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Federal Open Market Committee
Conference Call
April 28, 1981


Mr. Volcker, Chairman
Mr. Solomon, Vice Chairman
Mr. Boykin
Mr. Corrigan
Mr. Gramley
Mr. Partee
Mr. Rice
Mr. Schultz
Mrs. Teeters
Mr. Wallich
Messrs. Balles, Black, Ford, and Winn, Alternate
Members of the Federal Open Market Committee
Messrs. Guffey, Morris, and Roos, Presidents of the
Federal Reserve Banks of Kansas City, Boston, and
St. Louis, respectively
Messrs. Doyle and Smoot, First Vice Presidents, Federal
Reserve Banks of Chicago and Philadelphia,
Axilrod, Staff Director
Altmann, Secretary
Kichline, Economist
Sternlight, Manager for Domestic Operations,
System Open Market Account
(New York)

A complete record of staff attendance at this session was not
available in the Committee's files.

Transcript of Federal Open Market Committee Conference Call of
April 28, 1981
[Unintelligible] money supply figure. The
next money supply figure, in case any of you don't know it, shows a
sizable increase, which is not particularly in line with anybody's
expectation or projection and puts us well above the last path we had.
I'll get to that in a minute, but I want to put it in the perspective
of these seasonals. And I'm afraid there was some misleading of the
Committee at the last meeting in that it was said that it just doesn't
make much difference. It makes quite a lot of difference--not the
seasonal changes themselves, but how we treat NOW accounts. On the
seasonals themselves, a tentative decision has been made to use the
technique which, in effect, knocks out April to September of last
year. If we don't, and just run an ordinary seasonal, a lot of the
seasonal adjustment factors move in the opposite direction from [the
way] they have been moving in recent years and the year-to-year
changes in seasonal adjustment factors are much bigger than has been
typical. There are 0.5 changes and 0.6 changes in particular months,
which is very exceptional and doesn't look very reliable. Moreover,
the other technique is at least consistent with what our outside
consultants said to do when we had something unusual occur in a series
in the space of a year. Also, it gives seasonal adjustment factors
that are at least no more different than they ordinarily are; they
change either 0 or 0.1 or, in a few months, 0.2; and they all tend to
move in the same direction they have been moving in recent years. So,
tentatively at least, we're operating with those kind of revisions in
the seasonals.
As for NOW accounts, we are putting in the NOW accounts and
seasonally adjusting them. Of course, they've gotten quite big this
year, and there is a decision as to what to do.
I think we can say
there is no right way of doing it. We don't have any history that
gives a particular seasonal for NOW accounts. We could do what we've
been doing up to now, which is to assume they have no seasonal. We
can do what we are tentatively doing, which is to assume that the
proportion of NOW accounts that came out of demand deposits acts like
demand deposits and the other portion acts like savings accounts. Or
we can just seasonally adjust the [M1] series with NOW accounts in it,
which is presumably what we would do in the long run. But, of course,
we haven't got much experience for that either. So, tentatively, what
we're doing is taking that middle course, which is to seasonally
adjust the total of M-1B adjusted, in effect; and we get a seasonal
that is almost the same as the demand deposit seasonal, but there's a
big difference in the fact that we're including NOW accounts where we
didn't before. This question arose at the Committee meeting [in late
March], and the response was that it didn't make much difference.
Well, it turns out that it makes quite a lot of difference on a monthto-month basis. An advantage of publishing this now is that it makes
almost no difference from December through April.
In other words, it
would not change the April level appreciably. It would raise it by
$100 or $200 million or something, according to our current estimates.
But it does not make a very appreciable difference for the whole
period from December through April. It does make a big difference for
particular months.
I'll read you what we tentatively have for the
monthly adjusted figures.

For M-1B.


CHAIRMAN VOLCKER. What we now have shows:
+1.5 in January;
-2.3 in February; and +8.2 in March. Just extrapolating what we have,
with that big jump in the week we haven't published yet, April would
be +18 percent. Now, choosing the seasonal that includes in effect
two-thirds of the NOW accounts or a little more than that for the
early part of this year, the monthly numbers would be: January, +4.1;
February, +2.3, which is a particularly big change; March, +7.3; and
The quarterly change, which on the old method was
April, +13.6.
-.2, becomes +1.3.
The December-to-April seasonally adjusted annual
rate, again using that April estimate, is 6.3 percent on the old basis
and approximately 6.9 percent on the new basis. That change of about
1/2 percentage point is only a third of [the difference in the
quarterly change] because this seasonally adjusted annual rate
actually looks at the April level. The difference in the April level
is between 0.1 and 0.2 percent, and 0.1 is maybe a little more than
$400 million, I guess.

Well, it's about 0.2 off.

CHAIRMAN VOLCKER. It obviously shows a smoother pattern on
the new basis, but it doesn't change the general trend. April looks
much lower and February looks much higher. Let me just stop there and
see whether there are any questions or comments.
MR. BLACK. Mr. Chairman, Bob Black.
I think this really ought to be done.

I commend you for this.

CHAIRMAN VOLCKER. Well, I think it ought to be done, too.
But I'm not very happy about the fact that it involves such big
changes and that the pattern looks somewhat different than what we had
MR. BLACK. But if we end up with 13.6 percent in April, that
will look a lot better than 18 percent.
why we did it.

I agree with that.

People will say that's

VICE CHAIRMAN SOLOMON. Paul, when we publish this on Friday,
if that's what you intend to do, are we going to give it month by
CHAIRMAN VOLCKER. Yes, we'll give the back data for last
year and all the back data for this year, including the weekly
numbers. We haven't got the weekly changes worked out yet. It
obviously won't change the direction of week-to-week movements, but it
will change the week-to-week movements in some way that corresponds
with this monthly change.
we've been publishing-CHAIRMAN VOLCKER.
of just what we did.

But the week-to-week numbers that

We would also publish a long explanation

VICE CHAIRMAN SOLOMON. All right. And in the future when we
give the monthly adjustments for the correction of the NOW accounts,
we would give it seasonally adjusted?


CHAIRMAN VOLCKER. Well, that adjustment factor I don't think
is seasonally adjusted, but we will show the adjusted figures
The first
seasonally adjusted. We have two adjustments here:
adjustment is called shift adjustment; the second adjustment is called
seasonal adjustment. We will print seasonally adjusted, shiftadjusted, figures.

And that will be just once a month?


And that's going to clear everything up!

CHAIRMAN VOLCKER. Now, on this seasonal--nobody knows what
May is going to bring anyway--it reduces the April growth and it would
increase whatever May growth there is.
Or if May went down, it would
go down less because the seasonal happens to work in the other
direction. The way it works out, these NOW account additions don't
make much difference on a quarterly basis. But they make a lot of
difference in the months within a quarter. The seasonal adjustment
factor tends to come back to about the same thing in the first month
in every quarter as a kind of first approximation. So, when you look
at a figure from January to April, or April to July, or July to
October, it doesn't make much difference whether you seasonally adjust
the NOW accounts or not. But whenever the seasonal adjustment factor
moves by a large amount, it makes a large difference because NOW
accounts are now $60 billion or whatever.

Well, let's just forget about this--

CHAIRMAN VOLCKER. We have another conversation on [this
telephone line], I guess. Either that or I can't hear somebody.
going on here, Paul.

No, there's at least one other conversation

CHAIRMAN VOLCKER. I don't know whether it's more interesting
than ours. Mr. Secretary, can we clear this up?

We've been working on it since before we got

MR. BLACK. Mr. Chairman, he said what had been done couldn't
be undone. He must know what the April figure is!
MR. SCHULTZ. I don't think we're in any danger. Anybody
listening in on this conversation is going to be totally confused!
CHAIRMAN VOLCKER. Well, I wish this could get cleared up.
Is there any more comment on this?

John Balles, Paul.

Am I understanding

CHAIRMAN VOLCKER. Just a second, John. We have to get that
other conversation off of here. Can we start it over again or what?

We can.


over again.


put in here.


All that fancy telephone

[junk] they've

Well, that's just for within the Board.

can't call outside.

Look, we're going to hang up and start

Can't I call someone now and--

That doesn't take care of outside; in fact, we
When we started out, at least, we interrupted a

I thought we had dedicated lines.
think that could happen.
the other ones.

I didn't

Well, maybe it's because they're switching all
What is our range for M-1B adjusted?
3-1/2 to 6 percent.
So 6 to 9 is distinctly high?


Oh, I don't think they hear us.


But that's not what it would be quarter--


It's a quarterly target.


Naturally, we get a funny first quarter


MR. ALTMANN. Does anyone still hear the other voices?
I think we need to run down the list once again, which we can do
quickly, to make sure we haven't lost anybody.
[Secretary's note:
All Reserve Banks reported that they had been reconnected.]
CHAIRMAN VOLCKER. I guess we interrupted John Balles, but
let me just say one other thing. The implication of taking this kind
of middle course on the seasonal adjustment, which looks best at the
moment, is that we're going to have to change it again. At some
point--I don't know when--we should just be seasonally adjusting the
total series. You know, two years from now we're going to face this
same problem and what to do about it. Presumably at that point, we
may just shift over and seasonally adjust the whole series.

We'll only have one M-1.

MR. BALLES. Paul, this is John Balles. I was just going to
ask a couple of questions. It is my understanding, and I'm asking for


confirmation, that this is the first time the shift-adjusted M-1B
figures would have been published.
end of every month.

No, we published them in footnotes at the

With the wrong seasonal.

CHAIRMAN VOLCKER. They were not seasonally adjusted. We had
this bastardized series; the demand deposit component was seasonally
adjusted, but not the NOW account component. But those figures with
that earlier seasonal are in the public domain.
MR. BALLES. The one thing that's worrying me is the point
that some of you will remember from past years when we got into this
seasonal adjustment problem. It is what Arthur Burns used to call the
4 equals 12 problem. The different techniques are all equally valid
but yield different answers. I'm just wondering whether by publishing
the new seasonals we're adequately going to guard our flank, so to
speak, by pointing out that the seasonals are a matter of some
CHAIRMAN VOLCKER. We certainly intend to say that. And it's
very unusual for [alternative techniques] to make so much difference.
As I said earlier, I don't think there's any theoretically right
answer to this. The fact is, first of all, that we don't know the
shift adjustment, which bears upon it a little; that's an estimate.
But we don't know whether NOW accounts behave the way demand deposits
did before they became a NOW account. There's no way of knowing that
until we get some experience.
MR. BALLES. Certainly, these published seasonals will be for
weekly as well as for monthly [data]?


VICE CHAIRMAN SOLOMON. Paul, this is Solomon. Is the staff
taking one average shift adjustment assumption? Or are they taking it
month by month as far as where the NOW accounts came from?
CHAIRMAN VOLCKER. Well, we made the arbitrary judgment that
it's two-thirds [from demand deposits], I guess, throughout 1980.
Then in 1981 it's month by month. It started at 80 percent, Steve?
MR. AXILROD. It started at 77-1/2 percent out of demand
deposits, then 72-1/2 and 72-1/2 percent. Now we're estimating 70
percent for April, but we don't have any real data yet for April.
CHAIRMAN VOLCKER. Okay, did you get that? It's 77-1/2
percent for January; 72-1/2 percent for February and March, and a
guess of 70 percent for April. That's based upon some analysis of
asking banks and asking consumers.
MR. AXILROD. Also, we did a cross-sectional analysis of
9,000 commercial banks through an econometric technique. And we're
planning to--


same answer.

Whatever that means, it came out to the

MR. MORRIS. Paul, this is Frank Morris. It seems to me that
the new numbers are a little more compatible with what we know about
the real economy than the old numbers were, if that's any consolation.
CHAIRMAN VOLCKER. Yes. Well, it reduces that extraordinary
velocity in the first quarter by 1-1/2 percent. It's still an
extraordinary velocity figure, but it runs in that direction. When
they revise the GNP figure downward, we'll lose another 1-1/2.

Paul, what does this do to M2?


I don't have the M2 figures with me now.

I don't have it.

CHAIRMAN VOLCKER. It's obviously not going to move as much
because this is a small part of the M2 series. But I presume it will
raise January and February and lower March and whatever estimate we
have for April. I presume I can say this:
That it won't change the
April level of M2.
MR. AXILROD. We have M-1B and then we have to seasonally
adjust the other components.

Okay, have we finished with that subject?

Could I ask?


Wait a minute.

Henry Wallich.

MR. WALLICH. Have we tried alternative seasonal adjustments
of the kind that in the past gave us these wide variations?
the same data?

I'm not sure what you mean.

Have we tried different systems of adjusting

CHAIRMAN VOLCKER. Well, we did the two systems. We did just
the straightforward X-11, or whatever it's called, leaving in April
through September. And we tried it basically by flattening out those
Those were the two main alternatives
April through September figures.
that were looked at.
MR. AXILROD. Well, one can combine those in a way. We tried
6 or 8 different ones because we had this technique that the Chairman
mentioned of, in effect, leaving out part of last year. We also made
a similar kind of intervention for late '78 and early '79 when the ATS
accounts were introduced; that would distort the demand deposit
figures for M-1A and we had to do something. So we could do it with
or without that. And then we used 3 or 4 different methods of trying
to figure out what to do with the other checkable deposits.

But always on the X-11?


MR. AXILROD. Always on the X-11, which the consultants who
were making the report found to be the best thing to do, although they
had certain other things they would like to maneuver. But essentially
it was an X-11 program. We have not found a superior program, but we
felt assured by the consultants in some sense on that.
CHAIRMAN VOLCKER. Let me just repeat something Steve
mentioned, in case you missed it, because I didn't mention it before.
The staff did this same so-called intervention technique, smoothing
out a three- or four-month period, when ATS accounts were first
introduced. This led to a valley in demand deposits at that time.
That valley was smoothed out; that was at the of '79, I guess.



The end of '78.

MR. BLACK. Mr. Chairman, could I ask Steve one minor
technical question? Steve, it looked to us as if the 18 percent April
figure was based on a 72-1/2 and 27-1/2 percent break rather than a 70
and 30 percent break. If we are right on that, you'd get a little
lower figure than this with a 70/30 split.
1/2 point difference.

We'll recheck, Bob.

That would make about a

MR. BLACK. Right, [unintelligible] comes out 74.
I don't
know exactly what it would do on that seasonally adjusted figure that
had been previously shifted; we figured about 0.6 of a percentage
point on that one.
MR. AXILROD. Well, we'll recheck that. It should have been
worked out on a 70/30 split. We may in the end have to go back to the
other, but we'll recheck.


VICE CHAIRMAN SOLOMON. I'd like to ask Steve a question,
too. Forgetting about the seasonal adjustment of the NOW accounts-looking at the regular-type seasonal adjustments--have you assumed as
speedy a check processing by the IRS this April as last April or are
you going back to the earlier pattern?
CHAIRMAN VOLCKER. I think I can answer that. They didn't
assume anything. But that is relevant to the next subject of


MR. AXILROD. Yes, that didn't affect our seasonals. We
couldn't find any effect. Looking through the data that we have here
for '78, '79, and '80, one can't find any acceleration in collections
over the course of April. A little more was collected in April in the
past two years relative to earlier years, in terms of percentage
distribution. But over the course of April you can't find any
acceleration in collection looking at '78, '79, and '80.
In '81 there
might have been; it looks as if a little more was collected through
April 28--leaving out two days in the month--than in earlier Aprils.


MR. CORRIGAN. Paul, may I ask one other question, please?
Somebody mentioned M2. When we swing over and incorporate the new
seasonal for M-1B, is anything going to be done in terms of the fact
that the money market funds component of M2 is also not seasonally
MR. AXILROD. We hadn't been planning on it.
I don't think
we have any experience whatsoever to find the seasonal on that.
MR. CORRIGAN. I don't suppose you do, but I just raised the
question because those-CHAIRMAN VOLCKER.

It's the same kind of problem in theory.

MR. CORRIGAN. I know it's the same problem in theory. The
question that has been running through my mind is:
Is there any merit
at all to applying the same solution to the problem, recognizing that
the solution is imperfect?
MR. AXILROD. Well, one trouble, Jerry, is that here we felt
reasonably confident about how much was coming out of demand deposits.
And there we literally have no idea, and it's probably small.

That's true.

MR. AXILROD. We don't know what came out of Treasury bills
and what came out of savings accounts. It seems to me that it would
be almost an impossible problem. And one would hope, since M2 is so
big--it's $1.7 trillion--that [the seasonal effects] would get much
more swallowed up in M2 than they are getting swallowed up in M-1B.
MR. CORRIGAN. It might not be a bad idea to mention that in
your explanation. Having done this with other checkable deposits is
going to draw attention to the fact that we haven't done anything
there and [that will] then raise more questions.
MR. AXILROD. We didn't seasonally adjust other checkable
deposits separately. That ought to be clear. What we did for M-1B-MR. CORRIGAN.

I understand.

MR. AXILROD. --was the seasonally adjusted total of demand
deposits plus two-thirds or whatever fraction of other checkable
I'm just
MR. CORRIGAN. I understand what you did, Steve.
raising the point that it might be a bad idea to be totally silent.
CHAIRMAN VOLCKER. Yes, I think you're probably right. Maybe
we ought to fiddle around just for our own edification to see what
difference it makes. We have time. I should mention one other thing,
just for the sake of completeness, so long as we have M-1A. That is
being seasonally adjusted with a demand deposit seasonal, which is
probably wrong theoretically because a certain type of demand
deposits, namely consumer demand deposits, is a smaller component of
that now and that presumably changes the seasonal. But we don't know
how [it does so] and there's nothing much we can do about it.


If that is behind us, let me just introduce the more current
discussion by saying that, obviously, we have a high April figure. We
have had upward revisions for about three weeks, which is always an
ominous sign to me. Last week's preliminary number showed a fairly
sizable decline. By the time we got around to publishing it--every
day it got whittled down--it was practically no decline. At the same
time, we have this high preliminary figure for the [week] we will
publish next. And that is a little surprising, just with reference to
the earlier question, because if the IRS is really processing tax
payments more quickly, one would have expected a seasonally adjusted
decline. I don't know what up-to-date information we have on that. I
keep hearing that they are doing it quickly but, if that is really
true, it makes the increase even more ominous.
Let me just say that
for several weeks the reserve path would have indicated some
tightening; and in some statistical sense, that was right. But the
market hasn't reflected it until the last day or two; it is now
reflecting it quite strongly. But last week, on these normal
conventions we use, we expected borrowing to be $1-1/2 billion and it
was well below $1 billion because instead of having positive excess
reserves we had minus excess reserves of $450 million. That is
bigger, I understand, than anybody has been able to find in recorded
history. Let me have Steve describe the last few weeks and the
outlook and then Peter can describe the market.
MR. AXILROD. Well, Mr. Chairman, just to step back a minute,
I think the Committee will recall that two weeks ago we were expecting
borrowing to rise to about $1.3 billion, given the shortfall we had in
borrowing in the week of April 8th. In the event, in the week of
April 15th, we did get borrowing of close to that; it was $1.1
[As a result] of an overshoot in market factors affecting
reserves, we had somewhat higher nonborrowed reserves in the week of
the 15th--by about $100 million or so--because, as I say, on Wednesday
market factors supplied more reserves than projections had suggested
they would. On April 22, the week just past, we had assumed the
nonborrowed path implied borrowing of $1-1/2 billion. Again the Desk
was very close to path; in fact, Peter, if my memory's right, we ended
up a little below path even, and borrowing turned out to be only $864
million. That was because, instead, the market reduced excess
reserves by $700 million from a plus $300 million that we thought
they'd have to a minus $435 million. That was the actual number. So,
borrowing, in effect, was $700 million less than planned and there was
very little pressure on the markets, even with this large negative
excess reserve number. Given the shortfall in borrowing in that week,
borrowing falling out of the path for the current week, the week
ending April 29th, looked like $1.7 billion. And we left the path
there, implying that level of borrowing for the current week. In a
very technical sense, it turned out that the data we got last Friday
suggested more downward multiplier adjustments than we had made. We
had made none because we had evidence of only small amounts, but it
suddenly got large. And if all those had been made that were possible
to make, this $1.7 billion would have risen to an order of magnitude
of $2-1/2 to $2-3/4 billion.
Now, this week is the end of a so-called four-week period;
and for the next three weeks the path would have implied borrowing of
$1.7 billion. So, in a sense, to smooth the transition between the
two paths we left in that $1.7 billion for the week of the 29th; it
would move toward $1.7 billion in the weeks of the 6th, 13th, and the



20th. That $1.7 billion in this forthcoming three-week period
reflects essentially the strength in required reserves above what one
would have expected if we were on target with the Committee's
objectives for M-1B and M2.
In essence, it's M-1B that is running a
lot stronger than had been expected and that is strengthening the
required reserves. It's also, of course, strengthening the total
reserves; with borrowing running at $1.7 billion, total reserves are
running about $500 million above the path for total reserves that had
been set at the time of the Committee's meeting. Over the next three
weeks we would expect total reserves to be coming in about $500
million above the path. So, this level of borrowing of $1.7 billion
does not reflect any downward adjustment in the nonborrowed reserve
path to compensate, as it were, for the increased bank demand for
reserves and to try to put even more pressure on the banking system.
It is at the moment, as it were, the minimal borrowing that would fall
out of just merely holding the nonborrowed path where we were. As the
Chairman mentioned, the funds market, yesterday and today, is
beginning to show the pressures of the squeeze on reserve availability
relative to demand; but the market didn't show it for a couple of
weeks--last week largely because of this sharp drop in [demands for]
Prior to that, the market was just going ahead as if the
funds rate wouldn't change and banks didn't do any borrowing until
extremely late in the statement week.
of what has happened here?

Peter, do you want to report on your view

MR. STERNLIGHT. Well, as you said, Mr. Chairman, the banking
system has been slow in catching up with the increased degree of
pressures that should be falling on it as the aggregates strengthened
and as their demand for reserves grew. Much of that, as Steve noted,
is that they just didn't cover their reserve needs last week. But
yesterday and today it is catching up more forcibly so that the funds
rate, which had been averaging pretty close to 15-1/2 percent for a
few weeks, was around 16 percent yesterday. Today it started out
around 16 percent but it got up to the 17-1/2 percent area. We're
looking at a very large reserve need in this week just to meet path.
And even if we met path, there would still be a need; but because
available collateral has been in short supply we haven't been able to
put in very many of the reserves that we had planned to supply today.
We said [when we presented] our program this morning that we would be
putting in something like $4 billion in two-day RPs and we've only
been shown about $1-1/2 billion; we may do a couple of hundred million
or more than that later. So, we're building up to what looks like a
very large reserve need and borrowing need over today and tomorrow.
Probably most of it will fall on tomorrow. That's all I have, Mr.
CHAIRMAN VOLCKER. Well, we have a situation where we have
had some statistical pressure, but it was all in the statistics and
not in the market until very recently. And now this statistical
pressure may be even greater just because technically we can't get the
reserves in. That may be a good thing; I don't know. But there is
going to be a lot of borrowing, I suspect, today and tomorrow, as
Peter suggested. It will probably be tomorrow because there has been
no eagerness to borrow before people are really under the gun. I
don't think we require, in any technical sense, any Committee
decision. What I would plan here--and we can discuss it--is that we


might think of taking some of the adjustment implied by the high level
of total reserves, which we would normally do in this kind of
circumstance. Since even without that we have a level of borrowing
going toward $1.7 billion, if these calculations mean anything, that
does imply a sharply tighter market for the next few weeks unless the
money supply turns around. Obviously, this high figure, which is
supposed to be published on Friday, hasn't been confirmed yet. My
short-run error analysis says it's going to go even higher than the
preliminary figure. But we don't have anything for the following week
yet; and if we have a big decline, then things will look quite
different for May. But I just have no evidence of that at all at this
point. And if something is going on here in the tax collection area
that is affecting this--we do know these are extremely difficult weeks
because of the big tax collections--we just don't know how it's
affecting these weekly figures. One other thing I should mention in
this connection is that, while we're obviously above the path that we
set at the last Committee meeting, we are still, I understand--but
Steve better confirm this--just slightly below the midpoint of the
basic annual path.
MR. AXILROD. Yes. On the new numbers we would be $300
million, and on the old numbers $500 million, below the midpoint.

May I ask a question?



MS. TEETERS. Steve, you said that you thought the total
borrowing would end up about $500 million above the path. Is that
MR. AXILROD. Yes, $500 million above where it had been
originally set by the Committee at $1150 million.
MS. TEETERS. Now, if we adjust for that, won't that just
send the borrowing up to [nearly] $2.3 billion instead of $1.7
billion? Won't the total reserves be approximately the same, and we
would just be adjusting the split between borrowed and nonborrowed?
MR. AXILROD. In the very short run, that may be the result.
Over a longer run than two or
Of course, the question would then be:
three weeks, would it begin to cause faster adjustments in the money
supply back toward the Committee's path?
MS. TEETERS. So the short-run decision here is whether we
shoot the borrowings up to $2.3 billion, is that correct?

No, I don't think--

CHAIRMAN VOLCKER. Well, we won't go all that way, I don't
think, but typically we take a partial-MR. AXILROD. Governor Teeters, maybe I wasn't clear enough.
What I tried to say was that if the full multiplier adjustment had
been made--. We divide the period into a four-week and a three-week
period. We're now in the last week of the first four-week period. We
got a surprising downward multiplier adjustment. If we had taken that
in the current week, we could have had borrowing as high as $2.7



billion. We didn't because, without doing it, borrowing was $1.7
billion and taking that multiplier adjustment for the next three-week
period would have left the borrowing at $1.7 billion. So, in effect,
we just left one week of it off.
MS. TEETERS. But any of the actions that you are talking
about now implies borrowing rising?


Yes, that is right.

CHAIRMAN VOLCKER. Just let me interject another question.
Does anybody have a feel about what economic activity is doing now?
would personally volunteer that on the basis of very little--just
casual comments one picks up--I don't have a feeling that April was a
terribly weak month. Quite the contrary. But I don't know whether
anybody out there is getting a feel on the change in the business
VICE CHAIRMAN SOLOMON. Paul, I have the impression from
people I've been talking to in the financial market--not business
people so much--who are following this very closely that they expect a
significantly higher rate of real growth than the completely flat
forecast that the staff had last time. People here are talking about
1-1/2 to 2 percent real GNP in the second quarter. Has the staff
revised its forecast for the second quarter?
MR. KICHLINE. No, we have not at this point.
I would not
think that the difference between zero and 2 or zero and 1-1/2 percent
would be that large.
I think if we were to take all the incoming
information available and redo the forecast, we'd be close to very
little growth, which I define as within that kind of range.
VICE CHAIRMAN SOLOMON. Well, let me make a general comment
then. It seems to me that there is a much greater probability of
overshooting in the second half of the year, and I think we want to
take as much advantage of undershooting as we can get in the meantime
so that we don't repeat the pattern of the second half of last year.
It would seem to me, therefore, notwithstanding the big seasonal
question mark for April, that it would be best to reduce the
nonborrowed reserve path substantially, let the fed funds rate move
up, and not be as timid and as late as we were in the second half of
last year. I think it's quite clear, even if the tax cut gets delayed
until October 1st, that with defense spending building up the way it
is and the very big real increase in business spending that we've been
seeing we're going to have a heck of a problem later on. So, my
instinct would be to move quite vigorously, to the extent that we work
out the adjustment of the nonborrowed reserve path.

This is Fred Schultz.

I agree with that

MR. BLACK. This is Bob Black. I do, too. I think these
seasonals will scare the devil out of the market even though they're a
touch below what we originally thought.



MR. PARTEE. This is Chuck Partee. I don't think it's so
much a question of undershooting, Tony. I think our problem may now
be that we're beginning to move into a surge that will give us an
overshoot right now, regardless of what happens in the second half of
the year. I realize all these seasonal changes are very complicated
and confusing, but whether we say that March was 8.2 percent and April
looks like 18 percent or that March was 7.3 percent and April looks
like 13.6 percent, they both have the smell of a surge in growth that
is awfully difficult to control and awfully difficult to know how far
it might go. So, I would agree with the thrust of your remarks, and
those of others, too, in that I think we have to resist this and we
have to resist it strongly--not so much to save our pennies for the
second half, but to keep within a reasonable range right now.

April has used up our pennies.

MR. MORRIS. This is Frank Morris. I would agree with Chuck
and Tony. One other element in the picture is that, while the M-1B
figure may be near the middle of the range, the broader aggregates,
which are probably more reliable guides now, are above the tops of
their ranges.
CHAIRMAN VOLCKER. That is correct.
I haven't got those
figures right in front of me but they are all hovering just above or a
little more than above the top of their ranges. They are also not
showing this surge and this seasonal [adjustment revision] shouldn't
change that. You're quite right that they're high. If anything,
they're showing somewhat decelerated growth but they are high.
MR. WALLICH. This is Henry Wallich. I think we need to show
a strong effort to get the aggregates back on track. We want to do a
good job. Also, we don't want to lose further credibility. The
question is how we should do this. One way is to lower the
nonborrowed path. The other would be to increase the discount rate
and surcharge. That clearly would be a more visible action.


VICE CHAIRMAN SOLOMON. Henry, I think it's a little
premature to move that quickly on the discount rate, given the
question mark of April. Right now we could lower the nonborrowed
reserve path pretty strongly but at the same time keep an eye on the
discount rate.
[The picture] may begin to sharpen and we could move
CHAIRMAN VOLCKER. Well, obviously the discount rate question
arises here. We're not going to make that decision today.
MR. BOYKIN. This is Boykin.
what Tony Solomon has been saying.

I would agree very much with

MR. WALLICH. Henry Wallich. I've always argued for a higher
upper limit on the funds rate, and this may be my chance for testing
your feeling on that.
It's now 13 to 18 percent, isn't it?
CHAIRMAN VOLCKER. Yes, I'm at your service. But I don't
think we have to take any Committee [actions] today. That would be
one. This situation may bear some watching and we may want to have



another telephone meeting next week because what this next money
supply figure shows, I think, could be quite important in view of all
this uncertainty surrounding the tax [processing].
I think we have to
play it safe now--defining safe as has been discussed--but things
could look either quite worse or better very quickly.
MR. GRAMLEY. Mr. Chairman, Lyle Gramley. I would support
We have a piece of information coming out this week on Friday-that.
the employment report for April--that will be quite useful in finding
out whether our judgments on the second quarter are right or wrong.
In general, I think the economy this year has been a lot stronger than
anybody had expected. The first quarter may get revised but, if it
does, it could just as well get revised up as down. The inventory
figures assumed for March look funny. And I have come to the
conclusion that interest rates are not high enough yet to control
either economic growth generally or money supply growth in line with
the Committee's desires. So, I think it is time to move now on the
nonborrowed reserve path. Then, if on Friday we see figures on
employment that indicate that the economy is still going like
gangbusters in the second quarter, we can take the next action:
is, to change the fed funds rate range.
MR. CORRIGAN. This is Jerry Corrigan. I will be brief. I
agree with almost everything that has been said, certainly in terms of
adjusting the nonborrowed path now.
MR. BALLES. This is John Balles. I would add my support to
that proposal. I would also want to keep a careful eye on that
discount rate in case we [get the] higher funds rate that appears to
be in prospect.
MR. ROOS. This is Larry Roos.
I want to agree with the
reduction of the nonborrowed reserve path and with almost everything
that has been said.

Philadelphia can agree with that also.

MR. DOYLE. This is Dan Doyle in Chicago. I would certainly
agree with the general direction here, but I have to point out like a
broken record that this part of the country in particular, as it
reflects the auto industry and housing, is still in a very bearish
situation. And, if anything, those sales numbers are expected to
deteriorate rather markedly over the next several weeks.
CHAIRMAN VOLCKER. You remind me to note, in connection with
the broader aggregates, that bank credit, which was quite strong
earlier in the year, is quite weak now. It's still above the range as
I remember, but that is the one measure that has shown the most
pronounced weakness recently.
VICE CHAIRMAN SOLOMON. That may be, when you add the foreign
branches in. The bond market and commercial paper market all together
do not add up to a weak credit picture, though.
MR. RICE. This is Emmett Rice. I agree with most of what
everybody has said here, particularly with what Chuck said.



CHAIRMAN VOLCKER. Well, I don't know if anybody else wants
to say anything. I think, at this stage, this is not a Committee
decision in any formal sense. We are confirming that we will tighten
up the nonborrowed path, which is what we would normally do under
circumstances of this sort.
MR. PARTEE. Do you have a feeling for how much, Paul?
couple hundred million?


CHAIRMAN VOLCKER. I would say we have a choice between $200
or $300 million, I suppose.
MR. AXILROD. I should mention that when I said total
reserves are running $500 million above the path, that assumed a
certain multiplier adjustment. These things change quite rapidly.

These get looked at every week in that


So, by Friday it may--

CHAIRMAN VOLCKER. I think I am correct, but I stand to be
corrected if I'm not right, that we have not had borrowings above $2
billion. Late last year when we had the maximum tightness, the
borrowing level was something short of $2 billion, as I remember it.

Well, on Wednesday--

MR. AXILROD. Borrowing was $2.1 billion on average in
November 1980, and in December it was $1.7 billion.
over $2 billion, right?

Okay, I stand corrected.

It's tight, though;

It got a little

there's no question about

MR. GUFFEY. Mr. Chairman, Roger Guffey. If I understand
where everything ends up--and you appear to have a fairly good
consensus--we're talking about dropping the nonborrowed path, which I
assume would elevate our borrowing level above the $1.7 billion that
Steve was talking about earlier.


MR. GUFFEY. My understanding, at least according to my
staff, is that that implies an interest rate level that is at least at
the top of the range--18 percent--and quite likely something more than
18 percent.
CHAIRMAN VOLCKER. Well, maybe yes.
I would say it's quite
likely, too. But the reserve path that we had for the last three
weeks should have been implying a federal funds rate about 2
percentage points higher than it in fact was. So, unfortunately,
those guesses are not too reliable. But I think you're probably right
that the market has gotten in a different mood after the last couple
of days or is getting there.



suggest that
have another

GUFFEY. I think that's right, Mr. Chairman. I'd like to
this time we observe the upper limits for the purpose of
and that at the time we crack through the 18 percent we
telephone session.

CHAIRMAN VOLCKER. Well, I think we have to have one if it
goes above 18 percent.
But I was not suggesting that we just stop it
at 18 percent.
MR. GUFFEY. Well, [with] the path on the down side, I'd just
like to urge that we have a consultation at or near 18 percent.
CHAIRMAN VOLCKER. Well, we won't let it go too long before
having a consultation. Any other comment? I think we have disposed
of everything that I had on my mind. Thank you.
MR. WINN. Paul, do you get any indication of institutional
stresses and strains?
stress or strain?"

He said:

"Any indications of institutional

CHAIRMAN VOLCKER. I'm just getting your question repeated to
me, Willis.
I haven't gotten anything new, no.
MR. WINN. I was just wondering if the interest rate pickup
is going to cause panic in certain sectors.
CHAIRMAN VOLCKER. That has been so recent. What is
surprising here is that the market has just refused to go up despite
this statistical tightening.

I agree.

the regulatory proposal?

Has any progress been made, Paul, on

CHAIRMAN VOLCKER. Well, we are in rather intensive
consultation with Congress, and I guess the answer to that question is
The Administration is remaining in a posture of silence on the
thing basically. But we are going ahead and trying to get a
definitive bill, in consultation with the Congress. We are right in
the midst of that process now and maybe by the end of the week we will
have a definitive version.
MR. SCHULTZ. The Secretary of the Treasury said this morning
that they were watching the situation and did not believe it to be
critical and were not ready to propose any legislation. That,
however, is not the position of the regulatory agencies.
VICE CHAIRMAN SOLOMON. I've looked at the mutual savings
banks in New York and for some of them the situation is going to be
quite bad by the first quarter of next year. A few of them, a
handful, are going to have a very major problem.
CHAIRMAN VOLCKER. I'm glad this question was raised. Let me
just say one thing in that connection and one thing in another
connection. We're in the midst of this consultation process now. It



may be that when we get a bill it would be useful for you people to
have a meeting with your thrift advisory committees or whatever
equivalent you may have at your particular Bank to bring them up to
date and talk with them about it. We have a potential problem of
legislative tactics and all the rest in trying to get this bill
through in a hurry with a minimum of controversy. And that requires,
among other things, that the thrifts not bring out their laundry list
of highly controversial amendments that they might want to make such
as restoring differentials on money market certificates, doing
something about money market funds, and mortgage warehousing schemes.

Real estate.

CHAIRMAN VOLCKER. They have all sorts of proposals or wish
lists, none of which, in my judgment, can conceivably go anyplace at
the moment. And they would only make it difficult to pass this
legislation if they press to try to amend the bill.
I think this bill
is in their interest, but they have to see it in their interest and
let it go through and fight their other battles later.
I don't know
whether they will take that position or not. I suppose some of them
will and some of them won't.
I think what makes people edgy either in
the Congress or among some of the trade associations is any smell of
bank takeovers in extremis, which is in the bill, or any interstate
mergers or acquisitions, which is also in the bill as kind of a last
resort measure in the case of failing institutions. The capital
injection side I don't think is going to raise many hackles, but this
other stuff might.
VICE CHAIRMAN SOLOMON. Some of them also are very unhappy
about conditions that might be laid down such as salary [constraints].
CHAIRMAN VOLCKER. I saw an article to that effect in the
American Banker this morning. I've heard no discussion about
salaries. It is true that there's nothing in the bill about
conditions, but presumably the agencies would put on conditions, at
least of a standby kind. They would write a contract--this has been
their practice--that would give them very strong residual authority in
a great many areas. I think that's part of the price they're going to
have to pay. But it's not in the bill itself as now written. Now,
this is all subject to further negotiation. The bill itself is one of
those things that you can't understand when you read it because it
amends a lot of existing language in random fashion. But it basically
authority for liberalizing capital
has only three provisions:
injections; cleaning up some issues regarding mergers and acquisitions
of failing institutions or at least broadening that authority; and
adding a bit to the FSLIC draw on the Treasury. That's all that's in
the bill.
publication of the bill?

When do you want us to consult, after

CHAIRMAN VOLCKER. I don't know myself. We may do a little
consultation with the national associations, but we haven't decided
whether to do so before the bill goes up or when the bill goes up.
So, I don't know [the answer to] that yet. There are conflicting
feelings on the Hill about that. I wouldn't do anything at the
moment, but I'd just be ready to do it.



The other thing I wanted to mention, and I don't think we
ought to take any more time now, is that as time passes, I keep
wondering about the attitude of the banks toward the discount window.
We have the same dilemmas there that we've had before. I'm a little
suspicious that one of the reasons that on some occasions we don't
have much reaction in the market to a statistical tightening is that
the banks all sit there and figure they can borrow from the discount
window at the end of the week. We may want to do a little thinking
about talking with some of the banks, if they're persistently running
reserve deficits and not borrowing during the week but then popping in
late on Wednesday afternoon when we can't say much to them. That's
all I have. I'll resume my conclusion. Thank you.