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Meeting of the Federal Open Market Committee
October 3, 1989

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, October 3, 1989, at 9:00 a.m.

Mr. Greenspan, Chairman


Corrigan, Vice Chairman

Ms. Seger
Mr. Syron
Messrs. Boehne, Boykin, Hoskins, and Stern, Alternate
Members of the Federal Open Market Committee
Messrs. Black, Forrestal and Parry, Presidents of the
Federal Reserve Banks of Richmond, Atlanta, and
San Francisco, respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Assistant Secretary
Mr. Gillum, Deputy Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Patrikis, Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R..Davis, T. Davis, Lindsey, Ms. Munnell,
Messrs. Promisel, Scheld, Siegman, Simpson,
and Slifman, Associate Economists
Mr. Sternlight, Manager for Domestic Operations,
System Open Market Account
Mr. Cross, Manager for Foreign Operations,
System Open Market Account

Mr. Coyne, 1Assistant to the Board, Board of Governors
Mr. Ettin, Deputy Director, Division of Research and
Statistics, Board of Governors
Mr. Keleher, Assistant to Governor Johnson, Office of
Board Members, Board of Governors
Mr. Stockton, Associate Director, Division of
Research and Statistics, Board of Governors
Ms. Low, Open Market Secretariat Assistant, Division of
Monetary Affairs, Board of Governors
Messrs. Beebe, Broaddus, J. Davis, Lang, Rolnick,
Rosenblum, and Ms. Tschinkel, Senior Vice Presidents,
Federal Reserve Banks of San Francisco, Richmond,
Cleveland, Philadelphia, Minneapolis, Dallas, and
Atlanta, respectively
Messrs. Guentner and Thornton, Assistant Vice Presidents,
Federal Reserve Banks of New York and St. Louis,

1. Entered meeting prior to discussion of current monetary policy.
2. Left meeting prior to discussion of current monetary policy.

Transcript of Federal Open Market Committee Meeting of
October 3, 1989
CHAIRMAN GREENSPAN. Good morning, everyone.
please move the minutes of August 22?


I'll move it.

had a dull few weeks!

Would somebody


Without objection.

Mr. Cross, you've

I'm not even going to report today!
That probably means he doesn't want any

[Statement--see Appendix.]


Questions for Mr. Cross?

MR. HOSKINS. Where are we relative to our ceiling [on
holdings of foreign currencies]? Do you anticipate our having to do
more in the intermeeting period ahead in terms of raising the [$20
billion] ceiling?
MR. CROSS. We are at just under $1-1/2 billion below the
ceiling. Whether it is going to prove necessary to request a further
change in that depends very much on how things develop over the months
ahead. But we do have $1-1/2 billion which, if we share 50/50 with
the Treasury, means that there could be a substantial amount of
intervention--$3 billion worth--before we would come up against the

Governor Johnson.

MR. JOHNSON. Sam, there were a couple of things that I
thought didn't come through quite clearly in your report.
First of
all, the G-7 Communique said it looked like the dollar was out of line
I certainly disagree with that, but I
with existing fundamentals.
guess one could debate that point. But what the Communique also said,
specifically in follow-up language, was that the G-7 would consider it
counterproductive if the dollar rose above current levels or fell
In terms of exchange rate strategy, my understanding was
that there was certainly no implication in there about a concerted
attack on the dollar. You mentioned that the strategy was generally
to resist upward pressure, but there were times repeatedly when there
was a concerted effort to drive the dollar lower and then, as it
ratcheted down, to hammer it when it even started to show any upward
pressure from lower levels.
So, I think it's a bit of a semantic
issue to talk about resisting upward pressure when in fact it was a
clear strategy to ratchet down the dollar. Even though there were not
massive levels of dollars sold, that kind of strategy--especially when
we've never participated in Far Eastern markets on a regular basis--in
my opinion was just grossly destabilizing.
I thought it was a scary
event, and I can't see us condoning that sort of a strategy.
I think
it's potentially very, very dangerous.


MR. CROSS. Well, the words in the Communique were exactly
what you said and exactly what I read in my statement--that a further
rise or an excessive decline could adversely affect the prospects.
would say, though, that there is a very, very major difference between
going in and hammering the dollar down in falling markets and
resisting it when it is rising. We didn't always resist it
immediately when it showed any increase; we resisted when it was
rising and let the market take it down some. Obviously, the market
But the
knew that the G-7 was trying to guide the dollar down some.
point I was making was that we did recognize and try to take account
of, as much as we could, the risks that could follow if we really did
go in and hammer the dollar down while it was falling, which we didn't
really do.
MR. JOHNSON. Well, let me ask a question. Is there any kind
of technical agreement within the G-7 on a targeted band on exchange
I'm certainly not aware of any. And if there is, what is
rates now?
it specifically?

So far as I'm aware, there is none.
There is no quantitative understanding about

I am not aware of any target ranges that are in
existence. While there were some months and months ago, I don't think
those have any relevance at the present time.

Well then, how did you know where you were


Well, we were talking every day-What was your objective?

MR. CROSS. Our objective was to curb the dollar's rise and
to have it decline some. We did not want it to fall an enormous-MR. JOHNSON.

But where?

MR. CROSS. We discuss every day what to do for the following
It had fallen a little from time to time; it did not fall in
massive amounts on any day. We discussed with the others, based on
the closing level in New York, say, on Tuesday, what might be a
sensible target.
MR. JOHNSON. Just put yourself in the position of somebody
If the market concluded that what the Communique meant
in the market.
was that the G-7 wanted a lower dollar, that is [not the same as]
resisting [a rise] from current levels. So they're trying to figure
out where the fundamentals are; what is the target that goes along
It sounds like even we don't know. There is
with the fundamentals?
not even an understanding about where the dollar ought to be.
MR. CROSS. There is an understanding that the rise that had
occurred was not helpful. And there is an effort to bring about
greater stability and to reduce the dollar somewhat. But no one knows
that you need to move the dollar down to XYZ point in order to assure


that it meets with these longer-term [fundamentals].
So the
intention, as far as I'm concerned, was to try to take away some of
this upward momentum and to let it ease off somewhat. But, as I say,
it hasn't fallen all that much and we haven't driven it down that
much. We're now at levels we saw in August--that's less than two
months ago--and that we saw earlier in May. I'm sure that if the
dollar were to show a further significant rise this approach would
CHAIRMAN GREENSPAN. Let me answer, Governor Johnson. The
best way of defining what was involved is that it was not a range for
the dollar, but how much the various governments would be willing to
I think the best way of describing the agreement is that
there would be moderate intervention and if that intervention knocked
the dollar down significantly, which it did, that was fine. But if it
did not, there was no agreement to just use unlimited resources to
break the market. That was an original proposal which had been shot
down. And in a sense, rather than talk in terms of what was the
ultimate goal, I think the more appropriate issue as to where the
restraints were and what the guidelines were was the degree of
resources that were being placed into the markets.
MR. JOHNSON. Well, since there was no notion on where the
dollar should be but there was a commitment of dollars, what would
have happened if the dollar had collapsed and yet you'd only spent a
third of your commitment?

We would have stopped.
You would just keep spending it?


Where do you stop?


But where do you stop?

CHAIRMAN GREENSPAN. That's why in various meetings the
central banks that were involved in this insisted upon looking at what
was going on in the secondary markets--so that any evidence of a
cumulative deterioration would have induced a real pull back. It
really wasn't country versus country. It was finance ministers
against central bank governors.
If you're having trouble finding out
what the ranges are or what the policy is, [that is because] you're
looking at a committee.
They tried to get a consistent day-by-day
scenario, but as Ted Truman put it, there were too many branches of
possibilities. As they went day-by-day, the restraint or the
criterion was the amount of resources that were available, not a
particular target.
MR. JOHNSON. Well, if that's the case, I think it's even
more dangerous than I thought it was when I first started this
conversation. We spent $400 million and we intervened five times in
the market yesterday with the dollar down to around 139 for the yen
and 1.87 on the D-mark, and yet we don't know where we're going.
We entered in for almost all of that after the
dollar had moved up from that 139.



Well, up a fraction.

MR. CROSS. We knew of some points that were particularly
sensitive in the market as the dollar got up close to 140 [yen] and we
went in again in order to try to keep it from going through the 140
level. We didn't do enough to keep it from going through.
MR. JOHNSON. Hearing this description, I think there's a
risk that risk premiums are going to continue to grow. With as much
uncertainty as there is in here, you can imagine the uncertainty that
might be out in the market if we can't even figure out what's going

That's not quite fair.

Governor Johnson!

You're shooting the messenger here,

MR. JOHNSON. Well, I realize there is a resistance to a lot
of the [intervention] strategy here [among Committee members], but I
think we ought to step up that resistance.
MR. BOEHNE. I'd like to pursue this conversation along a
If I were in the market and saw this kind of
somewhat different line.
intervention--and the dollar has come down--one of the reasons I might
think it would come down is that if governments are going to spend
And the second act
this kind of money, they must have a second act.
So, my
might be some understanding as to some basic policy changes.
first question is: In these discussions about intervention, is there
some kind of understanding that the intervention will be followed up
with more fundamental changes in economic policy, whether on the
monetary side or the fiscal side?

The answer is "no."

The market thinks so.

I think the market would think so, because most
people probably would agree that intervention, except in rare
situations, has a rather temporary influence unless it is followed up
with something more fundamental.
CHAIRMAN GREENSPAN. Ed, that is true among academicians; it
belief now,
is not true among finance ministers. There is an
particularly among the Japanese, that sterilized intervention can put
the exchange rate where they want it.
MR. BOEHNE. Well, that leads into my next question; I think
Is the United States leading the charge on this or
you touched on it.
is it more a consortium of finance ministers who are leading the
charge and central bankers are acting as their agents? Or is there a
I'm just trying to
lot of enthusiasm on the part of central banks?
CHAIRMAN GREENSPAN. There is no enthusiasm among any of the
I don't think even the Bank of France is
central bankers.
enthusiastic. The two leading prongs are the U.S. Treasury and the
Ministry of Finance of Japan. There has been a pulling and tugging on



this of rather large dimensions. My impression is that in the event
this all fails and the dollar starts to creep back up this
intervention effort will be abandoned. What we have to be careful
about it is that as it becomes more and more difficult, they will want
to increase [the amount of intervention] more and more. What we have
been fending off, successfully so far, is pressure that was not too
subtly brought forth before the G-7 meeting to bring the central banks
into this whole game. In other words, essentially the G-7 would start
to control monetary policy. And I think that was fended off pretty
abruptly. There was a feeble attempt to put that in the Communique.
That was knocked out very quickly before things got moving. Our
problem, basically, is that at this stage we could probably as central
banks--we could at the Fed--create a really big fuss about this. As
you know, legally, the presumption is that the President, through the
Secretary of the Treasury, has full control over the issue of
intervention policy. It has never really been tested. We have always
had a partial voice; in other words, when Messrs. Brady and Mulford
started to talk about [a target of] 125 for the yen and 1.75 for the
DM, I protested to a point where I suggested that they would pull the
system apart. And I got that eliminated. So, they did have targets.
The trouble is if we ever tried to get to those targets, we'd have the
world's most awful mess on our hands. There is a limit as to what we
can do short of confrontation. I don't think it serves either the Fed
or the country to try to be actually up front and to bring this
In other words,
operation to an abrupt halt. I think we could do it.
if that were our objective--forgetting all the secondary costs--I have
no doubt that we could do it. I just think that it would be far
better not to try that and, hopefully, keep this constrained at a
level where the damage is minimal. I disagree with Manley on the
issue of the secondary effects being scary; on the contrary, I was
surprised at how minimal those effects were. Having seen an earlier
version of intervention really almost kick over the bond market, I
think in the last 10 days we got away with really minor results.
don't think we can depend on that continuing. I think that if we
hammer at these markets, something will crack.
MR. BOEHNE. In your judgment, what will it take to get a
I guess what I'm
message to our Treasury and the Japanese that--.
saying is: How long is it going to take for them to tire of this?
CHAIRMAN GREENSPAN. Well, let me start with the Japanese.
It was very clear to me, walking into the G-7 meeting, that
He strikes me as a fixed
exchange rate man, an interventionist who is willing to expend large
resources to create changes.
he came over to me just before the G-7 meeting
started and said if we can't get the Germans to join us we would like
to join you, meaning the United States, in extensive exchange rate
intervention. This is a different Japanese Ministry of Finance than
ones we have dealt with earlier. With respect to the Treasury, it's
basically Mr. Mulford with whom we are dealing and we have had
philosophical and other differences with him on this and other issues
for quite a while. We do have significant influence in that

In other words, it's not without possibilities.

I don't

know what the end result of this thing will be, but if the dollar all
of a sudden starts to strengthen I will try as hard as I can to
convince Secretary Brady that this is a futile effort, that the


markets are trying to tell us something, and that to fight against it
is a rather fruitless task. Whether I will succeed, I don't know.
Vice Chairman Corrigan.
VICE CHAIRMAN CORRIGAN. A couple of points: first of all,
there's absolutely no question that a perception--whether it's reality
or not--that the central bank is trying to beat down the dollar is a
very, very dangerous thing; we would all agree with that. What may
not be agreed to or perhaps understood is the amount of effort that
has gone into trying to minimize the kinds of problems that could
arise in the current circumstances both with our own Treasury and
elsewhere. Maybe that hasn't been pristine pure or perfect in its
execution but I think the thrust of the effort has been in that vein.
But, again, the real question is the one that Ed Boehne started to ask
and the real debate, it seems to me, should be on the threshold
Obviously, Governor Johnson says in effect
question of where we are.
there are no imbalances. That isn't quite what you said but it's-MR. JOHNSON. I don't say that.
I recognize that there are
The question is whether they can be financed or not;
nobody knows. The market is deciding they can and we are trying to
second guess the world economy-I think that is really where the
I don't think it's a question of intervention
debate should lie.
I think the real issue is the implications over time
tactics per se.
for where we are and where we are going with regard to the global
In terms of some of the attitudes
economy and our national economy.
that go into this kind of convoluted point we're at, there are very
sharp differences of opinion about the implications of the current
situation and the outlook for the world economy.
MR. JOHNSON. But why should central banks be participating
First of all, we've been making statements about
in this exercise?
price stability now to the point where I think we have almost been a
"johnny-one-note" on that issue. And people, I think, are starting to
For us to be countering that with this ridiculous
believe us.
approach just doesn't make sense; [it introduces] a potential doubt
out there. If central banks continue to participate in this kind of
strategy and show even a compromise on it, I think to some extent the
markets are going to say this is a joke--in fact, they are balancing
the goals of the current account versus price stability. Now, my
position is well known in wanting to go gradually on this goal; but I
sure don't have any current account goals ahead of our goals on price
stability. And I think we'd be announcing to the world that we are at
least equally concerned about bringing the international current
account into balance as we are about conditions of domestic inflation.

I don't think that's the question


But that is the question.
That's the key issue.

VICE CHAIRMAN CORRIGAN. I agree that is the key issue but
the question is: Are those goals compatible in any reasonable sense
over even a 5-year period?


CHAIRMAN GREENSPAN. Can you hold it?
Hoskins wanted to get in here.

Presidents Black and

MR. BLACK. Mr. Chairman, most of what I wanted to cover has
been covered by various people.
I wanted to start off by saying that
I think this issue is more important than any of the ones we have on
the agenda. Despite the Japanese belief that sterilized intervention
can have some permanent lasting effect, I don't really buy that. And
I think this does put us into a dangerous position. As Sam indicated
a while ago, we can drive the dollar down and the Treasury has a
vested interest in that so as not to show a loss on its operations.
You could say that we do, too, although I'm sure that that's not
anything that would motivate us.

That is not the motive of Treasury.

Oh, I know that.

CHAIRMAN GREENSPAN. In fact, I just very recently have been
arguing that the accumulation that we have to date does raise that
issue; and this was before the Shadow Open Market Committee raised the
They are only now becoming aware of that excess block of
reserve currencies--that the foreign currencies that we have are a
potential political threat whereas it was perceived that we all of a
sudden [could] lose a part of our cash.
MR. BLACK. Well, the next point I was going to make was that
I was sure you were making just that sort of argument and I wanted to
commend you for having done that.
I do think one issue remains and
that is one that Governor Angell and Governor Johnson raised last
time: whether this really can fall in our existing directive to
counter disorderly conditions.
To my mind, it might go a little
beyond that.
And I realize the [unintelligible] of the constitution
is the Treasury [unintelligible] and I think you had to cooperate; I
would support that.
But I think it does behoove us to continue, as
you are doing, to try to educate them that this path is fraught with a
lot of dangers. At some point if we continue to get pressure from the
Treasury to do this kind of thing I think we ought to at least take a
look at the directive and maybe expand it--if we think that's
I wouldn't want to go
appropriate--beyond disorderly conditions.
I realize you've
beyond that myself but maybe the Committee could.
been on the side of the angels in this and-MR. ANGELL.

That is correct.

I want to say that there's only one of
them on which I have been on the side of.
MR. BLACK. Well, I was going to commend you but at the same
time criticize the fact that we unavoidably and inextricably got drawn
into it because of the Treasury's primary status in this thing. I
would express the hope that this study we have undertaken could
convince some of those who really don't know that much about it.
CHAIRMAN GREENSPAN. One of the things that I intend to do is
to convey the substance of this meeting to Mr. Brady.


MR. BLACK. As I said, I knew you were on the side of the
angels! Others may argue, but Wayne has had very close contact with
angels and he says that that is exactly right! If there's anyone here
who's equipped to speak for the angels I think he really is.

President Hoskins.

MR. HOSKINS. Well, I won't go back to my objections to the
whole policy because I've done that before. So, let me start
someplace else, and that is that in this room it seems to me we have
some concerns about whether or not we're going to be hanging together
in terms of making decisions down the road. In the spring we had a
dissent when we went to $15 billion. Then we went to $18 billion and
I guess now we're at $20 billion. It seems to me we had two dissents
on the last go-around. So, I think that this issue is one that could
divide this Committee and it's not the right issue to be fighting
over. The right issue to be fighting over is price stability; and I
think most people in the room agree with that. So, my only question
to you--and I hope you do convey the feelings to the Treasury if
that's really the sticking point because I think it's more important
to have good relations on this Committee than it is with the Japanese,
and I would cut it that way--how far are we willing to go in spending
resources along this line?
I'm sorry it's too far for me; but
apparently we're not picking a limit. We may go on up and I think
that would be bad for this Committee--you'll get bigger and bigger

President Parry.

MR. PARRY. Well, it seems to me that we are pretty well
agreed on the efforts to [discourage] intervention. I would say that
we only have one factor that we can [use] and that is for you to make
our viewpoint known as best you can to the Administration. My concern
is that if we were to do something of a confrontational nature we
would be forced or required to do things that we wouldn't want to do.
I don't understand. If we were to back away, Manley, I don't know-MR. JOHNSON. Let me say, Bob, that if that's the case, I
think we're going through a silly exercise in approving limits.
What's the FOMC meeting on this issue for? Why do we even care about
it? Let's just turn over open market operations on foreign exchange
to the Treasury. What are we going through this silly exercise for if
we don't have something to say about it?

The point is we do.

But it is just--

CHAIRMAN GREENSPAN. No, that's not fair. We basically have
something to say; maybe we've got 40 percent and they've got 60
percent, but it's not zero.
MR. JOHNSON. Well, we have an account in which we acquire
exchange reserves and we are supposed to have authority over that
account. As Bob Black said, we certainly we have a responsibility to
serve as agent for the Treasury in their actions on foreign exchange.
And the last thing I would want to do is question that authority. We
can certainly do what they instruct us to do on their account; I would


never resist that.
But acquiring exchange reserves on our account
when we are totally opposed to the direction of policy that takes
implicates us in the policy, I think. Now, I'm not for confrontation
either. As a matter of fact, I consider myself to have been simmering
a long time on this issue because I've generally been approving these
things all along both at the Subcommittee level and at the higher FOMC
I have never felt that dealing with disorderly conditions or
resisting pressures in one direction or another was something worth
fighting over.
It was worth cooperating and maintaining this whole
atmosphere of coordination and cooperation. But when I perceive that
we're getting to a point where we are literally taking risks and we
are moving in a direction counter to our whole philosophy, it seems to
me that we've got to stand up and be counted here. This whole thing
runs the risk of implicating us in something when we are out there
saying we are standing for price stability. Now, I think we can have
a debate here about how fast we want to go toward that goal; but it's
going to take even longer if we participate in these kinds of
activities. And I just think that at some point we have to give a
clear message on what our point of view is on this. Continuing to
acquire exchange reserves and exposure on our own account is really
risky, especially given what I know about people over there running
things at the Treasury.
I don't think it's Nick Brady myself.
think you have a green-eyeshade person in David Mulford over there who
doesn't know what he's doing. And I think it's very risky to turn
over policy to somebody like that.
I think Secretary Brady is capable
of being brought around on this issue and maybe that's where [we
should go]; I know the Chairman has been effective in talking to him
I wouldn't be making these points if I wasn't worried.
think this strategy that we are pursuing is very risky and it makes us
look bad.

Mr. Chairman--


President Melzer.

MR. MELZER. I have some of the same concerns and I have
But I
raised them, in the fundamental sense, as we had these votes.
think the Fed is in the fire and this is not the time when you fight
the philosophical battle.
It almost has to be resolved when you are
not in the middle of the program. I guess the way I look at it is
that if we were to get our backs up and refuse to participate at this
point in time we'd, in effect, be embarrassing the United States in
international policy circles. And I can't think of a dumber thing to
do in a political sense. Even if we could defend it on price
stability grounds, or try to, I think we would be painted with a
different brush.
[It would raise the question] as to why we have this
arm of the U.S. government that has this kind of independence to pull
that sort of thing. I think that's quite possible. Beyond that, in
terms of market perceptions, I don't share your concern, Manley, about
this intervention somehow really undercutting our credibility in a
price stability sense.
I think it would be far more damaging if the
Fed refused to participate here and that became a cause [celebre].
Then market participants would be very concerned because of the split
between the Fed and the Treasury and what that might imply in terms of
U.S. economic policy.

What do we do if this continues?



MR. MELZER. Well, we have this study going on, but there
comes a point where--purely from a financial point of view--looking at
our balance sheet, we have more holdings of foreign currencies than is
I guess that would define a
really justifiable in a financial sense.
limit. But I have some hope that if this proves not to work--and
given the path the Chairman is taking--that the Treasury will change
course. I have some hope that rather than through brinkmanship-MR. JOHNSON.
are you going to do?

But what if they don't?

If they don't, what

MR. MELZER. As I say, I think there could come a time; but I
don't think this is the time.
VICE CHAIRMAN CORRIGAN. Manley, I think what we have to try
to do is what the Chairman has been trying to do at one level and Sam
If you really want
and Ted [have been trying to do at their levels].
the worst scenario that we're all so terrified of, I'll tell you how
you get it.
That would be to advocate this and then have our 40
percent taken away so it's nothing. And then you would have your
green eye shade guy running the shop.
MR. JOHNSON. I agree with that, but I can't buy the scenario
Is the Treasury
in which that's going to happen in a credible way.
going to go to the Congress and say that somehow we are acting against
the national interest of the country?


effective argument?

It's not.

No, that's not the scenario.

But how is that going to work, Ted?
They have done it on several other issues.
I'm just asking: How is that going to be an

MR. TRUMAN. They did it on debt strategy, so it's clear that
the same man who did it to us on the debt strategy could; I don't
think there's any doubt that he wouldn't do it on this one.
And the
trade issue is the gut issue in Congress.
VICE CHAIRMAN CORRIGAN. The point is that there is that
That is the
danger; it raises the specter of what a fight will alter.
And if it's precisely that, that could
way this plays out.
precipitate the collapse in the dollar and the rout in the bond
That's what I think we have to be so
markets and the stock markets.
careful of.
MR. JOHNSON. Well, as I said, I think confrontation has its
You have two scenarios: one is that we confront the
risks too.
markets and we can say interest rates are going to be higher than what
we forecast because the Fed is going to confront the Treasury. And
they are going to resist with interest rates any attempt that the



Treasury makes on the dollar.
some heat into the markets.

Now, I'm sure that that would throw

price side.

But that's a different debate.

But it certainly would


comfort on the

VICE CHAIRMAN CORRIGAN. That's a different debate; that gets
to the heart of the question of how do you get from here to there.
seems to me that's a different issue.
MR. JOHNSON. I don't understand. Look, the markets have a
right to be concerned if the Treasury and the Fed can't coordinate
policy. That's what it's all about here.
VICE CHAIRMAN CORRIGAN. The problem is we don't have any
coordinated policy. We've got a lousy fiscal policy and a pretty good
monetary policy. That's at the heart of the problem.

I don't disagree with that.

only one policy lever.

We have too many policy objectives and

MR. JOHNSON. But I do think there is a risk for us that
we're going to be implicated in talking out of one side of our mouth
about price stability goals and yet agreeing to constantly flooding
the market with dollars trying to get the dollar below where the
Now, you can
fundamentals are taking it with relative interest rates.
argue about relative real interest rates-VICE CHAIRMAN CORRIGAN. That is a different issue. The
question in terms of the price stability goal is: How do you get from
here to there?
There are a lot of variables that go into that
question of how you get from 4-1/2 percent inflation to 0 inflation.
MR. JOHNSON. You can still get there with Treasury pursuing
what they have been pursuing, but at much higher interest rates-VICE CHAIRMAN CORRIGAN.


--and much lower growth, and even a recession.
Maybe that is what we will pursue.

VICE CHAIRMAN CORRIGAN. That's the debate; that's the right
How do you get from here to there?

President Syron.

MR. SYRON. Most of the questions I wanted to asked were
already asked by Tom Melzer. But it seems to me that the United
States has a strange [institutional] situation. Domestic monetary
policy is the role of the independent central bank. International
policy is the role--on a 60 percent basis, at least--of the Treasury.
Mr. Chairman, I just wanted to ask a question but I think Jerry
answered it already: Have you been faced with sort of a Hobson's
choice in the sense of being involved in something that I think almost



everyone here is skeptical of--sterilized intervention--believing that
we were better off over the long course of time maintaining that 40
percent, say, rather than [our] just getting out at this point in time
for the reasons Tom Melzer noted?
I think an important factor in
waiting to see how long we want to remain a player is having some
notion of how long this process will go on.
It seems to me that it
might be useful--I would hope useful from your perspective--when you
go back and talk to the other people with whom you have to negotiate
to indicate the degree of discomfort that many people have on the
But I agree with Tom; I just don't see at this point how we
can back out of it. But I think we do need to have some notion of how
long this will go on.

Or how much.
Isn't that the question?

CHAIRMAN GREENSPAN. Part of the problem is that analytically
we have been projecting a declining exchange rate for quite a while on
the grounds that we've always perceived it as being out of sync and
too high. And the failure [of the dollar] to do that has led us to
temporize on this issue on the grounds that it would cure itself
eventually--in other words that we might have to engage in this
[unintelligible] just for the sake of appearances on the grounds that
the markets would then take over and that [problem] would disappear.
That hasn't happened. And that's what the problem is; and it's still
a problem with respect to the forecast.
MR. HOSKINS. For coordination purposes I think we've always
said--at least I've said all the way along that I'm willing to spend
$100 million here and there but not $40 billion, $20 billion of our
own. We are beginning to talk about potential impacts on monetary
policy and influences that are about to get negative on this

Governor Angell.

It seems to me that the markets are beginning to
recognize the Federal Reserve's commitment to price level stability.
Mr. Chairman, you've certainly contributed to that and I think other
members of the Committee have in regard to the one voice that we have
in this area. But we can't have that commitment to price level
stability without having a strong dollar. That is, a strong
commitment to price level stability [requires appropriate] interest
rate differentials and the dollar remaining strong. It just seems to
And, Mr.
me that we need to understand where our commitment is.
Chairman, this discussion seems to indicate a very strong feeling in
regard to the direction and the kind of policy we should engage in.
But I think one can go so far as to say that the Treasury certainly
That is, the thought that we
would be dissatisfied to be without us.
might pull out of this is indeed some force; and my dissent is in that
My dissent is to contribute to an environment in which the
I agree it's
Treasury recognizes that it may not wish to go it alone.
But sometimes we have to act like we
best for us not to get out.
might get out in order to [achieve our objective]; and it's to your
leadership that I entrust that we do it.




President Guffey.

Thank you, Mr. Chairman.

I guess virtually

everything has been said around the table. I don't have too much
concern about the actual profits and losses that the System will
sustain in terms of a rising dollar. I'm not terribly concerned about
the price stability issue in the sense that with sterilized
intervention I think for some long period in the future we can go

about a price stability objective without much problem. What I am
really concerned about, however, is bringing this issue to a
confrontational stage outside of the confines of this Committee and
the Treasury, because as soon as the public and the market perceive
that there's a split I think we have the real possibility of a

currency crunch that we will not want to face.
together at that time.

We'll have to go

CHAIRMAN GREENSPAN. As you know, it already showed up on the
front page of The Wall Street Journal last Friday.
MR. GUFFEY. Yes, I know. I'd like to ask a question: How
far can the Treasury go in the sense that they have a stabilization
fund that is authorized by Congress? Is there no limit to what-MR. JOHNSON. They can go on forever, Roger, when we keep
warehousing their currency.
MR. GUFFEY. Well, they still have to get authorization for
the Treasury to get dollars for us to warehouse.

[They warehouse] foreign currencies with us, so



So there is a limitation.

VICE CHAIRMAN CORRIGAN. The problem there though, Roger, is
that you give the Congress a choice. If you really do say you are
going to give the Treasury some more money or you are going to balance
the budget, which way do you think they're going to go?

Balance the budget, of course, Jerry.


President Black.

MR. BLACK. Mr. Chairman, I just have one comment. I was
comforted by your statement that central bankers were lined up almost
uniformly against the ministers of finance on that. Do you know how
strongly they are arguing their position with their minister of
finance counterparts as you are clearly doing in this country?
CHAIRMAN GREENSPAN. I'd say [it depends on] who controls
this. The Bundesbank controls their exchange rate operation but they
are pressured from the other side. I'd say that [unintelligible] was
quite strong. The others I would say varied. Actually,
been unfriendly to this heavy intervention.

That's good.



CHAIRMAN GREENSPAN. And I assume as a consequence he would
independently, or in support of-MR. JOHNSON. What about the Canadians?
about it either, are they?

They are not happy

CHAIRMAN GREENSPAN. As far as I can tell.
impression but I can't remember any real--

That would be my

MR. TRUMAN. There is some.
I think the Canadians have some
differences of view within the central bank.

President Boehne.

I think we have talked about most of the issues.
Clearly, you are in an awkward position. Just as one person around
the table, I think the worst thing this Committee could do is to leave
you hanging, given the awkwardness of where you are.
Despite where we
are on the fundamental policy issues and the difference with the
Treasury, my question is: Given the situation that we are in, how can
we be the most helpful to you as a Committee in this very awkward
predicament that you find yourself in?
CHAIRMAN GREENSPAN. Well, let me find out whether or not the
discussions with Messrs. Brady and Mulford on this help or hinder-meaning whether or not the real deep-seated concern of this Committee
induces them to be antagonistic or conciliatory. At the moment, I
think it is frankly somewhat useful to have some rumbling of a minor
nature at this stage because if it ever was to break then I would be
concerned what would happen to the markets. But I think professional
notions of discontent are not adverse provided they do not, for
example, get into an Allen Murray front page article in The Wall
Street Journal that the Federal Open Market Committee is revolting
against the Treasury on exchange rate policy. And they are prepared
to do that because that little thing they put in last Friday was much
So, that's a story that's
stronger than the reality of it was.
sitting there ready to explode.
It probably will be in The Wall Street Journal
next Monday, given the minutes to be released this Friday afternoon.

It may be.

I would think that Manley and Wayne better take

a walk.

of town.

MR. JOHNSON. Well, as a matter of fact, I am going to be out
I'm going to be hiding out.

And I'll be in Moscow already--

Maybe you'll be safe there.

MR. BLACK. May we all take off that day, Mr. Chairman?
really like to take off. Well, Monday is a holiday.

Yes, that's what I mean.





Columbus Day.


It'll be in the paper Tuesday, then.


Governor Seger.

MS. SEGER. I just want to say two things, primarily because
I've been one of the people concerned about the strong dollar--not
because I don't like strong dollars on the face of it--but because
I've been concerned about the impact on our manufacturers' ability to
produce or to export. But having said that, I don't believe the way
to get the dollar down is to bomb it through intervention.
I think
the best way to do it is to deal with it in a monetary policy way even
though the [unintelligible] said we don't believe in that, I do.
terms of Manley's concern over the possible market impact of this
bombing effort, I think the reason we haven't seen it yet is that
there are many people in the markets--maybe not in New York but in
other parts of the markets--who really do think that there will be
some monetary policy follow-up to this bombing. And if that does not
occur in the next couple of weeks, then I think we're going to get the
bond market impact etc., in spades.
So you can write that down as
woman's intuition speaking. Thank you.
CHAIRMAN GREENSPAN. I trust that ends our conversation?
Does anyone want to make a last comment on this?

Can I make the last comment?


You can approve his transactions.

VICE CHAIRMAN CORRIGAN. I want to come back to this price
stability issue. Obviously, that is the overriding goal for central
banks. But I think we have to be a little careful about how we
articulate that goal.
If we articulate it in a way that creates or
reinforces the perception that we can get from here to there in a
costless, painless, way I think that can be very, very dangerous. And
it's in that context that I worry about large current account
I certainly don't view them as a goal, as I'm sure you
know, Manley.

Sure, but--

VICE CHAIRMAN CORRIGAN. The question--if I can just finish-is whether the presence of current account deficits in excess of $100
billion in perpetuity are compatible with an orderly and relatively
painless ability to reach that goal of price stability.
MR. JOHNSON. And all I'm saying, Jerry, is that I don't
know; I don't think anybody knows.
It's a debatable issue. But to
try and say beforehand that the dollar has to be at some level that
some committee decides-VICE CHAIRMAN CORRIGAN.

That's a different question.

But it's not;

it's the same.




It's not.

A committee is a group of people.

This actually is
CHAIRMAN GREENSPAN. Can I just stop here?
a legitimate discussion, but not for this section. Let's leave this
for later this morning and then resurrect it because it really gets
into the fundamentals of the monetary policy debate. With some fear
and trepidation I request the ratification [of the foreign currency
Would someone like to-transactions].

What happens if they are not ratified?


Ted's salary for the next 4,000 years--


Is there a motion on it?


So moved.




Without objection, hopefully?

MR. JOHNSON. Well, since I dissented [before] I don't know
How do I vote in favor of previous transactions?
how I could--.

Just abstain.

MR. TRUMAN. Maybe the General Counsel can speak to this, but
isn't the issue here that he has done his job within the guidelines
and the Committee is ratifying the transactions?
I think Sam has done his job very well.



That's what you're voting on.

He's done it too well.

MR. BLACK. What you are saying, then, is that it was the
wrong job in your view?


It was very good in mechanics, but--

But it is the wrong job.
That's what we--

MR. JOHNSON. All right. Well, I certainly want to make sure
that that is the way it's written and the way it's understood.

Virgil [Mattingly]


is nodding.

That's all that you'd be doing, Governor.



MR. JOHNSON. What does the sentence say again--in terms of
what we're voting for?



Approve the transactions that I have already

MR. JOHNSON. Well, how about the manner in which you
Really, that's a different statement.
conducted the transactions?

No, it's the matter of the money.


It's an obligation we have already passed [on].


Yes, but I voted against that.

MR. TRUMAN. Yes, but he does [operate under] certain
procedures in the Authorization and Directive and the question is
whether he followed the guidelines and procedures.

But I abstained on the warehousing [vote]



I understand that.
That's a different issue in my opinion.

MR. TRUMAN. The issue is whether the transactions have been
carried out consistent with the Authorization and the Directive; it's
the same thing as for the domestic operations.
It's the same as the vote of directors of a
bank ratifying loans made by the bank. The loans are [already] made.
Okay, here's what I'm going to do.
I'm going to
vote on the affirmative on this one because this has only to do with
what has taken place.
I dissented in regard to the Authorization,
which was a proper dissent.
So, I'm going to make that distinction,
Manley. You do what you think.

I'm still trying to understand what this is all

MR. ANGELL. Well, in other words what we're doing now is
saying that we did transactions.
[The question is whether] they were
In other words, are they approved?
majority vote--

The guidelines

it is ratifying.

[that] the Committee has passed by

The Committee passed by majority--in other words

Okay, is that the way it reads?

MR. CROSS. My understanding is did I act within the
authority authorized and provided for by the Committee even though I



recognized that certain people didn't agree or did not favor the way

I think that's the reading.

MR. JOHNSON. As long as that's the way it reads, I agree
that there is no problem.
VICE CHAIRMAN CORRIGAN. The analogy, I think, is that any
time someone dissented on monetary policy grounds they would have to
dissent on Mr. Sternlight's operations.

It says "ratified."


That's true.

MR. TRUMAN. Okay, then you're fine.
that is used in the minutes.

"Ratified" is the word


MR. TRUMAN. I'm not quite sure what it means; maybe we can
get the lawyers to write us a memo.

I'm not asking.

Mr. Sternlight.


I agree that there have been no

MR. STERNLIGHT. Thank you.
[Statement--see Appendix.]

This is going to be an anti-

Questions for Mr. Sternlight?


MR. PARRY. You said that you think the markets are
anticipating further easing of some magnitude in the near term?
MR. STERNLIGHT. Of modest magnitude.
I think there is an
expectation, on balance, that the greater likelihood is for some
easing down the road.
If I drew up a central point consensus,
something within a few months would probably capture it.
MR. PARRY. I bring this up because the Bluebook seemed to
say the opposite--that [the market] does not now appear to be
anticipating any near-term change of policy. I think it has
implications for what might happen to market rates relative to the
choices we make. So I just want to-MR. KOHN. My judgment would be, President Parry, that if the
market had to bet whether policy would go one way or another they'd
bet that policy would more likely be eased than tightened.
If you
look at the term fed funds markets and fed funds futures and things
like that, they don't really have much ease built in there. On the
other hand, surveys such as the money market services survey do show a
little downtick by the end of the year of maybe a quarter of a point.
So it's a little; I don't think they have much built in there. It's



essentially flat with maybe some bias towards ease before the end of
the year.
MR. FORRESTAL. Peter, do you think that bias is based on
domestic considerations or foreign exchange issues?
I think it's a mixture of both, President
Forrestal. Those who have that expectation anticipate seeing a bit
more softness in business. But they think the foreign exchange factor
certainly would be working that way too.

President Keehn.

I have a question not with regard to Peter's
report on the operations but on the seasonal borrowing program. We
basically hear about the borrowing within [unintelligible] rather


And I'm not sure that fundamental underlying conditions are

that different.
It's easy to believe that people are perhaps using
it, hopefully, advantageously.
I just raise the question: Are we

going to take a look at the use of the seasonal program before we get
into next year?
MR. KOHN. We could certainly do that.
That request has been
made elsewhere in the System. Governor Angell has asked that same
question. The seasonal borrowing is about what it was last year.
this is really the second year--


At this point, Don, or--

MR. KOHN. Seasonal credit is a little higher than it was,
but the spread is a little wider than it was. For the October 5th
period last year seasonal borrowing was $433 million; I don't know
what will come out this year.
MR. KEEHN. Well, I think you're right. It seems to me it
complicated the operation of the Desk on the way up and it's likely to
complicate it on the way down. If people are using it for different
reasons [other than] seasonal borrowings, I think it makes sense to
take a look at it.
at this time?

Any other questions for Mr. Sternlight

MR. HOSKINS. Just a minor one. Would we have done outright
purchases if we hadn't had the intervention?
MR. STERNLIGHT. Oh, I think it's likely. The foreign
exchange intervention wasn't adding as much as at some earlier points
in the year but it was still adding fairly substantially. So, without
that factor, we would have had to be doing some outrights as currency
in circulation was increasing.

Would that cause you any concern?

MR. STERNLIGHT. I wouldn't say it was a problem at all in
our execution of operations. As a mechanical factor, we're amply well
informed about the extent of the foreign exchange intervention and we
just fold that in as a reserve factor in our planning of operations.




I just meant the substitution of the currency

in the portfolio for coupons and bills.

No, I wouldn't say it's any problem in that

CHAIRMAN GREENSPAN. Can I have a motion to ratify the
transactions of the Desk since the last meeting?


So move.


Without objection.

Mr. Prell, would you

bring us up to date on the economic situation?

I'll try, Mr. Chairman.



Questions for Mr. Prell?


MR. JOHNSON. You mentioned that you expect some stimulus to
the housing market but you are forecasting weakness in investment.
Earlier, in previous FOMC meetings, you had said that declines in
long-term interest rates stimulated investment in the housing market.
Yet this hasn't seemed to occur. How long do you expect the lags to
be after a decline in long-term interest rates before you see
something in the investment in housing? You mentioned that the level
of houses for sale was revised up. But I don't see any pickup in
housing. And nondefense capital goods orders, excluding aircraft,
seem to be at a lower level in the third quarter than the second
quarter. I just see nothing out there that points to a pickup in
capital spending and yet we have had this decline in interest rates.
MR. PRELL. I don't think we expect to see any dramatic
interest rate effect in the trend of capital goods outlays. The lags
there are too long. The [interest] elasticity is too low. We didn't
really think that was going to move that series around very much.
It's true that the orders trend, as I suggested, has not been
especially strong of late. If you start dissecting the data and you
take account of declining computer prices and so on, I think there is
a sound case for expecting relatively moderate growth in real
equipment outlays. And that's what we have in the forecast. We don't
have an acceleration; we have a deceleration in the forecast.
MR. JOHNSON. Okay, I agree with that, I think. But what
you're saying, though, is that this decline in long-term interest
rates hasn't had a stimulative effect on this.
MR. PRELL. I don't think it has had a large effect, no. We
haven't had a large enough change in interest rate levels to greatly
alter businessmen's assessment of the profitability of investment over
the long run. On the housing side, we have lowered our third-quarter
forecast for real construction outlays. We were disappointed by the
August housing starts. While the average in the past couple of months
has been up a bit, it hasn't been dramatic by any means. A lot of
that weakness has been in the multifamily sector; that's a very



volatile number. But the single-family starts in August also were a
shade on the weak side. What we think is happening, though, is that
we see some pickup in housing demand as manifested in existing home
sales. And in new homes sales, the information from surveys about
consumers' perceptions of home buying conditions has moved in a
favorable direction with the decline in interest rates. We're
expecting a modest boost to overall economic activity in the near
term, this quarter, from residential construction. But that's a small
sector. And despite the secondary effects that it can have on
consumer expenditures and so forth we don't think it's going to
provide a tremendous thrust to the economy. We do look for a positive
number, though, in the fourth quarter.
MR. JOHNSON. I want to follow up on one last thing that I
was talking about yesterday in the Board room when we were discussing
[unintelligible] and I still want to try to understand this. You
indicated then at the beginning of your presentation the need for some
slack to get inflation down further in the economy. But I'm still
trying to understand conceptually how that works to some degree. If
monetary policy maintains nominal demand at potential output or at the
full employment unemployment rate--say it maintained nominal demand
consistent with potential output growth--is the need for slack because
of the rigidities in the system? Does the adjustment process cause
you to get more inflation mix than a real mix temporarily?
MR. PRELL. I think that's the case. If you had super
rational people who perceive that all of a sudden monetary policy was
on a track that was going to hold nominal aggregate demand expansion
in line with the trend rate of real output growth, then expectations
would change and wage bargaining would revolve around that kind of
expectation. You could have an instantaneous downward adjustment in
the rate of inflation without any significant cost in real output. Of
course, there are contracts and other impediments so that even if
expectations adjusted dramatically-MR. JOHNSON. Okay. I want to understand what you're saying,
though. Is it that even if we bring nominal demand in line with
potential output, that actual output has to slow for a while relative
to potential because of the contracts [and other] rigidities in the
system? Okay, that's the-MR. PRELL. I think you'd have a hard task to bring nominal
aggregate demand expansion down immediately to that noninflationary
level. I can't envision that happening without an enormous jolt to
the system.

Yes, well I can't either.

But I'm still trying

to get--

MR. PRELL. But if there were no inflexibility in the form of
contracts and so on and if you had absolute credibility--if you could
announce today that you are pulling on to this track and everyone
believed you--then presumably everything would flow through and real
effects would be minimal.
MR. JOHNSON. Everybody understands that we have nominal
demand that is greater than that; that's why we have 4 or 5 percent
inflation in the market. But if you were to work nominal demand down



gradually in line with potential output and you maintained it there, I
guess I would have a little trouble understanding why you would
necessarily have any inflationary experience.
MR. PRELL. Well, I think you put your finger on the
appropriate facets of the system here that impede that kind of
frictionless movement toward lower inflation.
MR. JOHNSON. As I say, if you were to lower nominal demand-just lower it, even if it's currently above potential output--why
doesn't that lead to some slowing in the inflation rate even though
the real economy might be slowing but still not performing relative to
MR. PRELL. At this point we feel the economy is, in a sense,
overemployed. In that kind of situation the competition for resources
tends to put upward pressure on wages and prices.
And until we
develop a bit more slack, we think that's the direction in which
things are going to tend to drift. We've been generous, in a sense,
relative to what the models would tell us.
We have not really taken a
hard view that we're below the natural rate and that there are
tremendous acceleration forces here. We have rather modest
acceleration in the forecast. But the historical evidence is
reasonably compelling that in the short run there is this kind of
trade-off and you don't get the frictional movement to lower inflation
rates without any output loss.
MR. JOHNSON. Well, I think the historical record does show
that if you reduce nominal demand there is a mixed effect--that you
get a little of both.

Right, precisely.
The more flexible the markets are, the better

the mix.
MR. PRELL. Well, that's why we are being reasonably
We think perhaps there is some greater flexibility. We
think there is also some residuum of fear here about loss of
employment and so forth that may not have existed in earlier years,
but that workers are aware of because of the turmoil in the '80s and
the exposure to international trade,
MR. JOHNSON. I'm just saying that, given all that, it's
still not clear to me why the economy can't grow around its potential
rate while you're restraining demand even though the mix does
I think that's a central debate.
MR. PRELL. Sure.
This is not something we feel we know
absolutely. But we're hard pressed to explain what we have been
observing without some sense that, as the economy got tighter, that
exerted some inflationary pressure. You could play some games here in
guessing what inflation expectations were at various times during the
last several years and make that consistent with the pressures in the
labor market in terms of the unemployment rate level not having been a
substantial explanatory factor. But it looks to us that, as we got
down into the 5 to 6 percent unemployment rate range, there was some
pressure on wages and prices.



I don't disagree.

MR. PRELL. So the question is: How do you unwind that?
you could bring about a sudden powerful expectational change, that
might help to minimize the need for any loss of output in order to
move the inflation rate back down. But otherwise we think there are
going to be some frictional costs here.

President Parry.

I'd like to ask two questions related to the
near-term strength of the economy. Based upon the statistics that we
now have for the third quarter, do you think there is much of a chance
that the actual growth rate was in the 3+ percent area?
And related
to that, you have a very substantial decline in nonfarm inventories.
Is that just what is happening as a result of aircraft?
I see
aircraft exports are up and are very strong.

You're talking about the fourth quarter, right?


Third and fourth, [unintelligible]


Yes, the fourth-quarter inventory picture is
muddled by the aircraft deliveries and gyrations in oil inventories
that we inferred will occur because of a surge in oil imports
recently. So there are those technical considerations. Basically, we
have underlying that a rather moderate rate of inventory accumulation.
On third-quarter growth, 3 percent or 3-1/2 percent is certainly
within our confidence interval. At this point, looking at the labor
input, a number in the two's looks like a better guess. But I know
there are others who have looked at the data and come up with higher
This is our best guess at this point with a lot of data
CHAIRMAN GREENSPAN. If there are no further questions, I
think it's time for us to do a tour de table. Who would like to
MR. FORRESTAL. I'll start it, Mr. Chairman. Let me say at
the outset that I'm very pleased that the staff has extended the
forecast through 1991; I think that does give a longer-term and more
strategic focus on policy. With respect to the national economy, Mr.
Chairman, we think that the Greenbook is about right for the next few
quarters in terms of real GNP.
We don't have any basic disagreements
there. Also, our outlook for inflation is a little closer now to the
Board staff's than it was at the last meeting. We've seen some
improvements. Having said that, I think that we've been helped,
obviously, by some special factors along the way, and I'm not sure
that those are going to continue indefinitely. But more importantly-and perhaps where we might have some slight disagreement with the
staff--is that we think the unemployment number may be a little lower
than the Board staff's number; and that suggests to me that pressure
on wages, as Mike has indicated, might begin to appear. We've had
good numbers, as we've been observing, right along. These
compensation gains have been smaller than we might have anticipated.
But I do sense that there may be some deterioration in labor costs.
We've had an increase in strike activity in 1989, which perhaps
suggests a bit more militancy on the part of unions. Also, as the



fear of recession begins to wane, there may be more of a tendency on
the part of business to accommodate some of the labor demands that I
think might come along. I put that together with what I see in our
own District with respect to the labor situation--I think things are
tight--and that's where I see the pressure. That all suggests to me
that it's going to be difficult to make much progress on inflation
this year. Our forecast would suggest that some further tightening
along the road is going to be necessary if we are going to get the
inflation rate down lower.
Turning to the District, things have turned around a little;
deceleration of economic activity has about come to an end and there's
much more optimism among people generally. In other words, the
concern about recession has abated. Construction activity remains
particularly soft--both residential and office building activity. We
do have some better activity on the industrial construction side,
which is stronger in our District than anywhere else in the nation.
And on the housing and real estate situation generally, we're hearing
quite a lot of concern expressed about properties being put on the
market as a result of the thrift insolvencies. People are afraid that
as these institutions come on the market there's going to be an
overhang, which will affect the market adversely. Automobile
inventories remain a significant problem in our District. They are
much higher than in the rest of the nation even though recent auto
sales have been better. There is an interesting development in the
textile area. The textile producers have been doing very, very well
in terms of their sales but they are very concerned about imports,
which are up about 11 percent from a year ago. Domestic demand for
their goods has offset the danger of the imports but they're afraid
that as domestic demand begins to slacken off, as they think it might,
the imports will begin to affect them adversely. And I think this is
significant because they have been very, very aggressive, as you know,
in lobbying for protectionist legislation. I can't help but note that
Representative Jenkins from the State of Georgia has assumed a higher
profile in the Congress; he has been the one leading the charge for
protectionism for the textile industry. So that's a bit worrisome, I
think. I have just one other observation and that is that oil
exploration and production in Louisiana are picking up; the number of
offshore rigs has been increasing since April and that reverses a
decline earlier in the year. Natural gas is also doing well. In
agriculture the picture is mixed because there apparently has been
either too much rain or too little. In our case, recent heavy rains
have been a negative factor in many areas of the Southeast. But in
general, Mr. Chairman, things are looking better in the Southeast on
average than they did at the time of the last FOMC meeting.

President Parry.

MR. PARRY. Thank you, Mr. Chairman. I think the tone of my
report is probably going to be a little different from some others.
The economy in the West currently is expanding at a healthy pace, and
growth actually appears to have strengthened a little since our last
meeting. Improvements in trade and service activity account for much
of the recent strength we've seen. Apparel sales are reported to be
strong and, of course, toward the end of the quarter there were quite
strong sales of autos. We've seen good growth in tourism activity
throughout the entire area. Construction, both residential and
nonresidential, and real estate activity are strong in California,



Nevada, Washington, Oregon, Hawaii, and much of Idaho, although some
slowing in home sales recently has appeared in southern California.
Reports of weakness are focused, as they have been for the last
several meetings, in Arizona and are associated primarily with
construction. The Northwest is actually booming.
I don't think
there's any word that would be more appropriate. California-style
bidding wars on single-family homes have become common in the Puget
Sound area. Manufacturing firms throughout the Northwest plan to
expand employment facilities and equipment. Now, in two hours the
contract at Boeing will expire; 43,000 workers in Seattle and I think
12,000 in Wichita and 1,700 in Portland are covered by that union.
But the chances look less than 50 percent that there will be a strike;
it requires a two-thirds vote. At this point, if there is not a
strike, I would assume that that strength would continue for the
foreseeable future.

Are they voting today?

MR. PARRY. I don't know if they vote today, but the
expiration of the contract occurs today at 10:00.
vote for a strike.

I heard something about their voting.

That could be, but it does require a two-thirds

At the national level, the economy--to us at least--appears
stronger than at the time of the last meeting. We've revised our
estimates of third-quarter growth and now expect an increase of around
3 percent, which is somewhat different from that in the Greenbook.
Also, I wouldn't be surprised to see stronger growth in final demand
than projected in the Greenbook, especially in 1990.
Quite frankly,
looking at a lot of private forecasts, I see more centered in the area
of 2 to 2-1/2 percent than I do under 2 percent at this point.
If the
growth does not slow as rapidly as projected in the Greenbook, then it
seems clear that upward pressures on underlying inflation will

President Syron.

MR. SYRON. Mr. Chairman, on this give and take, the New
England economy is far from booming. The slowdown that we are in the
midst of continues.
It's not cataclysmic but it does seem steady.
Interestingly, the earlier declines in the southern New England
states--the big states such as Massachusetts and Connecticut--have now
spread to the three northern New England states. There are a variety
of factors: a quite poor tourism season, absolute declines of
employment of a substantial magnitude, particularly in the
construction area and also in manufacturing.
In the case of
manufacturing, I think that's a bit of a spillover from the slowdown
in manufacturing in Connecticut and Massachusetts.
In the case of
construction, it just reflects overbuilding and a lot of excess second
homes on the market.
With respect to our manufacturers with whom we
have contact, we get an interesting pattern. We tried to separate out
what they tell us about the national economy from the regional economy
and we get a very distinct difference in responses. With respect to
the regional economy, everyone is really quite pessimistic; but in
talking about the national economy, while no one is what we would call



euphoric or expects a runaway boom, the general response we're getting
is that they expect a rather moderate and steady [growth], with some
adjustment to the capital spending levels, but not a great one. There
is not a great concern about inventories on their part.
In retail
activity within the District we see some significant problems, with
the beginning of some inventory problems there. Labor markets are
The agreements and settlements that have been
generally mixed.
reached generally have been well behaved although there are still
substantial pressures at the low end of the labor market. At the
higher end of the labor market things really have been softening quite
a lot.
As far as the national economy goes, we have been generally
comfortable with the Greenbook forecast with two caveats: (1) the
Greenbook does have the saving rate declining, but we question whether
it might possibly decline even more and consumption come up somewhat
more; and (2) we have a concern about the pattern of wages. This is
reflected in other things that have been said: whether in the
employment cost index, particularly when one starts to disaggregate
and look at what is unionized and what is nonunionized, there really
is a dramatic change in that decomposition over time; and whether in
the future, particularly if the national economy remains relatively
robust, we might not have the kind of good behavior we've had in that
area. Overall, we think the risks are about evenly balanced between
the economy growing too fast or starting to slow too much, although we
I will finish by
don't see any signs really of cumulative softness.
saying, as you indicated earlier when we were discussing the foreign
currency issue, that before very long we're going to be in a situation
where we have to decide as far as inflation goes just what we want to
accomplish and in what kind of time period--what constraints we feel
are on us and how the mechanisms work. Thank you, Mr. Chairman.

President Black.

MR. BLACK. Mr. Chairman, I find myself in a little different
We really haven't changed our
position from the first three speakers.
view of the economic outlook very much from what we had last time.
The Greenbook projections seem reasonable to us; the staff always does
I don't think I will ever understand how Mike Prell is
a good job.
able to answer so many questions so well! But since there is some
onus on us to say how we differ, I would say that our best guess is
that the downside risk is a little greater at this point than the
First of all, I don't think we
upside risk, for a couple of reasons.
have yet seen the full effects of all the tightening that we have
undertaken over the last year and a half. Secondly, a lot of the
improvement that the Greenbook projects is based on the external
sector and that, in turn, has an underlying assumption that the dollar
is going to continue to depreciate at a rather steady rate. That's
certainly a plausible position, but I think one can make some case
that there is certainly more than a small possibility that the dollar
just may not decline for reasons that we don't well understand. I
don't think we fully understand why it was strong before we started
intervening; it may well be that that strength is going to resume,
If that were to be the
particularly after we are out of the market.
case, then real net exports and real GNP might come in a bit weaker
than what the staff is projecting. On the inflation side, I found the
staff's efforts to estimate the magnitude of the effects of the
projected depreciation of the dollar extremely helpful but rather



disturbing, because even with these alternative projections we didn't
show much progress on inflation through 1991.
But again, we find
ourselves in a rather unique position in that we think inflation may
do better than the staff thinks.
I feel rather uncomfortable with
that because I remember-CHAIRMAN GREENSPAN.

I assume by that you mean down?

MR. BLACK. We think we will have less inflation than they
projected. The reason I feel uncomfortable with that is that over
time I think most of our System policy errors have been made by having
been too easy rather than by having been too tight. And the outlook
is dependent to a large extent on what I think is an unusually high
degree of credibility that policy now enjoys. My feeling is that we
probably have a higher degree of credibility now than we have ever
had. And I think your statement in response to the Neal resolution
did a lot to strengthen that.
So, I'm a bit more optimistic on this
than I have been. But I hope that doesn't translate into the wrong
kind of policy for the Committee because I'm not ready at this point
to relinquish the reins and say that we have this battle won, by any

President Stern.

MR. STERN. My views have been deviating a bit from the
Greenbook in recent months and the deviation has grown.
In terms of
the economy, looking at the latest statistics and our own internal
forecast and talking to business people around the District and
elsewhere, I'm somewhat more optimistic about the outlook for real
growth going forward.
It looks to me like the economy, all things
considered, is in remarkably good shape. And I expect that's going to
continue. On the price side, too, I'm more optimistic in the sense
that I think we have an opportunity to make more progress against
inflation than the Greenbook envisions.
I say that in part because of
the course of monetary policy over the last 2-1/2 years, but also in
part because business people I talk to are clearly reporting an
abatement of inflationary pressures. That has been going on for
several months despite the fact that there are many tight labor
markets in our District; that doesn't seem to have been translated
into wage pressures.
I can only presume that concern about job
security and the well known international environment--where foreign
competition has been so very important--have served as restraining
I must say, having given that optimistic assessment, that
I hate to go back to an old and somewhat unhappy topic but I do think
this is all jeopardized by the course of the dollar, should it
continue to decline.
I think that would back up very quickly into
deterioration in the inflationary situation and outlook and,
ultimately, into the growth outlook as well.
So I think there are
some very serious risks there.

President Boehne.

MR. BOEHNE. Well, I think the bearishness in New England is
contagious; it's moving down the Atlantic coast. There clearly has
been a shift in sentiment in my District away from one of optimism
toward more concern about the economy. That is particularly true in
the real estate business. Residential construction is very soft and,
looking out over the next several years, it's likely not to strengthen



a great deal. Just looking at the underlying demographics, I wouldn't
be surprised, for example, if a good year for housing starts might be
two-thirds of what we have been used to in recent years. There is
some pessimism in the manufacturing area, partly because of what has
been happening to the dollar. The retailers are very cautious on
inventories: inventories aren't going anywhere; they are essentially
People in capital spending still have fairly good back orders
and I think are feeling good.
Nonresidential construction is quite
weak in New Jersey and Delaware: Pennsylvania tends to lag those
states and we're going through an office building boom which I think
will leave us in a glut position.
I think we clearly are in a slowing
position. With the national economy perhaps growing 2 to
2-1/2 percent this year, I would guess measured GNP in our District
would be about flat.
The unemployment rate, which has been well under
the national average and still is under the national average, is
nonetheless rising.
It's still tight at the entry level and that,
too, I think will carry forward given the demographics. But it is
beginning to loosen up further up the ladder.
As far as the national economy goes, I think there is this
dichotomy between what I'm seeing in my District and the national
It seems to me that the Greenbook is about right. One
point, however, is that the change in the composition of demand, as
shown in the Greenbook, does seem to have some implications for risks.
Essentially, what we have is a move away from exports and a move away
from capital spending in that we're counting on consumption and, to
some extent, housing. I have some doubts about housing picking up and
that leaves consumption. So it seems to me that we could end up with
significantly less growth and perhaps even more growth. But my sense
here is that the change in the nature of the composition probably
leads us to a slightly greater risk on the down side going out into
1990, given the mix of output that we have had over the last year.

President Keehn.

MR. KEEHN. Mr. Chairman, the overall situation, particularly
as it relates to the Midwest, is largely consistent with a pattern
that has been developing over the past several months--namely,
moderation in many sectors.
It is not in any way a sense of
deterioration, but a tendency [for activity] to come down toward a
level more consistent with our forecast. This moderation is
particularly true in the heavy manufacturing part of our economy. For
example: orders for the large trucks, Class A trucks, have slowed very
considerably; orders for heavy construction equipment are down
substantially; and some categories of machine tools are also off.
Offsetting this, construction activity in the District continues to be
pretty strong, stronger than the national numbers. Certainly, the
automotive sector is difficult to read.
I agree with Mike's
categorization; I think the strong sales level in August that was
carried over in September is largely for the 1989 [models] and is in
anticipation of the substantial price increases for 1990 cars. Also,
there are very heavy incentives on the 1989 models. As a consequence,
dealers are selling out of their inventories and the order level from
the dealers to the manufacturers I'm told recently has all but
collapsed. As a consequence, the auto production schedules have been
reduced substantially in the fourth quarter and the reductions planned
for the first quarter of next year are even more substantial than
that. So, anybody who is dealing with the auto sector is beginning to



take on a fairly bearish tone.

In the agricultural area, the news is

good. The harvest has started and we are anticipating good production
on both corn and soybeans--not record crops, but substantially higher
than last year. And our expectation is that, within the District, the
USDA estimates of production are probably a little on the low side.
On the price front, it's hard to get a good sense of where prices are
going, at least from the reports I get.
The Chicago purchasing
managers' index came out earlier this week and the price component of

that was at 50. I think that's reflective of the comments that I
hear: some prices are up and some prices are down, but there's no
decided trend one way or the other. On the wage front also there is
no change. The settlements, in my view at least, continue to be quite
constructive and not indicative of the wage pressures that you might
expect. On net, I think the economy is moving along on a constructive
but moderating trend. Not unlike the Greenbook, I think the outlook
for the balance of this year and, indeed, the early part of next year
is assured, but I'm beginning to get concerned as to what a
continuation of our current policy may mean as we get further out into
next year.

President Boykin.

MR. BOYKIN. Mr. Chairman, on the national picture our view
would be pretty well along the lines of the Greenbook. We would not
find anything about which we would have serious disagreement. As
several others have pointed out, the forecast of inflation running
through 1991 remains quite troublesome--certainly to me.
Looking at our District, it's very difficult to come up with
adjectives to characterize what is going on. If I were an optimist
I'd say we were having modest growth. If I were a pessimist I'd say
it has turned very sluggish. Not knowing which I am, I'll try to
describe a few of the elements. Where we had had some strength in
manufacturing, those gains are slowing. The slowdown in electronics
seems to be in line with expectations. In petrochemicals, inventories
have been building and prices have been soft, with a result that
several plant expansions either have been delayed or canceled. Retail
sales have shown modest improvement with the exception of auto sales,
which had been stronger and now are showing declines in many areas.
Two of our weakest sectors, energy and construction, have begun to
show small gains; but residential construction continues weak as does
agriculture--both cattle and crops. The statistical data continue to
show what I would say is modest growth. We have had rather extensive
discussions over the last couple of weeks with various businessmen and
others in our District. The attitude has changed, even in Houston.
Growth seems to have leveled off there as it has [in Southern Texas];
and they were two particularly strong areas. The way that they are
characterizing the situation is that they think our economy either has
stalled or is shortly headed for a stall.

Is that because


That could be a factor!


He's back.




into that area.

I thought he supported all expenditures that went


Well, I'm talking about


Oh, excuse me.


Well, a considerable difference--


Approximately the same magnitude.


President Guffey.

MR. GUFFEY. The Tenth District economic conditions continue
to improve slowly; I think they trail the national improvement.
Nonetheless, improvement does show in retail sales, which were up over
a year ago with inventories, we're told, well in line. With respect
to [agriculture], the good news is that the drought has been broken,
although crop estimates for the spring-planted crops are a fourth to a
third below what would be an average crop. The bad news is that the
rains have been so excessive that [farmers] are going to have a hard
time getting the milo bean and corn out of their fields. As a result,
I'm not sure what their conditions will be. But farm land values have
continued to increase; in our last quarterly survey they were up over
the three categories, roughly 2 percent over the quarter before, and
that's eight consecutive quarters in which those land values have
improved. The OPEC agreement to raise its production ceilings had
very little effect on oil prices, but the drilling activity has
increased modestly most recently. The rig count is about 259 in the
District, about 5 percent below a year ago; but it is improving on a
month-to-month basis. Most of that exploration is for gas; they have
found a big gas field over in eastern Oklahoma and Texas which is
being exploited apparently by some of our drillers who are going south
and going to help your economy, Bob. Construction activity has been
mixed, to be sure; nonresidential construction has increased from our
last meeting here, whereas residential construction has fallen off.
With regard to my view of the national economy, I would
I think it's appropriate.
accept readily the Greenbook forecast;
There are some within our own Bank who believe that forecast is a
little stronger than they would project. But my own view is that it's
about on track; given the underlying assumptions, I think it's a good
forecast and one we ought to be happy with.

President Hoskins.

MR. HOSKINS. The District hasn't changed much since I
reported last time. We are continuing to have very high operating
levels across almost all industries. We specifically targeted capital
expenditures this time to see if the presumed slowdown was occurring
and at least from the anecdotal [evidence] the answer to that is yes.
Most of the firms we surveyed have orders to carry them through next
year but there is a clear slowing in the order books for producers.
We still have a couple of geographic areas in the District that are
really quite strong. The Columbus area is one of them. We are seeing
wage pressures there. Service-type industries will be looking at 6
percent increases in wages. But overall, we haven't seen a major
change. Just to put it in perspective, Ohio is at about 4.8 percent



unemployment and I believe Pennsylvania is around 4.3 percent. So,
we've got pretty robust economies but they're not expanding at rapid
rates. And I think both [unintelligible].
In terms of the Greenbook, we have very little disagreement
with respect to the longer-term outlook for real growth. Of course
I'm disappointed, as everyone else is, with respect to the inflation
prospects. In light of the discussion this morning and the
alternatives shown in the price forecast, we seem to be working
against ourselves. When we tried to bring down the dollar it cost us
a half a point out there in 1991, if I read the chart right. So it
seems to me that that's an issue that we have to grapple with at some
point along the way. I'm not sure I'm ready to grapple with it today
after this morning's discussion, however. That's all I have to say.

President Melzer.

MR. MELZER. The pattern in our District is the same as I've
been reporting. We have had sluggish employment growth all year both
in nonagricultural payrolls and in manufacturing, and that pattern
continued in the most recent period. The only manufacturing sector
that showed any growth was chemicals. There was particular weakness
in electrical equipment: Whirlpool laid off 850 in Portsmith,
Arkansas; GE has announced layoffs of about 800 coming up in
Louisville; [unintelligible].
Having said all that, though, I think
we also have had very slow labor force growth. Unemployment rates are
still relatively low; St. Louis just published an unemployment rate of
5 percent, its lowest in a number of years. And there has been a
pickup recently in nonresidential and residential construction
contracts. Even at GE, for example, the feeling is that this process
isn't cumulative; they see a bottoming out here. I think they feel
that with these announced layoffs their production will be in line
with demand. They see next year as being relatively flat but they
don't see a continuing deterioration. One final thought--which I
mentioned last time and it continues to be the case--is that I've been
traveling around the District a little and it's very hard to find
businessmen who are worried about the economic situation. Nobody
grabs you by the lapels and says: "This thing is going south and you
better do something about it."

Governor Johnson.

MR. JOHNSON. On the real economy, growth seems to be
continuing at a fairly modest rate as compared to what looked like a
slippage earlier. So, as far as the economy's performance, there is
some inertia there that is satisfying, I think. I don't see it much
different than the Greenbook has in terms of the pattern that may be
developing. Did you say, Mike, that manufacturing inventories were
coming out this morning?

Right, and they were up $12 billion at an annual


As opposed to a stronger-It was $50 billion in July.
And that is a good sign.



1.64 to 1.56.

And the inventory/sales ratio went from

You're ahead of me on that;

I don't have those

MR. JOHNSON. Well, that's a good sign in that the bulge in
inventories in July did not carry forward.
auto shipments and sales.

A good part of that is a big increase in

MR. JOHNSON. Right, but there was some uptick even ex autos,
if I remember, before July.

Right, there was a pretty broad--


I was referring to the sales.

In spite of all that, I still see it like
I don't see
the Greenbook forecast--some winding down in the economy.
any signs of acceleration, taking all the regions on balance; I still
So, I perceive a little more
see some gradual slowing going on.
downside risk than upside risk. But I want to associate myself with
Gary Stern and others who earlier indicated a little optimism on the
inflation front--that inflation seems to be looking better and it
But as even
seems to go beyond just the food and energy components.
Mike Prell said, a lot of the ex food and energy improvement seems to
I'd be quite alarmed
be associated with the dollar, to some extent.
if we continue to contaminate the environment we have for improvement
I'm not saying we ought to be targeting
with a drop in the dollar.
the dollar, but given the fact that we are at high capacity levels, we
don't have a lot of fudge room there unless the economy were to slow
So, that is a
further and we could absorb some decline in the dollar.
big, big worry. And even though I think the risks are still toward
the down side, the current environment is not very promising for any
flexibility on policy.

Governor Angell.

It seems to me that the picture is a mixed
I'm somewhat on the optimistic side, as are Gary Stern and
Manley Johnson, in regard to the output-price tradeoff. It seems to
me that in the second half we are in a 2-3/4 percent inflation mode as
compared to 6 percent in the first half. I would agree that neither
one of those was sustainable. That is, I think we had accidental
factors giving us too high inflation numbers in the first half and we
are getting some benefits in the second half that are not sustainable.
But I would tend to expect inflation in 1990 to be within the 3
I don't call that good at all. My goodness, we are
percent range.
two years delayed in terms of being at 3 percent and I think we do
need to make more progress. But I think our ability to make progress
on the inflation front can best be done by not creating recession-like
And I'm optimistic that that will not occur. M2's growth
over 26 weeks is now back up to 4-1/2 percent, which seems to me to
mean that we have made some progress in that regard. Commodity prices
continue to soften, but I think it's a rather moderate softening and
not a precipitous one.
It seems to be a softening that reflects the



monetary scarcity that occurred earlier; and I think that needs to be
watched rather carefully as I think money growth needs to be watched.
But I do believe there's a different tone around in regard to how one
can profit by engaging in various economic activities.
I think profit
prospects or speculative gains by holding land or real estate or any
investments are probably being diminished somewhat. And it doesn't
seem to me that this is going to lead to a sustainable level of
I am as bullish as the
investment activity in many of these areas.
staff is in regard to exports.
In fact, I have exports slightly
higher with a stable exchange rate, whereas the staff is calling for
exports to decrease dramatically--well, I'd call down to 5 percent
I believe that we have had the
somewhat of a dramatic decrease.
benefit of having American manufacturers compete in the world markets
right here in the United States; I think they are getting better and I
think there is motivation to hold costs in check. So, I think it's an
optimistic outlook; but there are some areas, like the airline
business, that are showing some signs of change. So it looks

Governor Kelley.

MR. KELLEY. Mr. Chairman, I have adopted a self-imposed task
of delivering jeremiads from time-to-time about things that are going
on that are somewhat outside the economy and present a backdrop
against which we need to apply policy. I'm not going to repeat that
this morning, but I would just like to get on the table the fact that
there are a host of very important challenges and problems in the
economy that are very urgent and on which, in many cases, we seem to
have an opportunity to make some substantial progress. They are not
economic in many cases; but in virtually every case they are
substantially impacted by economic events and economic conditions. As
I look at the economy, I'm close to where I think Governor Johnson and
President Black and others are in that it's hard for me to see where
meaningful strength can come from and relatively easy to see where
weakness can come from. And that gives me some pause. I would
suggest that we ought to be rather sensitive to emerging weakness and
be quite careful that we don't induce something through policy that
would turn out to be counterproductive to society in a larger sense.

Jeremiah Corrigan!

VICE CHAIRMAN CORRIGAN. Well, in terms of the near-term
outlook I'd be in the moderate but steady camp that somebody--I guess
Dick Syron--mentioned. As I said to you this morning, there is some
evidence of a lessening in prices for some raw materials and
intermediate goods and even some evidence of modest improvement in
availability of deliveries. But all-in-all as I look at the current
situation, my bottom line is that I fear it will be weaker and my
instinct is that it will be stronger. Therefore, I think it's about
balanced. But let me take up a further [unintelligible] in terms of
the intermediate-term outlook. The staff has taken the forecast in
the Greenbook through the end of 1991 and I think what the staff is
saying is very, very revealing. You may not like it, but I think it
is probably the most exhaustive and professional insight that you can
get. What does it say?
It says: 2 percent growth for three years
running; the unemployment rate rising to 6 percent; the saving rate
falling again to 5 percent; the CPI with or without food or energy
stuck in the 4 to 4-1/2 percent range; compensation per man hour stuck



at 5 percent; the fiscal deficit still over $100 billion; and the
trade and current account deficits at the end of 1991, even with some
depreciation, still around $100 billion. Net external liabilities at
the end of '91 are going to be $1 trillion and portfolio net income
flows are going to be minus $50-odd billion. It seems to me that what
you get out of that is an intermediate-term outlook that I consider to
be in some ways as good as you can expect but in other ways very, very
risky and dangerous. It tells me, as we all know, that we have an
absolutely lousy policy mix in this country. It tells me that there
are great risks of a renewal of protectionist attitudes in this
country. It tells me that there are risks even in terms of the
ability of this country to provide leadership. And it certainly tells
me that there are very grave risks in the economic outlook in terms of
growth, inflation, and the exchange rate. I think the exchange rate
risk over time is clearly on the down side. That's one of the reasons
why, though I may not agree with the analysis, I certainly agree with
the stated concerns about the dangers of beating up on the dollar.
But I don't consider this three-year outlook anything but trouble
looking for a place to happen somehow or other.

Governor Seger.

MS. SEGER. I can't worry about where we're going in two
years because I don't think most of us can forecast even two quarters
ahead let alone two years ahead. Looking a couple of quarters ahead,
though, I do think that the slowing that we have seen is going to
continue. What concerns me greatly is the weakness that I see in
various manufacturing areas. And the weakness in manufacturing, I
think, is more serious than the overall weakness. The Purchasing
Managers' Survey for the last five months or so has indicated this
slowing; I have other sources of information as well. Just to repeat
a couple of things that Si Keehn said about the auto industry: using
the current production schedules for the fourth quarter this will be
the weakest fourth quarter since 1982 and you may remember that 1982
was not exactly a hot year for autos. Even if you pick up the
transplants which, of course, have become very big and very important
over this last seven years, it still will be the slowest fourthquarter production since 1982. Frankly, one of the reasons two or
three of the auto manufacturers have announced incentives for their
1990 models even before they are readily available is that they are so
nervous about the weak demand. In some cases, they do not have enough
orders even to start their plants running to produce the 1990 models.
So, I think the people who looked at the August auto sales numbers and
read them as a sign of strength got the wrong message. It was end-ofyear close-outs that they really pushed. It's just about 180
[degrees] away from a strong story; it's a weak story.
Also, if interest rates actually perform as the Greenbook
assumes--if short-term rates are basically flat during the year ahead
and long rates rise slightly--I'd be very hard pressed to expect
housing to improve. Maybe I'm missing something and maybe consumers
are interested in buying more, but the builders--at least in the
builders' survey that I read--are feeling rather negative. That's
particularly true in parts of the country that have been alluded to
here earlier. The export situation really has to be watched. I think
the strong dollar that we have seen over much of the year, until the
[unintelligible] began recently, has had an impact on export growth; I
believe it's going to have an additional impact because there are long


lags involved here. Also, there has been a rather significant
deterioration in profits going on. The IBM announcement a couple days
ago of disappointing earnings in the third quarter and expectations of
disappointing earnings for the full year, I think, is a great concern.
They have announced that they will offer early retirement to some more
people, which is not exactly very IBM-like.
If you read the press
release carefully, it mentions that the strong dollar was one of the
things contributing to their deteriorating profits because of the
translation problem--the profits that they are earning abroad and then
bringing back into their consolidated earnings report for this
country. It's my personal observation that when a company experiences
profit deterioration, that eventually impacts on its willingness and
ability to expand and even to modernize dramatically. So, I'm
probably a touch more concerned than the average around the table.
And if the stance of monetary policy is what we're assuming in the
Greenbook, then I think I would be a lot more nervous than the average
Thank you.

Governor LaWare.

MR. LAWARE. Well, I'm kind of sorry I didn't get in ahead of
President Corrigan because he summed up so perfectly my own views of
what some of the risk factors are in the near future--accidents
I'm very concerned about the fact that
looking for a place to happen.
the outlook is for sluggishness with no real progress on any of our
major problems.
It seems to me that the greatest fragility in what we
see going on right now is the possible effects of the dollar's
behavior. While I understand that solving the current account crisis
and the trade crisis is a necessary part of our planning, or hopeful
planning, it seems to me that it is not going to get solved all by
itself just by driving the value of the dollar down. The dollar is
behaving right now like a strong swimmer. But sooner or later, even
the strongest swimmer is going to go the bottom if you push his head
under water again every time he comes to the surface. And I worry
that any kind of a free fall in the dollar in the near future could
drive people away from dollar-denominated securities and reverse this
interest rate structure very dramatically by forcing the financing of
our deficits back into our own markets.
And that would rob us of the
monetary policy flexibility that we need in order to keep some sort of
an even keel through this perilous period.
So I'm worried, and that's
the issue that I have come to focus on--worried and frustrated, I
guess, sums it up.

I wish I had said all that.

time to break for coffee.

That's good.

I suspect this may be an appropriate
[Coffee break]


Mr. Kohn.

[Statement--see Appendix.]


Questions for Mr. Kohn?

Don, on your longer-term projections, I don't
know what you're projecting for 1991.
The Greenbook tells us we will



have 4 percent inflation or so in '89, '90 and '91.
So, given the
forecast for inflation, it seems to me that we're implying somewhat
higher than a P* kind of M2 growth. In other words, don't I have to
see some 2-1/2 or some 3 percents, on average, over time to-MR. KOHN. Well, eventually you would have to see that. You
would have to see 3s [in M2 growth] to imply price stability; this is
in line with Governor Johnson's question earlier.
If you look at the
financial indicators that were distributed--the last chart, chart 9
has the P*--we are assuming 6 percent M2 growth in 1990, about in line
with nominal GNP, and a small decline in velocity.
In 1991 we have 5
percent, a bit lower than nominal GNP, and a small rise in velocity
since we have this upward drift in interest rates in that year.
two taken together imply in the P* model--to keep P* just a little
below P--a very mild deceleration in inflation, not a rapid one. The
line is tilted down but not at a very steep angle.

We're having trouble seeing that.

CHAIRMAN GREENSPAN. What would happen if P actually reached
P* at the end of '91? What is the gap at the moment in that?
MR. KOHN. I can tell you that in a second.
end, if P were lower than-CHAIRMAN GREENSPAN.

Well, at the

No, equal to the P*.

MR. KOHN. Well, given the money growth that we've assumed,
that would require then that prices come in less than the rate-CHAIRMAN GREENSPAN.

That's what I'm saying.

--and presumably we would have that P equal to P*.
That would imply very little further downward pressure on-CHAIRMAN GREENSPAN. No, no.
If at the end of 1991 P* is
under P, then that gap is the measure of how much prices would fall if
P were equal to P*.
I'm asking-MR. KOHN.

How big is the gap is what he's asking.

as much as 2 percent.

On the chart it looks as if it could be

MR. KOHN. At the end of 1991 P* is 1.345 and P is 1.381, so
[the calculation] is .04 over 1.38.
It's about 3 percent, I'd say, or
whatever .04 over 1.38 is.




.04 over 1.38.


So it's 2-1/2 percent or so.





CHAIRMAN GREENSPAN. [Unintelligible] a P* operation is that
I'm not saying it's forecast;
we could get a lower [inflation rate].
but it's not an argument that you could get a lower inflation rate
consistent with that money supply growth [unintelligible].

I'm not sure I understood what you just said.


I'll say it again very explicitly.

I'm sorry.

CHAIRMAN GREENSPAN. The hypothesis that employs the M2
growth, which is better, is therefore not inconsistent with a lower
inflation rate than is in the Greenbook for '91.
MR. KOHN. Right. Actually, relative to the Greenbook, in
'91 the P* would give you 3-1/2 percent on the implicit deflator. The
Greenbook has 3-3/4 percent, so it's not much different. I thought
what you were getting at is what it would imply for '92. Presumably,
that is where you're coming out of '91 and that would imply some
further deceleration.

Well, '92 is an easy forecast; it's '91


MR. HOSKINS. Can I follow up? The shorter-term problem,
from my perspective and not obviously from other people's around the
table, is that we're going to have a growth rate--going into the
fourth quarter and starting the first of the year--of around 6-1/2
percent. Isn't that kind of a speed problem in the sense that we are
MR. KOHN. Well, if interest rates were to hold steady, I
would not expect money growth to accelerate in the first quarter


MR. KOHN. Presumably, if interest rates didn't come down we
wouldn't get the acceleration; I would expect M2 growth perhaps to
decelerate slightly. But it would be basically in the 6-1/2 to 6
percent area in the first quarter.
MR. HOSKINS. It's just a problem for me to look at M2 growth
of 5.2 percent fourth quarter-over-fourth quarter the previous year
and your projection of about 4.5 percent [for 1989] and now to see you
project that M2 growth is going to go back up to 6 or 6-1/2 percent.
The argument generally has been that the cost of bringing it down
because of interest sensitivity is too high--you get big swings in M2.
But you can turn that around and say you can bring M2 down with
relatively small swings in interest rates.
MR. KOHN. In the short run that's right. This is the
phenomenon that we discussed in July, I believe, when we were talking
about the long-run ranges. The staff forecast with relatively flat
interest rates was consistent with M2 growing about in line with



nominal GNP.
So if you think you're going to have nominal GNP growth
on the order of 5-1/2 or 6 percent next year you're going to get M2,
given that we've had a little decline in these rates, on the order of
6 or 6-1/2 percent, just mechanically working it through. But you
could raise interest rates a bit and you would get a little lower
nominal GNP.
You would also get even more impact on M2 given that
interest rise.

President Syron.

MR. SYRON. A theoretical question, looking out and going
into next year: If the capital gains legislation were to pass--and
there is a lot of discussion about windows and that sort of thing-what kind of effect will that have on M2 as we go into next year?
MR. KOHN. We discussed that to some extent.
If there is, it
could be a bit of a replay of 1986.
If people realize a lot of
capital gains quickly and then store the money waiting to pay their
taxes next April, for example, we could have some temporary upward
movement of M2 or a [unintelligible] level of demand for M2 in the
short run, which would then come back presumably after the taxes were
It would be a little different than we saw in 1989 when we
thought people were surprised in April by their tax returns and they
drew down their M2 balances and then had to move them up.
You could
argue in this case that, perhaps having learned from 1989, people
might deliberately make a decision on the basis of taxes in that they
might be more tempted to take some of the capital gains they got and
leave them in M2 and have that ready-CHAIRMAN GREENSPAN.
imply more M3 than M2?

Wouldn't that degree of sophistication

Depending on who's doing it, yes.

If it were--

If somebody were sophisticated enough to
act in context of that law, one would assume it's more an M3
MR. KOHN. Possibly. I think there are probably a number of
households with very high wealth and, therefore, potentially high M2
holdings who--if they were to park it there temporarily--could do
Presumably, if there were a mood shift out [of M2] into M3-type
liabilities, such as large time deposits, etc., from the bank and
thrift perspective they would have to issue fewer other types of M3
liabilities. So, I'm not sure whether that would really affect the
level of M3 so much.
I think there might be some impact on M3.
Why don't I get started
on policy issues. This ought to reflect much of what I've been
listening to here because I, too, think the outlook is mixed, with
some key timing points in the period immediately ahead.
It's fairly
clear that the evidence for weakness, if one looks at that part of the
spectrum, is most persuasively coming from the orders pattern,
specifically in durable goods.
The nondefense capital goods area,
excluding aircraft, clearly is scaling back at a fairly pronounced
pace, including declines in backlogs in nominal terms. What's unclear
at this stage is to what extent that order easing is a reflection of
real underlying weakness in capital equipment or merely an order



adjustment process to a significant decline in average lead times on
Obviously, if you're bringing
the deliveries of materials and parts.
the lead time down from, say, 90 days to 60 days--that's not the
actual number--one can collapse the unfilled order pattern and orders
If that is a
would fall without affecting total plans for shipments.
major cause of this phenomenon, owing to the fact that the order lead
times are now probably at rock bottom, at least in the context of this
country, it would follow, therefore, that within the next several
The purchasing
weeks we should begin to see some firming in orders.
managers' order data have stopped their accelerating rate of decline;
in other words, they are still implying a decline but the decline has
stopped accelerating. And there is some evidence popping up in a
variety of different places that suggests that maybe the softening is
I don't think we're going to know that for another
coming to an end.
three or four weeks.
The one aspect of the issue which I must say concerns me is
the notion that this may be something more than that. The argument
for it being more than that is the continuous, cumulative decline in
It's clear that
profit margins that has occurred since the spring.
what has occurred is that the slowdown in volume, coupled with the
price slowdown, has had a significant impact on the revenue side; the
slow volume clearly has raised fixed costs and especially the
extraordinarily high interest payments of the corporate sector.
fact, the series that we produce internally--the ratio of gross
interest payments by corporations as a percent of gross cash flow--has
spiked up in the last two quarters partly, I suspect, as a result of
the interest increases that are going on but also because of a
slowdown in cash flow, which is another way of saying that there is
It is not
pressure on margins coming from this gradual slowing up.
reflected in the Greenbook too much, so maybe these numbers are not an
issue of concern as much yet. But I do think that the capital goods
If capital goods hold up, I
markets are the key to this outlook.
think there's very little chance that this economy can move down; in
fact, if capital goods markets hold up we might exceed the Greenbook
easily. But if the capital goods markets continue to erode and then
accelerate down, then we get a significant backing up of in-process
inventories in the system. We look at inventory data of purchased
materials, goods in process, and finished goods from the establishment
But there's a very significant part of all of those
If you consolidated them
inventories which are really in process.
under their final sales level, for example, you'd find in the capital
goods area that the proportion of inventories that were [in process]
would be very high and that would tilt over the capital goods
situation; even though the inventory sales ratios don't look
formidable, you do get enough pressure to create some recessionary
forces. This is the downside argument.
The upside argument is
basically that if this process were underway, it's already overdue on
the basis of historical experience. This economy doesn't work that
In other words, when you get these types of patterns, they
trigger things and they go at a much faster pace than anything that we
have seen. That sort of suggests that this might be a false move.
In any event, when I look at this and translate it into
policy, it says to me at this particular stage that the argument
moving in either direction is rather dubious at this point.
reason is that if we were to move down--well, let me put it this
Moving up at this point strikes me as very unsupported.
I don't




a reason for doing that and nobody around here even remotely suggested
But moving down right at this moment [is problematical], in light
of what is presumed to be an increase in the Bundesbank rates on
Thursday and a coordinated attempt on the part of the G-7 to now put
monetary policy on the table and bring the dollar down--and believe me
it will succeed; it will go right through the floor.
If we were to
get anywhere close to moving rates down in conjunction with the
Bundesbank move, I'm fearful that we would get too much market
response as the new G-7 coordinated monetary policy endeavors to bring
the dollar down. And I think that would create some really major
I conclude, therefore, that at least where I'd like
problems for us.
to come out would be alternative B, asymmetrical toward ease as we are
now. And I would keep a close eye on the order patterns because we do
get information coming in continuously. If the patterns weaken
considerably, I think that probably would be suggesting to us that the
I don't think that's
capital goods markets are beginning to slip off.
where the odds lie, but it is still a disturbing possibility. If the
more probable event occurs--namely, that the economy is about to
In any event,
stabilize--I think we will know that in several weeks.
I would like to suggest as a policy position alternative B, asymmetric
toward ease.
Governor Johnson.
MR. JOHNSON. Yes, I'd like to associate myself with that
view. I'm not sure I'd explain it the same way. My major concern
right now--even though I think there is a downside risk and we ought
to be prepared to use our flexibility to ease at some point--is that
I think there are still some questions
the atmosphere is not right.
going forward and we ought to wait and look. My major reservation at
this point is what is going on with the dollar and the fact that any
attempt to ease now, even if we thought it was the right thing to do,
would have great risks because the perception [would be] that our
goals were associated more with some dollar level than our view about
inflationary risks.
And I really don't want our policy tied in with
So, I prefer to maintain our flexibility going forward.

President Parry.

I would certainly support alternative B, but I
would have a preference for symmetrical language because I think the
data to date suggest that the risks are equal on the up side as well
as on the down side.

President Forrestal.

MR. FORRESTAL. Mr. Chairman, I would certainly support your
prescription for policy in the short term. I think it's exactly on
target with respect to the dollar. Any easing at this point would be
associated with dollar movement and that has very grave risks, as you
stated. I think we're at a point where we ought to be fairly happy
Clearly, there are risks and they have
with the state of the economy.
been articulated very well; I don't minimize them. But I certainly
find it very hard to imagine a stronger case for leaving policy
unchanged at the moment.
I, too, would prefer a symmetrical directive
only because I think that the risks are about evenly balanced.

Governor LaWare.



MR. LAWARE. I'm strongly in favor of alternative B. I think
the risks of easing because of the dollar situation are significant.
Therefore, I would prefer the symmetrical language.

President Hoskins.

MR. HOSKINS. My concerns, again, remain in the longer term,
not this short-term consideration. My fear in the longer term is not
that inflation is going to get out of hand on the down side. It seems
to me that if it's going to get out of hand it's going to be on the up
side. That seems to me to be where the risk is: trying to head off a
recession that is not there will always bias us toward inflation and
volatility in the inflation rate. I would prefer the "B" path. I'm
not so comfortable that I'd want to tighten right now but I would have
asymmetry in the other direction on the notion of getting the M2 path
below 6 percent for next year.

President Syron.

MR. SYRON. Like many others, I'm happy with the current
state of the economy. But also like many others, I'm not happy about
the outlook, particularly on inflation, as we go out a couple of
I know the errors that such a forecast has.
I understand the
constraints that are on us as far as the dollar goes. Because of my
longer-term concerns on inflation I'm very comfortable with "B," but I
would also prefer symmetrical language in the hope that the market
would see symmetrical language as no change.

President Boehne.

MR. BOEHNE. Alternative B, and I think asymmetrical is fine.
I could also live with symmetrical. I should say that while this
makes good economic sense, I think it is going to be somewhat
confusing to observers of this whole process in that we have been
intervening to drive down the dollar and, if the Germans raise
interest rates, there will be an expectation that this is a
coordinated effort. And if we don't follow through--I agree we should
not follow through, that's not my argument--I think it will raise a
number of questions and will sire a number of speculations about where
the Fed is in all of this. That's more politics and public relations,
but it is nonetheless part of the world.

President Keehn.

MR. KEEHN. I'd be in favor of alternative B and asymmetric
language. It seems to me that what we're basically saying is no
change in policy. A word change is awfully minimal; nonetheless, I'd
prefer remaining with asymmetric language at this point.

President Stern.

MR. STERN. Well, I too favor alternative B. I have a mild
preference for symmetric language just against the circumstances in
which we find ourselves. There are indeed a lot of problems that
might impinge upon us, but it seems to me that the best policy we can
adopt, given all these potential problems, is to try to keep the
economy on a relatively even keel. And I think "B" accomplishes that.
I certainly wouldn't want to see M2 growth in the near term--by that I



mean the fourth quarter and going into next year--go above that
associated with "B."
I do think our credibility is very important and
I think we have to be very careful about that matter.

Governor Angell.

MR. ANGELL. Yes, Mr. Chairman. I also prefer alternative
"B" with asymmetric language toward ease.
It seems to me that there
is more restraint in place than I think some of the words so far have
suggested. We have had monetary restraint sufficient to turn the
foreign exchange value of the dollar around. We have had monetary
restraint sufficient to take commodity prices that were rapidly rising
and turn them into falling prices.
We have had monetary restraint
that has taken the PPI on a year-over-year rate of change basis from
moving up to moving down. To think you can get lucky enough in that
kind of environment to do that and have no change in monetary
restraint and to think that that restraint is going to be just right
on the other side does not follow the logic that I know of.
So, I'm
quite suspicious of the fact that we may be getting further into this
process than we know. We need to be watching very carefully to see
what occurs. Now, I would be delighted if we could just say: Well,
we're going to pull the monetary aggregates down and we're just going
to have them under restraint; but I think all of us know what happens
if you go into that mode.
The demand for money has to increase during
a period of time in which price level stability is much more of a
clear possibility. So, I think we have to watch very carefully all
the signals that have served us so well in keeping this economy going
for so long and yet provided the restraint that we needed.
I believe
that it's not so important at this point whether we ease a quarter or
not here or there except that I don't want any timing with the dollar.
But 25 basis points one way or the other doesn't make or break
anything. You could make way too much of that.
But it does
contribute to the possibility of orderly markets that are so
important; the whole housing industry, it seems to me, needs orderly
I think a very steady, careful, easing ought to be done;
it's unfortunate that the G-7 took away what I think may be a time in
which we may need to act.
I think it's essential that we take this
time to wait, but I am more inclined, I guess, than some others to
believe that an easing is going to be necessary.

Governor Kelley.

MR. KELLEY. Mr. Chairman, I support alternative B with
asymmetric language toward ease.
That's where we are now and I see no
reason to change it.
I concur with Governor LaWare that the risks on
the dollar are certainly there; you articulated them beautifully. But
I also believe that that's going to have to be played out on a day-byday basis.
It's a little hard to know how that's going to go.
think that you and the Committee can and will adequately take that
into account as events unfold. Meanwhile, I think the potential for
weakness in the economy and the consequences of it--if we get it and
it gets away from us--are severe.
I may be a cockeyed optimist but I
think there's a possibility that we will continue to get better
inflation results than expected. As a consequence, it seems to me
that your proposal is appropriate.

President Melzer.



I favor "B." Symmetrical language would be my
I would
preference but I could live with asymmetrical toward ease.
just comment that several months back I was concerned about the degree
of the restraint.
I'm not sure what to make of M2.
But in terms of
some of the narrow aggregate and reserve measures, I take some heart
in the fact that they had a pickup in September and are projected to
pick up [further] through the end of the year. So, I think that the
shift that Governor Angell was concerned about to some extent has
taken place, at least based on those [data].

Governor Seger.

I favor alternative "A" because I think we do
need a slight degree of easing; actually, I believe the difference
between "A" and "B" is basically a slight one.

That means easing immediately?

I don't think the 25 basis points is going
to pour rocket fuel into our engine. Anyway, my main concern, as I
indicated, is in the auto area and possibly in the capital goods area.
In regard to the impact on the foreign exchange markets, I think the
demand situation there is one of great strength for the dollar, which
is why we had to be in there doing this heavy intervening and selling
of dollars along with the other central banks.
If we drop the
interest rates slightly, then that would allow Sam Cross' people to
take two days off and maybe that would be good. So, I don't think
that that would be a real danger. Finally, just thinking back to our
discussions here earlier this year about inflation, the actual
performance of price indexes has been far better than any of us
dreamed. And I don't think the apparent shortages that were so
worrisome are there now. While I don't think inflation has gone away
--and I say that so Lee Hoskins will understand--nevertheless, I don't
think it is accelerating either. So, I would be more comfortable with
alternative A.
MR. LAWARE. Martha, the Bluebook says that "A" is related to
a 50 basis point drop.
Would that change your view on that?

I'm sorry, I meant 50.
No, it wouldn't.


Vice Chairman.

I'm comfortable with alternative B.
I guess I prefer symmetric but since we have asymmetric, that's fine-just leave it there. I would come out there pretty much on the
grounds of my own assessment of the domestic economy, although the
exchange rate situation makes it a bit more compelling.
I would note,
Mr. Chairman, tongue somewhat in cheek, that I'm not prepared to make
this argument, but much of the earlier discussion today would not be
incompatible with tightening monetary policy.

Do you mean drive the dollar higher?



VICE CHAIRMAN CORRIGAN. A whole variety of things: the
dollar, price stability, making room for export growth. You could
make a pretty good argument based on the discussion around this table
that we should be tightening policy. I'm not prepared to make it.

You'd get a pretty darn good argument if you


President Black.

MR. BLACK. Mr. Chairman, I'm very sympathetic to the point
that Lee Hoskins made because I tend to focus on the longer run, as I
think he does.
And I think our long-run problem is inflation rather
than recession. I'm also sympathetic to the points made by those who
favor symmetry just because I'd like to send a signal to the market
that we don't really approve of the G-7 action. But I also share
Wayne's feeling that monetary policy has been a little tighter than
most people assume and that it may be [sufficient to] hold down the
inflation risk. So, I think your original formulation is probably the
best one for now; I would go with "B" asymmetrical on the easing side.
[Unintelligible] and I think most of the
comments around the table about using monetary policy with respect to
the dollar are right on the mark. I don't think the old adage "you
can't serve two masters" is to be taken lightly.
I think monetary
policy should be devoted to domestic economic policy and not to the
dollar. And further, with respect to the prescription for the period
ahead, I would accept "B" but would want a symmetric directive.
wanted that last time, as you may remember, and I've seen no
accumulating evidence that suggests we are any closer to a recession
at this meeting than we were at the last meeting. As a matter of
fact, in my own view, we're further away from it.
As a result, I
think there's a greater demand for a symmetric directive than there
was last time. Therefore, I would prefer "B" symmetric.

President Boykin.

I favor alternative B.
be for symmetric language.

My preference also would

CHAIRMAN GREENSPAN. The consensus is obviously alternative
"B" with some concentration for asymmetric toward ease, which I would
like to take a vote on. But I will say that since there's enough in
the way of desire for symmetric language, should the evidence emerge
that action is required I do think it might be useful to have a
telephone conference and discuss what the issues are; they are likely
to be subtle and the Committee's views would be useful.
In any event,
I would like to propose a vote on alternative B with asymmetric
language toward ease. Would you read the directive so stated?
MR. BERNARD. "In the implementation of policy for the
immediate future the Committee seeks to maintain the existing degree
of pressure on reserve positions. Taking account of progress toward
price stability, the strength of the business expansion, 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 acceptable in the
intermeeting period. The contemplated reserve conditions are expected



to be consistent with growth of M2 and M3 over the period from

September through December at annual rates of about 6-1/2 and 4-1/2
percent, respectively. The Chairman may call for Committee
consultation if it appears to the Manager for Domestic Operations that
reserve conditions during the period before the next meeting are

likely to be associated with a federal funds rate persistently outside
a range of 7 to 11 percent."

Call the roll.

Chairman Greenspan
Vice Chairman Corrigan
Governor Angell
President Guffey


Governor Johnson
President Keehn
Governor Kelley
Governor LaWare
President Melzer
Governor Seger
President Syron


VICE CHAIRMAN CORRIGAN. Mr. Chairman, could I raise another
question before we formally adjourn?


VICE CHAIRMAN CORRIGAN. I wonder what the sentiment around
the table might be, looking forward to our next meeting, to ask Mr.
Prell and Mr. Truman and Mr. Kohn and others to do a special
presentation for the Committee where we would take a look at this
question of price stability in five years in some systematic way. I'm
not suggesting a forecast but alternative scenarios, problems,
obstacles, and costs, so that we could really get a systematic feel of
what kinds of problems would be involved in that kind of underlying
policy goal. I don't think-CHAIRMAN GREENSPAN.

[Unintelligible] suggestion.

MR. PARRY. One [other point]: I'm sure you all got this
letter to respond to by the end of October or early November from
Representative Neal and that kind of information might be useful.
don't know what we're all going to do about that but that kind of
information might be an important-CHAIRMAN GREENSPAN.


What is the deadline for answering that


The end of October or early November is my
He just said as soon as possible.

MR. PARRY. Well, he says he'd like to make it a part of the
record and he will be doing the hearings in late October or early
November. And we assumed that--




We are not all going to answer that separately,


Do we want the FOMC

are we?


[to respond]?

That's the question I was going to raise--no


I think we ought to

as the FOMC.

I would think we should have one response.



Do we all agree?

That's what we have done in the past.
Well, I'd like to discuss that.

VICE CHAIRMAN CORRIGAN. Well, putting aside this other view,
I don't want to prejudge the letter.

We will discuss the letter at our

VICE CHAIRMAN CORRIGAN. We have to deal with that.
quite apart from that, I really think that we ought to put this
exercise under a microscope so we really have a-SPEAKER(?).

Well, this is something [unintelligible].


Well, I'm just trying to formalize



I agree.

What model are we going to use?
The model that works.


That's why I want to look at it.

MR. KOHN. I think this will be something of a time consuming
exercise at the FOMC meeting as well as for the staff between here and
there. Aside from this Neal question which, if it needs to be
answered by early November would precede the FOMC meeting anyhow, we
The November
do have a two-day meeting scheduled for December.
So before
meeting was to be a Tuesday afternoon meeting in any case.
President Parry brought that up I was going to suggest that maybe we
schedule it for the December meeting, but I'm not sure how it
interacts with this Neal letter. We could have a Tuesday afternoon/
Wednesday meeting.
MR. ANGELL. Well, how about a Wednesday morning meeting with
[Wednesday] afternoon?
MR. KOHN. Some Presidents don't like that when they have
Thursday directors' meetings.



CHAIRMAN GREENSPAN. The answer to that letter has to come
long before any of this other stuff occurs. And I'm not altogether
certain that the answers to the letter per se are going to be really
I think what's involved here is
tied up in any analytical issues.
looking at the problems in financing the large budget deficit, not
pressures on the money supply. What we really have to deal with,
crucially, is what real rate of interest is consistent with a path of
money supply which itself is consistent with zero or moderate
inflation. Because it's the real rate of interest that will tell us,
literally, the capabilities of bringing the system into balance. And
I'm not sure that that really gets to this letter or anything related
to it.
MR. JOHNSON. Plus, it seems to me that there has always been
a [unintelligible] definitions which has to be addressed as well. You
could probably go around this table and find half a dozen different
views about what price stability is.
I know I have one.
CHAIRMAN GREENSPAN. Yes, but I bet you they don't differ by
more than 10 percentage points.

That's exactly the problem.

MR. BOEHNE. Well, if we have to reply to this letter over
the next month, and if we're going to have a two-day meeting in
December anyway, this idea of price stability isn't going to go stale
between now and Christmas.
natural schedule.


I wouldn't think so.

I think we ought to let it flow into our

CHAIRMAN GREENSPAN. Okay. There is a fundamental problem
that we have with this whole procedure in the sense that there are a
lot of [unintelligible] things that have to be done in economic
policy. And with fiscal policy now out of the game, and really
monetary policy and sterilized intervention being the only
[unintelligible] there's an awful lot of mischief that can occur. But
I think it's those types of questions that we need to ask.

I agree.

MR. ANGELL. Well, the model that we're going to use is going
to be rather important.
It seems to me that if you're going to use
the Phillips curve trade-off model you're going to defeat the Neal

What you want to do--

[Unintelligible] if you want to defeat it, just
use that model and you will guarantee a defeat.
MR. BOEHNE. On the other hand, if you think you're going to
get this like a free lunch, that's not realistic either.



MR. SYRON. And it depends on the time periods you're looking
I think the Neal letter is consistent with looking at this over a
long period of time. Most people don't behave-VICE CHAIRMAN CORRIGAN.
going to be costs.


over five years there are

MR. SYRON. There are going to be costs but there is going to
be a benefit in that over the long period of time after that
prosperity will be greater.
CHAIRMAN GREENSPAN. Well, at a minimum, just having a
focused Congressional examination of this process cannot be bad.
I'd rather Congress be debating this about
monetary policy than a whole lot of others things they could be
focus on the-MR. BOEHNE.


I think it forces them to

Right, I agree with that.

--costs and benefits.
out is unlikely to be anybody's--

Whatever comes

MR. BOEHNE. But I think it's also a good opportunity, even
though fiscal policy is in a state of paralysis, to remind people
about what good things could happen if it weren't.

How about Bill


might testify?


Well, I think he would say that.

They might come to that conclusion anyway if
they examine the costs of getting there. They may say "Oh, no way are
we going to pay that price."
That's the danger on the other side.
I will tell you: If you went back to the
1960s I would say you probably would have had 2 to 1 against it as far
as economists are concerned. I bet you now it's 1 to 2 the other way.

It probably is.


That's right.


That's probably right.

CHAIRMAN GREENSPAN. The old Phillips curve trade-off was one
that everyone believed: either you got lower inflation and higher
unemployment or the reverse and that was it.
But now I think there's
a much more sophisticated view of that relationship and it differs.
MR. BLACK. We can use a long-run perfectly vertical Phillips
curve and I wouldn't have any objection to that.



MR. BOEHNE. The truth is we don't know.
biases but we don't know.

We can have our

Yes, that's about the best.

MR. BOEHNE. And what you have is an array from the most
optimistic and least costly all the way over to something that would
be fairly costly.
CHAIRMAN GREENSPAN. Yes. Also, I think in all of our minds
is the thought that over the next five years we really believe in some
way or by some means that there is going to be a recession. And
that's going to be the period in which the price [improvement] occurs.
MR. BOEHNE. Right. But, with the exception of Lee here,
probably few people would be willing to precipitate a recession to
pull it off. But, if one occurred, we'd be willing to take advantage
of it.
recession. I object.

I never said I wanted to precipitate a
That's why I said--


I think lunch is served.