space that's there now, assuming
It's a big number.
that nothing else is built for the next six years.
If you look at the banks--maybe somebody else looked at this before
but I hadn't really focused on this--loan losses as a percentage of
That doesn't sound all that bad, but it
total loans are 1.37 percent.
turns out that 1.37 percent is by a wide margin the highest that this
And the loan losses in the banking system just
has been since 1936.
in 1990 were $28 billion, as against before tax profits of $23

11/5/91

-19-

billion. Again, what is interesting about the $28 billion in losses
is that while $7.7 billion was in real estate, $7.2 billion was in
consumer lending, $8.5 billion was in C&I lending, and there was still
$4.7 billion left over in all other categories of lending. Again,
those are very big numbers and they're not confined by a long shot to
real estate.
When I look at all those things, what leaps into my mind,
other than that the chickens are coming home to roost, is that in some
ways I'm surprised that we didn't have a credit crunch, whatever that
may mean--I think Bob McTeer makes a good point there--a lot sooner or
that it hasn't been a lot worse. But the way I come out on all those
numbers is that, in the face of them, we're probably doing as well as
we could reasonably expect to do. But that raises in my mind even
more this question about the outlook.
Clearly, those things strongly
reinforce the view that the recovery, whatever else it may be, is
going to be distinctly subpar. That has never bothered me per se.
But the question that looms larger in my mind and has in the past is:
With all of that, can we even get a result that looks like the
Greenbook in a context in which I think the Greenbook [projects] a
pretty good outcome if for no other reason than that it is respectable
at least in terms of growth. But more than that, it is an outlook
that is compatible with this continued whittling away at the core
inflation rate. And I guess I'm not so sure that even that outlook is
as comfortably in hand as I once thought it was.
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. Mr. Chairman, I guess there's one thing that's
clear and that is that things are not ebullient.
CHAIRMAN GREENSPAN.

We can stipulate that!

MR. KELLEY. We can stipulate that.
The anecdotal evidence
we've had at the table here this morning could hardly be more
negative. We came out of the third quarter with a poor September and
went into the fourth quarter with what looks like a poor October.
And
the confidence data that we're seeing certainly don't give us any
confidence.
Still, as I look at the data available to us, the third
quarter, while not as strong as we had thought it might be, was not
bad. The Greenbook outlook, which is probably about the best estimate
that we can make, is certainly not all bad. And we have to keep in
mind, as has been mentioned by several people, that we have a great
deal of easing still in the pipeline, and I think that's very
important.
So, I ask myself:
How can policy best help this
situation?
The first thing one has to say--and this has been said,
too--is that a lot of what is going on here is structural and is not
going to be susceptible to being helped by monetary policy.
It's just
going to take time to work through. But if we do feel that we want a
little insurance for the middle part of 1992, cautious and modest
easing would probably provide that. And if we do feel that things are
going to hell in a handbasket in a hurry, then maybe it's time--or
would be at some point--to get very aggressive and ring the gong very
loudly.
One thing that I think is in everybody's mind is:
How do we
improve confidence?
I'd like to say a word about confidence; I think
it may be a little more complex than meets the eye.
If we make

11/5/91

-20-

another small move, it probably will have a small impact. We've made
10 small moves in the last 12 months. And we can each make our own
assessment of what the effect on confidence has been from all of that.
If we make a major policy move in an effort to improve confidence,
it's not easy [to conclude] that it will have the result we want. On
the affirmative side, of course, rates would probably drop, the prime
rate particularly. Spending and borrowing would probably be helped at
the margin. But there are potential negatives to it as well.
For one
thing, the Fed could come off looking panicked, which could possibly
have very adverse consequences since we're seeing the data as being

not that bad but people would wonder what the Fed knows that they
don't know or what the Fed thinks that they don't think. And
particularly right here with the drumbeat of the White House in our
ears, I think the Fed could come off looking politically dominated.
Both of those things feed into what I think would be very a poor
situation if the Fed began to lose its credibility.
In my view, we're
just getting that solidly in place now after a long time of feeling
And I would surely hate
that we deserved it and weren't getting it.
to see something happen that would knock that back.
If something were
to happen just as we were beginning to be accepted as fully credible
and we were called into question again, it might be a very long time
indeed before we could get that credibility back once more.
I think inflation expectations are beginning to wane in the
economy and that's beginning to have a favorable effect. And I
certainly would hate it if we were to do something that would call
that into question again and cause that confidence that inflation is
receding to waver.
If it appeared that inflation were returning, once
That
again we would be a long time weeding it out a second time.
could have the effect of holding interest rates, particularly longterm rates, higher than they would otherwise need to be. Also, there
are the self-fulfilling elements of having inflation expectations
[revive], which could make our job very difficult all over again.
There are a couple of other risks that we need to keep in
mind as we think about the desirability of a very strong move, to the
For one thing, the stronger the move,
extent that that is attractive.
the more likely it is that we would get a perverse effect in long
rates.
I don't know how likely that would be or at what point that
would [happen], but we have to think about the possibility that that
I've
could occur at some point. The inflation battle isn't won yet.
always been optimistic that we can and will win it and I still am; but
I'm not quite as comfortable--to use the word that Jerry used just a
And frankly, the Greenbook forecast, which
few minutes ago--as I was.
I'm sure is a very responsible and good one, isn't all that impressive
to me in terms of the amount of inflation progress we're going to make
The dollar could weaken
over the forecast period through 1993.
meaningfully if we got very aggressive [in easing].
Of course, that
would help net exports. That would be good news for the short run but
in the long run we'd have to deal with the inflationary consequences
that could come out of that. Another thing that has not been
mentioned yet today is that we're going into the political season, and
there's going to be an enormous temptation in this environment for
fiscal stimulus of one sort or another.
I can envision the
possibility, if we got a huge amount of stimulus moving through the
pipeline, that we could be presented with some pretty tough choices.
We could either accommodate that fiscal stimulus, in which case we'd
have monetary and fiscal policy both easing at the same time we have

11/5/91

-21-

this enormous deficit. Alternatively, we could offset it by an
earlier tightening than we might otherwise desire. That could be very
awkward to do from a number of different standpoints.
So, in sum, if things are going very wrong either now or in
the future, we might just have to bite the bullet and ring the gong
and run the risk of getting lead poisoning from the bullet.
On the
other hand, it's not impossible that things might turn out to be
somewhat better or at least as good as they appear, in which case I
don't think any immediate action would be required. And to the extent
that is what we see, we'd have a little time to watch and wait.
If
we're unsure but would like to get some mid-1992 insurance--and we may
well want to do that at some point--I don't think there's any rush to
do it.
There is some time still available to affect the middle part
of 1992, and a delay will give us an opportunity to evaluate just what
risks we have and to pick a time and a method to do that carefully and
methodically. Mr. Chairman, that's where I am at the moment.
CHAIRMAN GREENSPAN.

Governor Angell.

MR. ANGELL.
I agree with those who suggest that this is a
long-cycle adjustment process.
I think anyone who saw what happened
in the oil producing states and the agricultural states in the mid1980s understood that this was going to be an asset price adjustment
period. Now, monetary policy was sufficiently powerful in the mid1980s to be able to abort that adjustment process. We are not just at
12 months and 10 small [easing] moves but 2-1/2 years and 490 basis
points lower in the fed funds rate than we were in June of 1989.
That's a rather significant move. Now, it seems to me that monetary
policy lags may be increasing in this environment. And I wonder about
looking at maybe at least two behavioral groups to see how that might
be occurring. First of all for households, with their reliance on CDs
and other short-term investments that we taught them to rely upon in
the 1980s, I think that heavy shift really did not involve direct
ownership of equities; and a very small amount of direct ownership of
bonds by households leaves them rather vulnerable on the income side,
[given] the interest rate declines that have occurred. The interest
gap for the household sector is rather enormous when one thinks about
short-term CD rates at 4-1/2 percent as compared to credit card
interest rates of 19 percent.
It doesn't take a great deal of
brilliance for households--many of whom learned to have a mix of both
short-term liquid assets and also to hold liabilities at the same
time--to understand that there's a lot of payoff to shifting out of
CDs and bringing down debt.
That low rate of return for households is
undoubtedly driving them into the equity market in a new way. As
interest rates fall, that occurs. And that phenomenon means that we
don't get quite the "bang for the buck" that we ordinarily would
because we're not impacting the rates that households are paying as
much as we're impacting the rates that households are receiving.
There's also a lagged phenomenon at commercial banks.
In
ordinary recession cycles there is a shift, of course, between lending
and investment; but [when] a longer-term adjustment [is under way]
that shift might be even more pronounced and longer-lasting and have
some somewhat perverse effects.
It seems to me that the real
opportunity cost for commercial banks in lending is not exactly the
opportunity cost in what they're paying; as U.S. government securities
in the two- to three-year range become a larger portion of the assets

11/5/91

of commercial banks, the real opportunity cost is the yield on those
two- and three-year Treasuries.
In a declining interest rate market
that yield is much higher than the coupon rate.
And as long as that
yield is as high, in many ways commercial banks worried about asset
quality in the lending area would naturally delay making the
transition to aggressive lending.
In many ways it seems to me, then,
that the impetus to lend is going to come somewhat after interest
rates have stopped declining.
So, to some extent, declines in shortterm interest rates may [lead to] a delayed effect as to what occurs.
Now, there's another factor we ought to consider and that is
that long-cycle adjustments occur because conditions get out of whack.
And those adjustments--those things that need to be changed--need to
[occur].
In a sense aborting asset price adjustments doesn't help all
that much. Asset prices need to adjust to a different level of
expected inflation. And in some ways the faster those asset price
adjustments take place the better the recovery. Unfortunately, the
RTC and other ownership arrangements that don't cause these assets to
be docked may indeed prolong the adjustments.
Another fact in the long cycle that we have to consider is
that household savings in a sense are inevitably linked to capital
inflows to the United States. And I think there are some real
advantages for household savings to adjust in such a manner that we do
not [continue to take] the share of the world's capital that we have
been taking over the last 10 years.
So, that savings adjustment needs
to take place, and we need to keep in mind that we don't want to
disrupt conditions by trying to create in a sense the typical
recovery. The typical recovery is not going to be there; and trying
to get that typical recovery will run greater risks of upsetting
certain markets than if we go in a more steady-as-we-go [manner]
through here.
Just think how serious it would be if we were to upset
the foreign exchange market or upset the equity market.
One concern
that I have is that the equity market could be in for a boom and that
could involve a speculative fervor; and if this adjustment period is
as long as I expect it to be, then a run-up in equity prices [until
they get] out of line and then watching them unwind very rapidly is
So, the critical question
not going to be a very pleasant experience.
in front of us is:
What are we teaching the world that we are doing?
Are we teaching the world that our focus is on employment and output
or are we teaching the world that we continue to have a concept of
price level targeting that will enable long-term interest rates to
come down in such a way as to continue to get recovery in housing,
which I think is essential to get this long-cycle process going our
way?
Just because it's a long cycle doesn't mean that it has to be an
extraordinarily bad long cycle. And I think what we do is very, very
important.
CHAIRMAN GREENSPAN.

Governor Mullins.

MR. MULLINS. Well, I agree with Governor Angell that we
don't have much risk of a typical recovery here. What I would like to
see, though, is confidence that we at least have a sustainable
recovery.
I guess I do agree with the basic diagnosis that we're
experiencing a gradual wringing out of the excesses of the '80s and
that that is imparting downward pressure on growth. We've seen those
excesses, and people are talking about an asset [deflation] in real
estate. Expectations of inflationary home prices have collapsed, and

11/5/91

-23-

I agree with those who think that that has had a profound impact on
consumers since that's probably the single most important component of
their wealth. And I do agree that the leverage also was an excess.
One can see the way corporations are using the current equity market
to [deleverage].
Consumers not only have been reducing their debt,
but their leverage has robbed us of the excess bench capacity to spur
And I believe all this
a recovery. So, we don't have that force.
comes home to roost in financial institutions, which financed these
excesses. We've seen this most dramatically in the collapse of the
S&L industry; but it's also in banks, insurance companies, and finance
companies, all with varying degrees of exposure to these structurally
troubled areas of commercial real estate, unleveraged loans, and junk
bonds.
The public capital markets in my view adjusted quickly and
brutally to these excesses. The stock market collapsed in '87; the
junk bond market disintegrated in '89.
But even after that period,
the momentum of excess continued in financial institutions, and their
retrenchment out of this is slower and more painful. They're still in
the process--it was not only in 1990 but even in 1991--of recognizing
and dealing with asset quality problems and pulling back to raise
capital ratios and asset quality. We see this in the shrinking of
financial intermediary credit at the same time that public market debt
is growing. We also see it in slower M2 growth.
I think that much of the force of our easing to date has been
absorbed by this retrenchment process instead of fostering spending.
The ease in long rates and the rise in stock prices resulted in large
new issue volumes, but the proceeds are not going to business
spending; they're going to clean up balance sheets. The ease in bank
funding costs has gone into the healing process of increased margins,
and mortgage rate reductions have gone increasingly into refinancing
We can't avoid this retrenchment
to reduce home [mortgage payments].
process, but I think we must take into account these retrenchment
pressures in setting our course. And our current stance has not been
consistent with our earlier forecast of moderate sustained recovery,
at least in my view. That earlier forecast had two engines of growth.
First, sustained recovery in housing of modest dimensions and
secondly, this inventory-led increase in industrial production.
These
two developments, housing and industrial production, were supposed to
spur income growth and consumer spending with business spending coming
in later.
In my view, it's pretty clear that the forecast is not
being fulfilled. The housing market, after advancing since early this
year, has at best flattened out and is likely declining despite lower
interest rates.
Industrial production, after growing for four
straight months, has been dead in the water for three straight months.
The leading economic indicators also have flattened out and the
momentum that was in evidence in mid-summer is now gone. And
sentiment has turned increasingly sour.
With the importance of the consumer to our economy, I think
we have relatively little room for error in the current situation.
With industrial production and employment not growing, income growth
will be minimal with a low saving rate and deteriorating consumer
confidence.
We've already seen it have an impact in the housing
market; we've had long-term mortgage rates coming down dramatically
over the last several months and yet the housing market is going in
the opposite direction [of what one would expect].
I think that's the
impact of confidence.
There is a real risk in this environment and a
potential for the momentum in this massive economy to turn down.

11/5/91

-24-

Business confidence is also increasingly sour, reflecting the
deterioration of the recovery. And I fear there is power in negative
thinking.
[Earlier] the momentum was generated in part by an
exogenous shock:
the military success in the Persian Gulf. It raised
confidence, which increased stock prices and bond prices and reduced
oil prices.
This time I see no such positive shocks on the horizon,
although I wouldn't rule that out.
I would agree with those who think
the economy is vulnerable to a negative shock, and there are some
potential ones in the financial sector.
So, I have difficulty with
the current [Greenbook] forecast [in terms of] understanding what is
going to pull the economy out of this deceleration and place it neatly
back on the track in the second quarter of '92.
That is perhaps where
I differ a bit from the Greenbook.
As for policy in the current environment, we need to weigh
against these retrenchment forces and the deteriorating confidence in
order to return to the track of this summer's Greenbook forecast.
Since these are contractionary forces we are responding to, I see
little risk to the inflation reduction program.
Indeed, the current
environment has been characterized by an extended period of slow
growth of M2 and slow growth of credit.
If you take one-year
inflationary expectations right off the Michigan Survey and compare
them to one-year bill rates, real rates are higher than they were last
year at this time.
So, I don't believe monetary policy is too easy.
It is true that we've done three easing moves recently, but two of
those--or I guess more than two--are already included in the Greenbook
forecast.
There are some arguments against making this adjustment.
Some would argue that lower rates may not be especially effective.
If
so--if you think they're not going to affect the economy--they should
not be especially harmful or risky to inflation. Despite doubts in
every [bout] of economic weakness, I believe that monetary policy
works. And I think a significant reduction in rates would help the
housing markets and the stock and bond markets and would facilitate
the [deleveraging] process, which ultimately must give way to business
spending.
I think it would help banks; it would precipitate a
lowering of the prime rate and allow the pass-through of lower rates
to final borrowers while still retaining the margins needed for the
adjustment process.
Ultimately it would help with consumer durables
as the average age of autos reaches historical levels.
The quality of
domestically produced autos has improved substantially, and I think
we'll have a pickup from that as well.
Also, I think a move would
cause the dollar to give up some of this year's gains and that would
have an impact on exports. My view is that a move at this time would
also help confidence; I don't think it would frighten people.
It's
pretty clear to me from the confidence surveys or the public opinion
polls that consumers and business people alike perceive the
deterioration in the recovery. The frustration is that they see
nothing happening that could turn the situation around. They see no
response. And if we respond in a discreet and visible way, I think
that would be supportive to confidence, not frightening.
It is true
that we might be accused of responding to what Mike Kelley calls the
drumbeat from the White House but since that drumbeat is constant
[unintelligible] all is quiet up the street.
CHAIRMAN GREENSPAN.
stopped at some point.

If they had an impact, they would have

11/5/91

-25-

MR. MULLINS. And when they say this ease came just after a
drumbeat, I would say:
How does that distinguish that day of the week
from any other day of the week?
I do think there is some risk of
dissipating the impact of our moves with continued small moves, and I
wonder if we continue on this path whether we're going to have much of
a "gong" left to ring. So, I think the time has come to make a move
and to lean visibly against this ill wind before it blows us seriously
off course. The risk to policy if we wait is that the force of
economic momentum could well turn down and confront us with much more
difficult policy situations down the road in 1992.
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE.
Mr. Chairman, I've really been startled by the
recent clouding of our otherwise perfectly clear crystal ball.
I also
find it difficult to deal with the proposition that this is a bankmanaged credit crunch that is a major factor in the continued
sluggishness of the economy. After all, credit extension is a twoparty transaction:
a willing and demanding borrower and a willing and
accommodating lender. And lenders who have been abused for reckless
lending and excessive risk-taking can hardly be criticized for a more
cautious current stance. As a matter of fact, I suspect that those
who are complaining the most and the loudest about the unavailability
of credit are the people who didn't pay back their loans last year and
whose balance sheets have deteriorated substantially as a result of
the economic slowdown.
I think businesses and consumers at this point
are confused and worried by the same conflicting signals that confuse
and worry us.
And they are not hammering on the doors of the banks
demanding extensions of credit.
In my opinion we are in a paralysis
of confidence on the part of consumers and businesses as well as
banks.
And I am somewhat skeptical about the effectiveness of
monetary policy in dealing with human psychological depression. It
seems to me that confidence is more likely to return under the
stimulus of a clearly enunciated political leadership in dealing with
domestic issues, and I question whether further ease in interest rates
will do the trick.
CHAIRMAN GREENSPAN.

Coffee has arrived.
[Coffee break]

[CHAIRMAN GREENSPAN.
MR. D. LINDSEY.

Mr. Lindsey.]

Thank you, Mr. Chairman.

CHAIRMAN GREENSPAN. Excuse me, why don't you wait; we've
just lost Governor Mullins.
Sorry about that.
We're back in recess
pending the finding of a missing Board member. Here he is.
Okay, go
ahead.
MR. D. LINDSEY.
see Appendix.]

Thank you again, Mr. Chairman.

[Statement--

CHAIRMAN GREENSPAN. Any questions for David?
If not, let me
get started. As I indicated at our telephone conference last week, I
think what we are dealing with clearly is an historical process that
has very little in the way of counterparts in the post World War II
period. This is an old fashioned asset contraction. It is reflected

11/5/91

-26-

most severely in the commercial real estate area, with obvious
consequences in the financial [sector] as we discussed.
It's
reflected, strangely, in the residential single-family area even
though the data themselves scarcely suggest anything even remotely
close to the asset-price deflation in commercial real estate.
Nonetheless, what is clear--and one picks this up from anecdotal
evidence and at these cocktail parties we all go to--is that
individuals somehow perceived that the market values of their
residences were actually much higher than they really were. There was
a sense in which the offering price they had in the back of their
minds was the equivalent of a market [price], and what is happening
now with the return of a degree of realism is basically that people
feel that the prices of single-family residences are undergoing a
fairly major decline. All of the analytical work we've done suggests
that this is a major factor in household purchases, especially durable
goods outlays.
Part of this process reflects not only the weakening in
balance sheets, but it is also a significant element in the physical
volume sense. As Gary Stern was saying earlier, what we have here is
another "inventory" problem, which we've been discussing pretty much
all year--especially earlier in the year--and last year. These
inventories are not so much autos in the dealers' showrooms or unsold
homes in the hands of developers, but too many cars in the garage and
too many homes relative to the underlying demand.
In a sense, not
having had an economic contraction in the 1980s, we just never had
that adjustment.
Businesses and households picked up a much higher
level of economic structures and of hard durable assets so that their
balance sheets are all undergoing a fairly apparent adjustment process
at this stage.
What is clear about this whole process is that one would
assume that there is some significant price deflation going on.
But I
have been confronted with something, which I find really quite
puzzling, in the differential behavior of the stock market and the
bond market.
If in fact there is a significant decline in
inflationary expectations, which one would assume in this sort of
environment and which is clearly supported by the slow growth in money
supply even if we make all of our various adjustments, one would
expect that price/earnings ratios in the market would be high. All of
our history suggests that in a noninflationary environment price/
earnings ratios are significantly higher than in an inflationary
environment.
Indeed, the level [of stock prices] today, calculated in
a real rate of return sense, is fully consistent with the notion that
the stock market is presuming that there is a disinflationary force
out there and that a low discount rate on effective real earnings is
appropriate. But if this is the case, why are real rates in the long
Or, more readily getting at
end of the market as high as they are?
the issue of trying to make that calculation, why are nominal rates as
high as they are?
One possibility, which I suggested to some of you--and I must
say it's unclear whether it's true or not--is that we all view the
intermediation process as something that brings down the real rate of
In fact, it is that phenomenon that
return of long-term instruments.
creates the value-added in the intermediation process. As a
consequence, if you are focusing on what has clearly been a crippling
of the intermediation process, and the symptoms of this are all over

11/5/91

-27-

the place, then the answer may be--and I'm not sure that this is a
correct answer--that one of the reasons we have higher long-term real
rates is that we are not getting the intermediation process that
brings the whole basic rate structure down. That should not affect
the stock price relationships because that's external to the
intermediation process. But it is very clear that this issue is a
major problem in trying to evaluate the extent of the disinflationary
forces and how critical they really are. Measured inflation is higher
than is consistent with the hypothesis that what we are looking at is
a gradual disinflationary process. Part of this, however, may very
well be the fact that there are significant increases in indirect
business taxes that are showing up in the GNP accounts. And this is
partly the issue at the state and local government level. It also
reflects some of the excise taxes that were put in as part of the last
budget agreement. Indeed, take a look at the nonfinancial corporate
business rates and remember that they break down prices into unit
profits, unit capital consumption allowances, unit indirect taxes, and
all that. If you strip out the governmental actions that affect price
levels--indirect business taxes and mainly subsidies, which usually
come in in the other direction--then the rate of inflation that we are
looking at through the second quarter in the GNP accounts shows that
the total price increase for the quarter is 3.8 percent; excluding the
direct taxes and subsidies, it is 3.1 percent. Now, I don't want to
make too much of that, but it may well be that one of the problems we
have here is a measurement problem because it's fairly apparent that
we could have a highly disinflationary process and if we stick a bunch
of sales taxes on top, we get measured price indexes in the CPI that
are fairly significant.
The implication is that once we get beyond this particular
period, the measured price inflation is likely to fall somewhat faster
than is indicated in the Greenbook. In fact, if I had a bet on it, I
would take it. The consequence of all of this is that we have seen,
as everyone has mentioned, a very major crippling of financial
intermediaries. Obviously, the S&Ls are not lending; they're in
trouble [as are] the commercial banks and insurance companies. It's
really interesting that the areas where we are seeing very strong
lending are areas that are not touched by this, namely, the smaller
finance companies, other than those involved in autos. In fact, the
most interesting statistics that were given to us yesterday in the
Board staff presentation were the very dramatic increases--a 25
percent annual rate--in small finance company lending. We're
obviously seeing a tremendous amount of public offerings of equities
and bonds. If the loan demand is so weak, why is it so strong in
certain areas? I think the answer has to be in part that we are
dealing with a very weak financial intermediary system. None of this
is new. We knew all of this two, three, four months ago. We
certainly knew it when the economy was coming out of the recession.
What we didn't know is how significant all of this was, as Mike Prell
mentioned earlier. There is no question that the economy was coming
back in July and August. It wasn't coming back in a huge surge, but
[at a pace] consistent with the proposition that this overhang of
disinflationary forces was not very potent. In the last several weeks
it is beginning to appear that that conclusion may not be correct; it
can be a wholly false phenomenon. I had to live through the summer of
1976. We all remember the "recession" of the summer of 1976; that's
what got Jimmy Carter elected. And in February 1977 there was this
new "get the economy rolling" program which had to be pulled back

11/5/91

-28-

because the economy was at that point rolling too fast.
So, we have
seen pauses before, and it is not inconceivable that this is exactly
that.
The trouble is that we just do not know that this is going to
happen. And we have to think of policy in the context of a period
which is very sensitive and one which in retrospect is going to look
What all of this suggests to
absolutely clear to all of our critics!
me is that at this stage six-week intervals between contacts of this
In
Committee are not particularly appropriate time lengths.
discussing the issues of policy, I would suggest, irrespective of what
we decide to do, that we really ought to meet--and I don't mean
physically but in a telephone conference--to review what is going on.
Having said that, in trying to balance the various forces as
I see them, I think the risks of easing at this stage are very small.
I say that for two reasons. One, if we were to move lower at this
point, it would be in the context of the money supply showing a minus
$4 billion when we publish it Thursday, leaving the growth of M2 for
If we look
the year below the lower bound of the Committee's range.
at the credit structure, it is very tough to envisage inflationary
forces re-emerging anywhere near this level. It's not interest rates
that move inflation; it's finance.
And so far as finance is
concerned, we just do not have inflationary forces running. The rate
of borrowing at this stage is the lowest it has been in the post World
It is just extremely difficult to believe that
War II period.
inflation will take hold unless one believes that inflation is not a
monetary phenomenon. And that, I suggest, just makes no sense
whatever.
Secondly, I think the evidence of our ability to move on the
up side during an election year is fairly significant. Earlier views
I think what
were that the Fed could not move under those conditions.
we were able to do in 1988 clearly indicates that there's a change in
the tone of how money and politics run. And, if it became necessary
to turn around, I don't see any reason why we shouldn't be able to do
that.
I certainly would say, and I hope, that the will of this
Committee is clearly in that direction.
So, I conclude from all of this that we ought to move lower.
Because of the uncertainties that are involved in the outlook, I would
Now, how we would handle
suggest that we only do 25 basis points.
that with respect to the discount rate is something that the Board of
Governors will have to decide. Having gone through all of that, I
would suggest to you that we are in a very unusual period. And while
I hear this issue of a jump-start as being crucial, a jump-start is
not the need of the economy because you can't jump-start the American
economy.
It's like a battleship or an aircraft carrier, which has to
turn.
We may at some point need an element that affects confidence.
I would suspect that it's conceivable, as Mike Prell pointed out, that
we may have to do some ringing of the bell a lot more loudly at some
point.
At the moment, however, I think it is very important that the
Federal Reserve appear to be there because what has been going on out
in the political world is the indication that nobody is minding the
And to do something that
store. We're the last game in town.
suggests that we are there, that we are mindful of what is happening,
and that we are up to date on everyone's concerns is a crucial factor
We're going to find
that we have to keep in mind as the weeks go by.
out one way or the other where this whole thing is going within a much
shorter time than I think we suspect. And in the interim, as I said

11/5/91

-29-

earlier, we have to keep in somewhat closer contact with Committee
members and make judgments in real time.
So, in summary, I would at this stage recommend half of
alternative A, which I hope we would implement after the refunding is
over, which suggests to me Friday. Governor Angell.
MR. ANGELL. Mr. Chairman, since we might be having a
telephone conference call anyway, there's some uncertainty in my mind
as to how that would take place if the Board were not to make a
discount rate move. Wouldn't there be some advantage in going "B"
asymmetric and then having a telephone conference call after we know
what the Board is going to do? That would still mean the FOMC would
be free to do what it chose to do, but it would then have knowledge
about what the announcement-CHAIRMAN GREENSPAN. Well, with the alternative I suggested
we don't need a telephone conference because the 1/4 point is
contingent on a discount rate cut.
MR. ANGELL. That could be an alternative.
alternative that would be more appealing to me.

That would be an

MR. KELLEY. Mr. Chairman, how would you propose to structure
If there were to be a decision at this table to go
this technically?
down 25 basis points to be effective Friday, we have a couple of days
to get through here that could be susceptible to some sort of leak to
the market that could be of critical importance.
CHAIRMAN GREENSPAN. I would suggest to you that the
experience that we have had in the last couple of meetings indicates
that this is a secure organization. If that is false, then we have
far more problems than we know. If you feel more comfortable about it
and you want to leave it asymmetric, I would recommend that we go
asymmetric but my intention would be to move.
MR. BLACK.

Would that be on Friday?

CHAIRMAN GREENSPAN.
MR. BLACK.

Friday.

On the federal funds rate?

CHAIRMAN GREENSPAN.

Yes.

MR. SYRON. Mr. Chairman, if I might just [comment] on that
narrow issue. I think security after our unfortunate episode has
improved. And if we really think that's what we're going to do--I
have some sympathy for it and I'll get back to that later--then this
group, depending on what it thinks the Board of Governors is going to
do [on the discount rate], should vote for it now instead of going
through the process of just saying we're not officially doing it
because we're afraid of a leak in a couple of days.
CHAIRMAN GREENSPAN. I feel uncomfortable about it just
because of that leak possibility. Wayne, are you through?
MR. ANGELL.

Yes.

11/5/91

-30-

CHAIRMAN GREENSPAN.

President Parry.

MR. PARRY. Mr. Chairman, it's pretty clear that the recent
data have intensified doubts about the whole process of the recovery;
At the same time, we seem to be making
that's clear to all of us.
some progress with regard to inflation. Under these circumstances, I
too would favor the middle course, which I would define as a 25 basis
I really would not favor the 50 basis
point cut in the funds rate.
point decline. It seems to me that gradualism has served us quite
well. Of course, we reduced the funds rate 1/4 point last week and I
think another 25 basis point, presumably on Friday, would be
If we wish to ring the "gong," it's very easy to do
appropriate.
that, of course. And I guess in some respects I would be in favor of
It seems to me that if the move of 25 basis points that we're
that.
talking about were combined with a move on the discount rate, that
probably would accomplish a great deal as well. Finally, in terms of
the language, I would favor asymmetric language on the down side.
MR. BOEHNE. Mr. Chairman, I just have a technical question
before we proceed. We do have this even keel [consideration] in [the
face of a Treasury] financing but is it an open-and-shut case that
After all, we have
this change could not be done tomorrow morning?
the shortest maturity being auctioned today, which isn't as affected
If we did it tomorrow, both the medium-term
by these fluctuations.
And I am
and the longer-term bidding would still be ahead of us.
thinking, given the risks--and while we are an honest organization-I'm just wondering what the pros and
that that's a long time to go.
cons are.
CHAIRMAN GREENSPAN.
MR. BOEHNE.

Well, may I make a suggestion?

Yes.

CHAIRMAN GREENSPAN. Let's wait to see what conclusion we
Then, let's put "when" on the table, if that is the
come to.
conclusion, as a separate issue.
MR. BOEHNE.

Okay.

CHAIRMAN GREENSPAN.
MR. PARRY.

Okay.

Bob Parry, are you finished?

Yes.

CHAIRMAN GREENSPAN.

President Forrestal.

MR. FORRESTAL. Mr. Chairman, I came into this meeting
I also
feeling that we should cut the funds rate 25 basis points.
hoped, and I still continue to hope, that that will be accompanied by
I think that would send an important and
a drop in the discount rate.
dramatic message that we really need to send. As you said, the
I pay a
momentum of this recovery has slowed down or even stalled.
great deal of attention to this confidence element, and I think people
really need some kind of a signal from some institution. And given
the impotency of fiscal policy at the moment, we're the only
institution that can provide some kind of action that will help to
turn confidence around. Twenty-five basis points and even a drop in
the discount rate may not renew confidence completely, but it will go
some of the way toward helping with that and helping with the further

11/5/91

-31-

consumption and business [unintelligible] needs.
Finally, I agree
with you entirely that the inflation risks of moving at this time are
very minimal. So, given the risks to a sustainable recovery, I think
we need to move and 25 basis points strikes me as [appropriate].
CHAIRMAN GREENSPAN.
MR. FORRESTAL.

And would you be asymmetric?

I'd be asymmetric.

CHAIRMAN GREENSPAN.

President Syron.

MR. SYRON. Mr. Chairman, while I'm in favor of what you want
to do, some questions arise, given what we know and don't know. What
we do know is that we have risks on the down side and that, while we
may not be able to control things, we can influence them. This issue
of confidence, which others have spoken of, is very important. I
think the worst thing we could do would be to tell the American public
not only that fiscal policy is impotent but that we don't think
there's anything the Federal Reserve can do either.
I think people
would give up. Also, in terms of the longer time frame, if it should
be necessary to turn back, I think the Federal Reserve would do it.
It's a win/win situation in some sense if the economy recovers because
we buy more credibility in the long run by showing that we're willing
to do it then. I certainly hope, because I think some--to use the
phrase of the day--"gong effect" is needed, that the 25 basis point
cut will be associated with a cut in the discount rate.
Some of [my
concern] does have to do with the timing issue that Ed Boehne raised
and that you want to return to. But I'd be in favor of [your
proposal] and I'd be in favor of asymmetric language.
CHAIRMAN GREENSPAN.

First Vice President Hendricks.

MR. HENDRICKS.
Thank you, Mr. Chairman. Our support for the
recent reduction in the fed funds rate was based on the need to
encourage a stronger growth rate of M2, not because of a perceived
threat to the economy in the District or the nation. We're concerned
over the persistent weakness in M2 since last spring and its longerterm trend over the past four years. A stronger growth rate in M2,
within its target range, would likely add to the credibility of that
target and would provide the base for a realignment of intermediateand long-term rates.
Normally, we would be inclined to wait a bit
longer to judge the impact of this recent reduction in the funds rate
to the 5 percent level. Work in Cleveland suggests that if we want a
fourth-quarter-to-fourth-quarter 1992 growth rate of 3 percent in M2,
we need a funds rate lower than 5 percent.
Projections of M2 growth
have fallen short for some time now, and we would prefer to push on
the funds rate until we get M2 safely to a level we are comfortable
with. We're getting close now to next year and, although we haven't
come to a finalization on our view yet, our guess is that we will want
something around 3 percent.
We would not mind going into next year a
little heavy on M2 growth, but we don't believe the 1/2 point
reduction in alternative A is needed at this point; our preference is
for the position half-way in between. We believe another 25 basis
point reduction of the funds rate with symmetric language is
appropriate at this time. And we believe we should push ahead as
rapidly as we can to get the M2 growth we want.
CHAIRMAN GREENSPAN.

President Keehn.

-32-

11/5/91

MR. KEEHN. Mr. Chairman, it seems to me that the small
reductions we have been doing really aren't producing the desired
results, with M2 in this process having continued to deteriorate. We
haven't reduced the discount rate since September and that seems to me
an awfully long time to have left such a visible rate in place, not
I do think we are at a point where we need to
having made a change.
This confidence factor is
do something a little more visible.
important. Also, it's important to do something that will bring the
prime rate down.
I'm not [certain] that a lower prime rate is
necessary to encourage more lending, at least at the outset; however,
ultimately, I think it does work its way through to higher lending.
My
But it certainly does reduce the costs [of doing business].
preference would be to reduce the discount rate by 50 basis points and
As to whether it's Wednesday
the fed funds rate by 25 basis points.
I
or Friday, I have a slight preference for Friday, but I don't care.
must say, having heard the conversation earlier, that I don't know
quite how much confidence I have that a change in the discount rate
Lacking that, then I'd be in favor
[will be adopted] at this point.
But
of alternative A with a 50 basis point cut in the fed funds rate.
I could live with 25 basis points now on the fed funds rate if there
If [the consensus] were for 25 basis points
were asymmetric language.
now and symmetric language, I'd find that a very difficult option at
the moment.
CHAIRMAN GREENSPAN.

President Boehne.

MR. BOEHNE.
I favor this "A to B" 4-3/4 percent funds rate
with an asymmetric directive for this body, and I think it ought to be
accompanied by a discount rate reduction by the other body. The logic
is that we have a reasonable prospect of doing some good with this
package and I think we have very little chance of doing harm. And
So, in that situation,
even if we find it is harmful, we can undo it.
it seems to me we ought to do it.
CHAIRMAN GREENSPAN.

President Stern.

MR. STERN. I find these unusually difficult circumstances,
It's not that I
but on balance I come out in agreement with you.
think a 1/4 point reduction in the funds rate, whether or not it's
accompanied by a discount rate reduction, is going to do a lot quickly
and directly for consumer confidence or [business confidence] or jumpstart the economy. And we know more about jumper cables and jumpstarts in Minneapolis than most! But my expectations would be more
I am concerned about the slow growth of M2, not so much in a
modest.
strictly monetarist context but in the sense that going into this year
I at least was looking for continuity in policy, not a sharp departure
I
in M2 growth from what we experienced in the previous four years.
I don't believe such a move at
think continuity is still a virtue.
In fact, it might enhance
this point would weaken our credibility.
our credibility and I think it's the responsible thing to do at this
time. And I don't think it would interfere with wringing out the
excesses of the 1980s, a process which has to continue if we're going
to restore economic health.
CHAIRMAN GREENSPAN.
MR. MELZER.
with alternative "B."

President Melzer.

I'd go
I'm in favor of standing pat right now.
It's not an
[Unintelligible].
We just moved.

-33-

11/5/91

original idea; Wayne alluded to it and others have mentioned it.
But
I'm not so sure that a lot of activity isn't frozen on the expectation
that rates are going to go lower. A lot of people are just waiting to
see.
So, I'd just stay where we are and watch for a while. Also, I
wouldn't be so quick to say that there isn't any inflationary risk
right now.
I continue to think long rates are a reflection of longterm inflationary expectations.
I wouldn't be a bit surprised, if we
made a move, that long rates would come down somewhat.
But I don't
think that's the measure; it's a measure over a longer period of time
of what those rates are doing.
I think we have to be careful if we
disturb them.
CHAIRMAN GREENSPAN.

President McTeer.

MR. MCTEER. I think your recommendation of a 25 basis point
cut in the funds rate is appropriate. And in the context of more
frequent discussions in the coming weeks, I would prefer the symmetric
language.
CHAIRMAN GREENSPAN.

President Hoenig.

MR. HOENIG. Mr. Chairman, I have some concerns about easing
now in terms of inflation down the road.
I assume that there may be a
discount rate cut.
If that's the case, that would make for an
announcement from the Fed and then I would recommend the possibility
of a 1/4 point cut on asymmetric [language toward] easing based on new
information that may come to you. So, I'd be slightly different.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN CORRIGAN. I would favor the 25 basis point
reduction in the funds rate accompanied by a discount rate change of
1/2 percentage point, recognizing, of course, that the timing decision
[for the discount rate] itself is the Board's.
If both of those
things were done--this gets into Ed's question about timing--I
probably would favor a symmetric directive thereafter. With just the
funds rate done, that complicates matters and I'd probably favor an
asymmetric directive.
CHAIRMAN GREENSPAN.

The trouble is:

Which would you vote

for?
VICE CHAIRMAN CORRIGAN.
CHAIRMAN GREENSPAN.

That means I'd vote either way.

President Black.

MR. BLACK. Mr. Chairman, I'd like to suggest a compromise,
which I guess would be controversial, though.
VICE CHAIRMAN CORRIGAN.

That's how it's a compromise!

MR, BLACK. I thought we had covered every permutation and
combination we could have, but I don't think anybody has come up with
exactly this.
I would leave the federal funds rate where it is for
right now, but I would favor submitting--in the case of our Bank,
which would join several others--[a recommendation for] a 1/2 point
cut in the discount rate with the hope that the Board would see fit to
approve that on Friday. If we had a steady federal funds rate right

-34-

11/5/91

now, I think that would be a good way to reassure the long-term
markets and it would give us a little more time to judge the easing
actions that we took last week. At the same time, reducing the
[discount] rate would reestablish a more normal spread between the
And a very important point,
discount rate and the federal funds rate.
to which Governor Angell alluded earlier as did Tom Melzer, is that it
might also convince a lot of potential borrowers who are sitting out
there just waiting until they think rates have hit the bottom to move
into the fray. A lot of people in the real estate business think that
is true. Now, if we did adopt that approach, which I'm sure we're not
going to, I would favor having an asymmetric directive in favor of
ease thereafter.
CHAIRMAN GREENSPAN.

Governor Kelley.

MR. KELLEY. Mr. Chairman, I don't believe the state of the
We may
economy is quite to the point here that others seem to feel.
get there, though I hope we don't; I don't think we're there now. I
think there's still a lot of stimulus in train that is going to
support us as time goes forward. And I don't view a discount rate cut
here as quite as riskless as we would like. As a consequence, I would
prefer alternative B but I do believe that asymmetric language is
I'm aware of the fact that you
warranted under these circumstances.
If that turned out to be
have said you would use it if you got it.
the case, so be it.
CHAIRMAN GREENSPAN.

Governor Mullins.

I would favor a 1/4 point cut now and also
MR. MULLINS.
asymmetric language because I believe the risks are still very much on
We're playing catchup.
the down side.
CHAIRMAN GREENSPAN.

Governor LaWare.

MR. LAWARE. Well, I must say that I feel like the person who
is lost in the woods who as a boy scout was told that if you get lost
in the woods find a stream and follow the stream downstream and you'll
It may be a long trek if you're somewhere near
eventually come out.
But I sense that there's a stream going along
the Continental Divide!
here, and I guess I'm persuaded that the downside risks are not
So, I will vote reluctantly for "A" symmetrical.
material.
CHAIRMAN GREENSPAN.
MR. LAWARE.

I'm sorry, with the 25 basis points?

Yes, 25 basis points down but symmetrical

language.
It's clear that
I've run out of people.
CHAIRMAN GREENSPAN.
I count
there is a majority of the Committee for 25 basis points.
one, two, three, four, five...; there is a majority for asymmetrical.
Can we
Is anyone's vote dependent on "when?"
Let me ask you this:
discuss that independently?
MR. PARRY.

Well, maybe Peter ought to address that issue.

CHAIRMAN GREENSPAN. No, no, what I'm trying to say is
whether or not the vote [unintelligible] we just took a survey. What
I conclude from marking down what everyone has said is that there is a

11/5/91

majority for
The question
whether that
other words,
fact that is

both 25 basis points now and leaving asymmetric language.
I am asking is:
Was anybody's [decision] related to
In
would be done, if it were done, sooner or later?
can we discuss that issue after we find out whether in
the consensus of the Committee?

MR. PARRY.

Yes.

CHAIRMAN GREENSPAN. I'm merely asking whether these are
independent events in a sense.
MR. PARRY.

Yes.

CHAIRMAN GREENSPAN. Okay.
ask that you read the directive.

If that's the case, then I would

"In the implementation of policy for the
MR, BERNARD.
immediate future, the Committee seeks to decrease somewhat the
Depending upon
existing degree of pressure on reserve positions.
progress toward price stability, trends in economic activity, the
behavior of the monetary aggregates, and developments in foreign
exchange and domestic financial markets, slightly greater reserve
restraint might or slightly lesser reserve restraint would be
The contemplated reserve
acceptable in the intermeeting period.
conditions are expected to be consistent with growth of M2 and M3 over
the period from September through December at annual rates of about 3
and 1 percent, respectively."
CHAIRMAN GREENSPAN.

Would you call the roll.

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

Yes
Yes
No
Yes
Yes
Yes
No
Yes
Yes
Yes

CHAIRMAN GREENSPAN. Okay. We now ought to have a discussion
on the timing of this. Do you want to start, Peter, on the issue of
what would happen if we move 25 basis points Tuesday, Wednesday,
Thursday, or Friday?
MR. STERNLIGHT. Well, Mr. Chairman, as I said in my
probably
statement, I think the market is looking for further easing:
a further 1/4 point on the funds rate and probably also a discount
rate move.
That has to be on their minds as they bid on these
Treasury offerings. Yet, I can't escape the feeling that it's somehow
potentially disruptive to have those changes actually implemented
right within the period of bidding for the Treasury securities.
If
something had been done early this morning, a couple of hours before
We did that in
they come up to bidding for the 3-year, so be it.
August, I believe, when a small change was implemented the morning of
the 3-year auction. We did get a certain number of complaints from

11/5/91

But with a move that occurs right within
the market even about that.
You can say,
the bidding period we would hear even more about it.
well, why wouldn't an easing move if anything be a plus for securities
if they take them?
But you have to remember that they're in the midst
of a distribution process where they are shorting; they are selling on
a "when-issued" basis the issues that are about to be bid for.
So,
you could catch some market participants in that stage of having sold
"when issued" to some customers with the expectation that they will
then be putting a bid in the auction.
I think that's an awkward
So, I have just a gut feeling that
position to be leaving them in.
It seems to
Now, how long should you wait?
it's preferable to wait.
me Friday would be about the earliest that I could feel comfortable
with.
I could even make a case for having it carry over to early next
week. But I would feel most strongly that it would be preferable not
to implement a visible change just within these bidding days of today,
Wednesday, or Thursday.
CHAIRMAN GREENSPAN.
MR. D. LINDSEY.

Do you want to [comment]?

I agree with Peter's comments.

CHAIRMAN GREENSPAN.

Governor Angell.

MR. ANGELL. Mr. Chairman, I hope my advice is wanted on this
I do believe that there's an
even though it wasn't on the other.
Information is scarce and information is
integrity question here.
hard to come by for the market. And I don't feel comfortable for us
to deliberately let an auction take place for a 10-year issue tomorrow
morning and not let the markets know all that we know. I do not feel
comfortable with people taking short and long positions on an auction
It seems to
tomorrow while we know precisely what we're going to do.
me that the fairest thing to do is to do it as soon as the markets
have [closed], which I think for us would be tomorrow morning. I
would also suggest, Mr. Chairman, that there have been times that
we've had leaks that are more in the realm of information for [news
But if we were to have a leak, that would only be seen as an
media].
advantage for someone in the market and would do this institution a
great deal of harm.
CHAIRMAN GREENSPAN. You know, I must say I agree with that.
Let me cite one of the problems I have. The FOMC is scheduled to meet
The
on a publicly announced date and is expected to make decisions.
market knows that.
If we in the past had moved during an auction,
everyone would have screamed bloody murder. But the question
And the question I'd
Who is right in this question?
essentially is:
If we were to do it some time in
like to put to a vote with you is:
the middle of the auction, how much damage would actually be done?
MR. D. LINDSEY. I personally started out with that view last
week and early this week. And I thought particularly that if the
Committee were to go down 1/4 point, that is what is expected and it
could be done in [the midst of] an auction. But after talking to
Peter, who yesterday read me a litany of commentators saying it's
inconceivable that the Federal Reserve would move during the auction.
I
"Peter, I realize that's a common view, but is it right?"
I said:
I did finally come around to the thought
was resisting even then.
that it would be better not to mix this policy change with the middle
So, as I said before, I personally come down
of that bidding process.

11/5/91

-37-

with Peter on this one. After having thought about it, I realize
there are two sides and I've been on both!
CHAIRMAN GREENSPAN.
damage is actually done?

But answer the question.

How much

MR. SYRON. Mr. Chairman, may I add to your question?
much damage is done and to whom is the damage done?

How

MR. D. LINDSEY. Well, let's say that the 1/4 point isn't
fully built in. Let's say we announce tomorrow and there's a little
decline in the yields in the 3-year note.
To the extent that there is
some market reaction, those who went short on the 3-year are going to
be hurt and we're going to hear from them. There are going to be
complaints.
I think they'll complain more if we move tomorrow than if
we move on Friday in the sense that they're going into their bidding
on the 3-year note pretty sure that we are going to move on Friday.
So, they're not as likely to write irate letters even if yields move
against them. So, there are people who potentially are damaged.
I
should probably let Peter-MR. STERNLIGHT.

[Unintelligible.]

MR. BOEHNE.
In these kinds of situations where you have
something of a trade-off, I think you have to ask yourself a question:
If I had to defend the actions to the whole world, which side would I
rather be on? And I would rather be on the side that said we had a
scheduled meeting and we made a decision; there was speculation pro
and con but we implemented that decision in the market so that
everybody would find out about it at the same time.
I'd rather say
that than that we delayed it for three days or five days or six days
In
because we were afraid a few people would get hurt selling short.
the whole context of what our role is as a public institution, we have
to go with the side that meets our standards and with which we feel
comfortable.
CHAIRMAN GREENSPAN. Well, you have to ask yourself: What is
the job of the market people?
Their job is to make judgments as to
what is going on in the market. And one of those jobs is [judging]
what we're going to do.
MR. SYRON. Mr. Chairman, I just want to associate myself
very strongly with the views both of yourself and Governor Angell. I
think this is a case where there is a question of integrity of the
organization in what we're doing, particularly in the environment of
the last several months domestically. I'd be concerned about not
letting people who are paid to bear the risks bear the risks when we
really don't think, from what I hear, that this is something we fear
is going to do a lot of damage to the economy. And the economy is
what we're supposed to be concerned with.
CHAIRMAN GREENSPAN.

President Black.

MR. BLACK. Mr. Chairman, there's another complication. A
number of us have meetings of our executive committees or full boards
on Thursday and we'll be addressing the question of the discount rate.
And if we know that we're going to cut the federal funds rate 1/4
point on Friday, we can't tell the directors yet.
They don't have the

11/5/91

-38-

information they need to make a rational decision. So, there's
another reason for doing it now rather than then, although I have a
lot of sympathy for what Peter and his associates have been saying.
MR. PARRY. You mean you can't make a recommendation on the
discount rate independent of that?
MR. BLACK. Sure, I can; but I have knowledge that they don't
have that I can't share with them.
MR. PARRY.

Yes, but you--

MR. BLACK.

And I wouldn't--

VICE CHAIRMAN CORRIGAN.

That's true all the time.

MR. BLACK. Well, it is [a concern] to me not to share
information and give them my best judgment, which would have to be
affected by the knowledge that we were going to cut [the funds rate]
1/4 point the next day. We're pretty free with our directors but we
never tell them anything about what we're going to do or anything
about what we just did that isn't released, and we never will. So we
couldn't possibly tell them that this 1/4 point [reduction] was
pending. And yet I think their attitude would be affected to some
significant extent by that if they knew.
CHAIRMAN GREENSPAN.
MR. MULLINS.

Governor Mullins.

First, I think we shouldn't schedule FOMC

meetings around quarterly auctions.
CHAIRMAN GREENSPAN. Why don't the quarterly auctions
schedule themselves around our meetings?
VICE CHAIRMAN CORRIGAN.

That's not a bad idea!

MR. MULLINS. I tend to agree with Wayne's analysis, although
I think we should be aware that there is potential damage here. The
concern I would have is the 30-year auction, because that price is no
longer being set by people at the margin. On auction day, Thursday,
they will rip open the market and reach deep within it to sell $12
billion worth of bonds and, when you do that, that marginal buyer is
sometimes a fairly aberrant personality. If there is skepticism about
our move, I don't think we would see that on Friday so much because,
again, they are trading at the margin. And we just are more
vulnerable and at risk of getting a sloppy auction and doing some
damage to the long-term rate. I think that happened a bit in April,
and there have been some other examples as well. Even recognizing
that risk, I still would come down with Governor Angell.
CHAIRMAN GREENSPAN.

President Melzer.

MR. MELZER. I was just going to ask Peter: If, say, we did
I don't know what
it tomorrow, how effectively could you transmit it?
mode open market operations are in right now.
MR. STERNLIGHT. Well, we think we have a moderate add need.
We didn't do anything today because funds were sitting right at 5

-39-

11/5/91

If we wanted to transmit a signal tomorrow, we probably
percent.
could do overnight system repurchase agreements and it probably-MR. ANGELL.

At what time, Peter?
At our normal time.

MR. STERNLIGHT.
MR. FORRESTAL.

MR. ANGELL.

Could we do it early, though?

You wouldn't do it early?

MR. STERNLIGHT. I don't know.
I wouldn't be inclined to.

I'd have to think about that;

MR. SYRON. If that's your concern, wouldn't you have to put
more in if you do it at the regular time rather than by doing it with
an announcement effect before the market opens?
MR. STERNLIGHT. I don't know. My inclination would be to do
something--. To go back to this question of damage, I don't see
terrible damage from doing it, and I really have a lot of sympathy for
If there's a change in
what Governor Angell and others have said:
policy, it ought to be transmitted to the market. Maybe I've been too
close to the markets on this, but I think we'll get some adverse
reactions.
MR. MELZER. I'm a little rusty on this. I was just going to
ask: What is the dollar price effect of 10 basis points on the 10year?
VICE CHAIRMAN CORRIGAN.
MELZER. Exactly.
the 10-year, isn't that--?

A whole bunch!

So, if somebody is short $50 million on

VICE CHAIRMAN CORRIGAN.

It's probably $150 per 1/32 per

million.
MR. STERNLIGHT. But as the Chairman has said, they're all
big boys and they know that we're facing these policy decisions and
could be acting. They know we're having a meeting today.
CHAIRMAN GREENSPAN.

Vice Chairman.

VICE CHAIRMAN CORRIGAN. I tend to be a bit conservative, as
you know, about these things. But in this context, I frankly don't
worry about [unintelligible] people maybe getting burned because
they're short. They are risk takers. What worries me is a little
more far-reaching than that, and that is, as you know very well, we
have to be very careful about this marketplace. Governor Angell is
quite consistent. But going back to our discussion a week or 10 days
ago when we were talking about basically dismantling the whole
infrastructure to that market, this is a very concrete, vivid example
of the kind of thing I'm worried about. And we've got to be careful
of these things.
CHAIRMAN GREENSPAN.
schedule our meetings--

Well, what we ought to do is at least

-40-

11/5/91

VICE CHAIRMAN CORRIGAN. Well, I think Dave has the right
idea.
Notwithstanding my extreme caution in terms of some of these
other more sweeping moves, in this particular context I'd go ahead and
But that doesn't mean that
do it on Wednesday and take our chances.
my anxieties about the need for a little care and nurturing of this
market can be assumed to have disappeared.
CHAIRMAN GREENSPAN.

President Forrestal.

I was
I think my question has been answered.
MR. FORRESTAL.
going to raise the question about how we would get the announcement
effect out tomorrow. The last time we did this there was some
So, whatever we do, we ought to make it very
confusion in the market.
clear. On the broader issue, I'd go ahead and do it and risk the
I just wish we had done it early this morning!
letters and so on.

have!

MR. BLACK.
[Laughter]
MR. MELZER.
MR. BLACK.

If you hadn't talked so long, maybe we could

That's impossible.
I know.

CHAIRMAN GREENSPAN.

I'm being facetious.
Governor Kelley.

MR. KELLEY. Mr. Chairman, I'm very strongly in the camp with
We have made a decision here and it becomes at that
Governor Angell.
point a simple question of integrity. With this auction going on, we
now know what has been done and what will be done and it is only a
matter of straightforward integrity that we have to go on and do it
and release that information. If we did not make this effective right
away, in time, as the minutes come out, the fact that it was decided
upon and then delayed would be known to the market and I think we
would quite correctly suffer an integrity question and a credibility
gap that we would deserve to suffer. And that would be there for a
long time.
I didn't want my comments to be misinterpreted.
MR. MELZER.
It think it's unfortunate
I'd support going ahead and announcing it.
but I support that.
CHAIRMAN GREENSPAN. Well, we also ought to see if we can
arrange not to have a conflict; this issue has come to us before.
SPEAKER(?).
SPEAKER(?).

surface.

Bizarre.
It's just crazy.

CHAIRMAN GREENSPAN.
Tom.

This issue shouldn't be coming to the

MR. HOENIG. I totally support taking this action tomorrow
for the very reasons that Governor Angell, Governor Kelley, and others
have expressed. We need to get it out.
CHAIRMAN GREENSPAN.
SPEAKER(?).

Okay.

I'd go now.

Anyone else?

-41-

11/5/91

MR. BLACK. Could I ask Peter one question, Mr. Chairman?
Peter, if we went in before the normal time, which you could and
sometimes do, would that alleviate to any extent the problem that you
alluded to originally?
MR. STERNLIGHT. It probably is a better way to make sure the
message gets across immediately. I don't think it will remove some of
the down side that I see.
I'm kind of swinging around in my own view.
MR. BLACK.
MR. KELLEY.
through the market?

I'd favor doing it in the morning, first thing.
Just make an announcement--not let it happen

MR. BLACK. No, I was thinking about going ahead and doing it
through the market tomorrow as soon as the market opens.
MR. BOEHNE.
MR. BLACK.

As soon as the market opens?
That's what I think I'd do.

CHAIRMAN GREENSPAN.
MR. KELLEY.
MR. BLACK.

Okay.

Not 11:00 a.m.?
No, nor 11:30 a.m.

CHAIRMAN GREENSPAN. The next meeting is December 17 and we
will adjourn for our luncheon for our departing colleague.
MR. PARRY.

Is that a one-day meeting?

CHAIRMAN GREENSPAN.

A one-day meeting.
END OF MEETING