View original document

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

Transcript of Federal Open Market Committee Conference Call of
April 29, 1980
CHAIRMAN VOLCKER. Good morning, gentlemen. We only met a
week ago but the markets have moved and the money supply has moved.
Perhaps we better have Mr. Axilrod tell us how they have moved.
MR. AXILROD. Mr. Chairman, following the Committee meeting
we had a very sharp drop in the money supply numbers that were coming
in. The data we published for M-1A for the week ending [April] 16th
turned out to be $1.4 billion lower than the preliminary estimate we
had at the time of the Committee meeting. Also for M-1A the number
that came in for the 23rd turned out to be $5.7 billion lower than we
had been projecting for that week; [our estimate reflected the number
needed] in order to have a decrease in the money supply for April of
only 4 percent. Given the data we have in hand through the 23rd--with
the 23rd being a preliminary estimate and assuming some increase but a
modest increase for the 30th--our estimate for M-1A growth in April is
now minus 12 percent. Our estimate for M-1B growth for April is minus
9 percent and our estimate for M2 is plus 0.2 percent.
This weakness in both demand deposits and currency has
weakened required reserves and therefore [reduced] the amount of total
reserves that we would expect in this four-week intermeeting period.
Given these required reserve figures for the first two weeks of the
four-week period and our projection for the last half of the four-week
period, our total reserves appear to be running about $400 million
below path, largely reflecting this decrease in required reserves.
And of course, in providing the nonborrowed reserves, we would be
expecting borrowing to be dropping substantially. Our estimate is
that instead of the $1-1/2 billion of borrowing ex First Pennsylvania
that had been indicated at the time of the Committee meeting for the
weeks of April 30th and May 7th, we'd be looking at borrowing of
something like $910 million and declining to something like $660
million in the next two weeks.
Of course this week, the week ending April 30th, borrowing
thus far is running higher than that $900 million--somewhere on the
order of $1.5 billion ex First Pennsylvania, as banks did borrow
substantially earlier in the week. Given these reserve paths and the
projected levels of implied borrowing, it would seem that the feder al
funds rate would begin dropping below the 15 to 16 percent notional
range mentioned at the Committee meeting. Most recently, yesterday
and thus far today, it has been in the 14 to 15 percent area.

Would you like to add anything, Mr.

MR. STERNLIGHT. I wouldn't have anything to add [on the
I'll just add the thought that as we were
aggregates and reserves].
aiming for the nonborrowed reserves on the path, [we have seen] along
with those weakening aggregates a further decline in rates, especially
short rates. The bill rates in yesterday's auction, for example, were
down nearly 2 percentage points for the 3-month bill and about 1
percentage point for the 6-month bill.
and attitudes?

How would you characterize market gossip



We can't hear.

question, Paul.

We couldn't hear Peter's response to your first

further question.

Well, he can repeat that and answer my

MR. STERNLIGHT. I commented first to Chairman Volcker that I
didn't have anything to add to Steve's commentary on the aggregates.
But with respect to interest rate moves in the past week, I noted that
at the short end there had been a further marked decline--particularly
in bill rates. In yesterday's auction, rates were down from a week
earlier by close to 2 percentage points for the 3-month bill and
around 1 percentage point for the 6-month bill.
The Chairman then asked me about market attitudes. I think
there has been some surprise in the markets at the extent of the rate
declines. I do not get a strong sense at this point, I must say, of
great concern in the markets about the extent of the declines.
Nevertheless, my own inner feeling is that such a concern could build
up if we were to continue to get sizable declines and if there were a
market sense that we were permitting, with little or no resistance,
substantial further declines in rates. But I would honestly have to
say that up to now I do not sense great alarm, from the domestic
markets anyway, about the extent of the decline in rates.
CHAIRMAN VOLCKER. Do you have anything to add from the
perspective of the foreign markets, Mr. Pardee?
MR. PARDEE. All I can say is that since the FOMC meeting,
the dollar has declined by about 3-3/4 percent against the German mark
and has declined against other currencies pretty much across the
board. Again that largely [reflects] the decline [in U.S. rates] in
relation to the climb of [foreign] interest rates, which has been
particularly precipitous in the Eurodollar market. We also had the
effort to release the hostages, which when it occurred did lead to
some selling of dollars. At the moment it occurred the Bundesbank
went quickly to the market and intervened. We have not intervened in
big amounts. We've done about $150 million worth of marks and some
Swiss francs. The Bundesbank has done about
We have
not been in a mode of trying to resist very heavily the movement of
the dollar, given that the market perception is that the problem is
not intervention but a decline in interest rates.
a problem.

I'm tempted to ask why they consider that

MR. PARDEE. As I outlined at the FOMC meeting, it's a matter
of timing in that interest rates have come down before there was any
indication that we were making progress on inflation or on the trade
balance. The market currently is waiting for the trade figures this

Where is the dollar/mark now?

It's 179.5.

It was 186 at the time of the FOMC


CHAIRMAN VOLCKER. The only thing I have to add by way of any
information is that I think it's very likely that we will get an
increase in the German discount rates this week--not necessarily
presented as a great tightening of money, but there it is.
As Mr. Axilrod described, we have a situation where, because
the money supply and therefore the reserve need is even less than we
thought at the time of the Federal Open Market Committee meeting, the
federal funds rate has already in the last day and a half moved below
the range that we talked about as a checkpoint. I suppose one could
argue, if one were in that mood, that it has already gone further than
it should, on a timing basis anyway. We could leave it alone around
this area but say that we would be disturbed about further immediate
declines. Or at the other extreme we could say that we would not be
disturbed about further declines. We do have an official checkpoint.
It is the boundary limit in the present directive. We don't have to
do anything here about changing the directive but I would appreciate
any comments that members of the Committee have at this point.
MR. EASTBURN. Paul, could I question Steve? This is Dave
Eastburn. Steve, do you have any guess about the aggregates for May?
MR. AXILROD. I have our projections, Dave. They would
suggest a growth rate in May of 4-1/2 percent, followed by a growth
rate in June of 9.3 percent. That projection assumes interest rates
roughly at current levels.

With an error range of plus or minus 10

MR. EASTBURN. These projections, Steve, were made with a
knowledge of what was happening in April?
MR. AXILROD. Yes. They assume really a very modest recovery
in the course of May from what we presume will be a slightly higher
level in the week of April 30th. If we have a very substantial
recovery over the course of May, we could have a rather large [rate of
increase] in May. I understand from Peter that the Federal Reserve
Bank of New York has a much [higher] projection for May than we now
MR. STERNLIGHT. That's true. I'd say red-facedly that we
obviously had a stronger April than the Board staff had--far stronger
than it turned out. We continue to be higher for May than the Board
staff. I think we're projecting about 8 or 9 percent growth.

Are you waiting for reactions?

I'm waiting for substantive reactions,

VICE CHAIRMAN SOLOMON. This is Tony Solomon. Let me say a
few words about how we see it here in New York. First of all, I think
it's important to say that the market viewed the April [money] numbers
as largely reflecting technical problems endemic to April. Market
participants don't expect us to change our posture as a result of the
April figures and they would be very surprised--and I think
disappointed--if we were perceived as overreacting to these one-month


developments. The market is really looking for some resistance. And
in view of the fact that the April M-1A drop clearly goes beyond
anything that can be explained by the economy, we are projecting a
substantial comeback for money growth for May and June. So it seems
to me that we've got to follow a fairly prudent policy here and not
overreact. I would like to suggest that we put a downward limit of 14
or 14-1/2 percent [on the funds rate] for the next two weeks, after
which we could meet or confer again. This involves a borrowing
assumption of no lower than about $800 million to $1 billion, which I
think Steve would feel would be consistent. If we resist going below
14 percent, the fed funds rate would average about 14-1/2 percent next
week probably. That's all I have to say at this point, Paul.


Governor Wallich.

MR. WALLICH. It seems to me that we've become prisoners here
of our technique. I don't think from an overall point of view that we
want such a sudden degree of easing. [I say that] not because of the
dollar, which has importance but is not dominant, but because the
impression that would create is that there has been a change in
policy. It is not going to help us to say that we haven't changed
policy and we're following the same targets as before. People would
perceive the big change in interest rates. And I think substantively
they would be right; it is a change in policy if we let interest rates
drop dramatically. So my suggestion would be to try to hold the line
at the [present rate] or a little above it and wait for further

Governor Partee.

MR. PARTEE. Well, as you might imagine, I disagree with both
Tony and Henry. I think the money supply figures may well be telling
us something. The [weakness is] in currency as well as in demand
deposits, and it's associated with extraordinarily weak information on
the economy. In the last three weeks the initial claims for
unemployment insurance have shot up to the level they reached in the
spring of 1975. And they show no sign of turning. I just spoke a few
minutes ago to a man who operates a very large retail business, and he
said that in the month of March he missed his projection of credit
outstandings by $20 million. That is, they were $20 million lower
than he had [expected]. He had never before missed it by more than $1
million. He said that sales have continued extraordinarily weak in
the month of April. The car dealer community is on its ear and so is
the automobile industry. There is no building going on except for the
completion of single family units that were started earlier, and even
there in some cases there has been a stoppage.
So I think there is a fair chance that this money supply
[behavior] is telling us that we're now entering into the sharpest
phase of recession we've seen any time since World War II. And if
that is the case, to maintain interest rates [at their current high
levels] and thereby destroy the reserves necessary to support
reasonable monetary growth is a grossly wrong policy for the Board or
the FOMC to follow. I wouldn't want to panic on this, because it does
seem to me that a minus 12 percent rate is just so unbelievable that I
can't believe it could continue for any length of time. But I do
think, since the Committee has in its [most recently] published
directive to the Manager a range for the funds rate that extends down


to 13 percent, that we have no business looking at any [lower bound]
above 13 percent in terms of limiting the Manager's activity. So I
would say that what we ought to do now is to use the full range that's
available to us and that we specified only a week ago in the
directive--and which has yet to be made public. And we ought to talk
in another week to see if it should be reduced further because I think
we have to react to what could be a very seriously deteriorating
economic situation.
MR. ROOS. This is Larry Roos from St. Louis and I agree
totally with Chuck Partee.
MR. BLACK. This is Bob Black and I agree, too, Mr. Chairman.
I would be very careful in announcing that if we tried to do it. I'd
say there's no change in policy but this is a pursuit of aggregate
targets that we set out for ourselves in your recent public statement.
MR. BALLES. This is John Balles, Mr. Chairman. I fully
associate myself with Chuck's views, particularly given the fact that
this big April decline follows hard on the heels of a March decline.
In view of that, we've got to view with considerable skepticism if not
alarm, the projections that call for a revival of monetary growth in
May and June. I hope it happens. But I think we've got to guard
against it not happening at this point. And really, to come down to
the 13 percent lower limit we've set for ourselves would not disturb
me since 13 percent in absolute terms is still pretty high.
MR. GUFFEY. Mr. Chairman, Roger Guffey. I'd like to
associate myself with Governor Wallich and Tony Solomon. It seems to
me that we should resist--not overly resist, but resist--[the funds
rate] going down too quickly. I would think that a range of 14-1/2 to
15 percent for some short period of time would be very appropriate. I
would also agree that maybe a week from now we ought to consult again.
I would suggest that the numbers we are looking at in April are just
as surprising as the numbers on the other side were in February, and
they may not mean a whole lot. I would hate to see us drop the funds
rate precipitously strictly to try to get back onto the somewhat
artificial path for the first half of 1980. I'd rather take a bit
longer. The aggregates are coming in weak but I would not try to get
back on path in one month on figures that we're not very certain
MR. EASTBURN. Paul, this is Dave Eastburn. I'm having
trouble seeing what the risk is of sticking with our path. It seems
to me that there's obviously a risk in appearing to panic. On the
other hand, there's a risk that we might have to back up. But I think
the long-term movement is so definitely in the downward direction that
I can't see much risk either way. So I'd stick with the plan that we
formulated at the meeting.
MS. TEETERS. Mr. Chairman, it seems to me that if we're
wrong, then the market will react and rates will go back up again.
That happened to us in November and December and again in February.
It seems to me that we should stick to the policy [we established] and
[use] the full range and let the interest rate fluctuate. We took
that approach when we were going [up on the funds rate]. And if
necessary, the market will change [the rate] and push it up if we've


made the wrong decision.

So I would stick with the 13 percent lower

MR. FORRESTAL. Mr. Chairman, this is Bob Forrestal in
Atlanta. We would like to associate ourselves with Governor Wallich
and the New York and Kansas City Banks. I recognize that the numbers
for April are extraordinarily low and not what we anticipated. On the
other hand, I would not be overly concerned about one month's numbers.
They could well be technical aberrations. Basically we're on target
with what we intended to do last October. I think the greater risk at
this point, both domestically and internationally, would be to run the
risk of underkill on inflation. Without any reduction of the
inflation rate we'd be making a serious mistake if we didn't [show]
some resistance at this point to a precipitous decline in interest
rates. I think they've fallen enough already and I would like to see
the Committee opt for resisting [further declines] at the 14 to 14-1/2
percent level, wait a week to see what happens, and consult again.
MR. MORRIS. Mr. Chairman, this is Frank Morris. I agree
with Chuck Partee's analysis. I think the weakness in the aggregates
is a reflection of the dramatic and very widespread weakening in the
economy. I'm also concerned about the Committee moving back to the
management of interest rates. I think Peter has served us well.
[This operating technique] has turned the situation around a lot
faster than would have occurred if we had been managing interest rates
on the up side. For us to turn around and try to manage them on the
down side now, I think would be a mistake.

Governor Rice.

MR. RICE. I agree with Chuck Partee almost completely. I am
concerned, though, about the speed with which interest rates fall. If
they fall too precipitously and we allow that to happen, I think that
runs the risk of giving misleading signals. However, I don't see much
difference between 14-1/2 and 13 percent and, therefore, I would
certainly favor maintaining our present range. And if at 13 percent
there is still substantial downward pressure on the funds rate, then I
would want to have another careful look.

Mr. Winn.

MR. WINN. I can agree with Chuck's analysis of the economic
situation. I'm not sure that a week may cut much difference in terms
of our policy moves at the moment. We may even want to reconsider the
13 percent floor if we get a better reading on unfolding developments.
I am concerned about having whipsawed here--allowing further rapid
declines in rates and then having them go up very rapidly--in terms of
market impact and interpretation and so forth. I could see holding
[rates] where they are and taking another reading next week, Mr.
CHAIRMAN VOLCKER. I'm a little surprised at all these
comments that people agree with Governor Partee's analysis of the
business outlook. I don't, if I interpret him correctly. I think the
economy may well be declining rapidly now; I'm not sure what that
means for the future. I suspect we had a decline in retail sales.
The question is whether it will level off and go up again or whether


it will continue to decline and I don't see any evidence bearing on
the issue. I want to insert [that comment] here.

Our policy will have an effect on that.

MR. ROOS. This is Larry Roos.
I'd like to point out one
thing. My agreement with Chuck Partee is from the point of view of
policy. I'd ask those who feel that we ought to resist the downward
movement in the fed funds rate if they don't recognize that the only
way we can do that is by pulling reserves out of the System. And that
has the effect of exacerbating the downward movement of the economy,
which I don't think anybody wants at this stage of the game.
Governor Schultz.

Who has not been heard from here?

MR. SCHULTZ. Well, like President Winn, I'm a little
concerned about getting whipsawed and I'd like to see us hold the
funds rate at 14 percent this week and talk again next week. I love
seeing these interest rates come down; I just have some concern about
the speed, which has been extraordinarily rapid.
CHAIRMAN VOLCKER. We have a difference of opinion obviously,
if we express it in terms of interest rates, and I don't think we
should do that directly. Let me just see how this situation lies. I
think we ought to talk about the level of borrowings--presumably
that's consistent with the way we're going about [conducting policy]-and not about a level of interest rates. What did you say the current
level of borrowing is?
MR. AXILROD. This path, Mr. Chairman, has $900 million of
borrowing followed by $660 million; that is just what falls out of
holding to the nonborrowed [objective] that was set at the time of the
Committee meeting.
I should hastily add that it makes no adjustment
for an initial look [suggesting] that for multiplier reasons we ought
to add around $250 million [in reserves].
We did not do that the
first week because we have found [in the past] that [the reserve
injection] might have to be reversed. So ordinarily [in such cases]
we've let that go for a couple of weeks. But should that persist,
borrowing would go down another couple hundred million because of the
addition. And that makes no allowance for the fact that total
reserves are running below path; in the past we have often raised
nonborrowed reserves simply for that reason. So what I'm saying is
that at the moment, unless there's a big change in deposits, that
[$900 million] is kind of the maximum level of borrowings that jumps
out of the path. Next week, unless the deposits change, the path
could call for a lower level of borrowing.
MS. TEETERS. Steve, with the money supply dropping and a
level of borrowings that is relatively high at the present time, where
are [the reserves] going? Do we have a massive increase in excess
MR. AXILROD. No, we're mopping up the excess reserves. What
is technically happening is that with required reserves dropping,
we're kind of releasing reserves to excess and they are being mopped
up. That is what literally is happening. If we supplied all these
total reserves, which we couldn't, we would have a massive amount of


excess reserves. So we're in effect mopping up the excess reserves
that were released by the decline in required reserves.
CHAIRMAN VOLCKER. I don't entirely follow that when the
level of borrowings is so high this week, which I think is what Nancy
is asking. Why is the level of borrowing so high?
MR. AXILROD. Well, borrowings ought to drop off to almost
nothing today and tomorrow. Our estimate is that they might drop off
to $600 or $700 million. If we literally followed the nonborrowed
path, they would drop off to very close to zero to achieve this $900
million [average].
But banks did borrow quite a lot early in the
week--more than we think is needed given the required reserves and the
amount we were planning to provide by nonborrowed reserves. So at the
end of this week, the funds rate would drop and the level of borrowing
would drop.
MS. TEETERS. I guess what I'm really saying is that the
level of borrowing seems inconsistent with the money supply.
planning on or-MS. TEETERS.

Well, do you mean the $900 million we're
No, I mean the actual.

MR. AXILROD. In terms of the actual of $2.3 billion, you
have to take out the $700 million that is First Pennsy. So that puts
it down to $1.5 or $1.6 billion. Whether that is consistent or
inconsistent with the money supply would depend in part on banks'
response to that level of borrowing. We believe that it is high [in
relation to] this money supply, but we have been wrong before on
banks' attitudes toward borrowing. And it may be that they're quite
happy and are willing to borrow and are going to go on and expand
despite that. Our judgment is that the level of borrowing would have
to be lower to promote a very rapid rise in the money supply.
million of borrowing?

Your current path is based upon $900

MR. AXILROD. Yes. That is simply because of the weakness in
required reserves relative to what we had planned at the time of the
Committee meeting. It makes no allowance for multipler changes or any
effort to compensate for the reduction in total reserves relative to
the path.
CHAIRMAN VOLCKER. Well, I'm thinking that the obvious thing
may be just to maintain--in the short run anyway--that $900 million,
which is what fell out anyway. That is $600 million lower than we
were talking about a week ago. And then let's see what the next
figures bring or whatever.
MR. PARTEE. I do think, Paul, that we'd have to follow
practice and look at the multiplier, if it holds up to be a shift.
But it probably would be another week before we'd have that
information. So for the week $900 million is all right.
VICE CHAIRMAN SOLOMON. I think it makes a lot of sense,
Paul, to work on that borrowing assumption of $900 million.


CHAIRMAN VOLCKER. I'm talking about a short time period
here. We'll get a new money supply figure shortly and we will get
some other evidence. But I think this is fully consistent with what
we said. We're going through the checkpoint. In a sense we relaxed
the $1-1/2 billion that we started with because it falls out. And
we're saying let it fall out. I don't see any need for any specific
decision other than that we're saying we should stay more or less on
the path. We're not leaning over backwards to push it up, along the
line of reasoning that Steve suggested could be used, but we're not
deliberately pulling back either.
VICE CHAIRMAN SOLOMON. But isn't it possible, even with a
borrowing assumption of $900 million, that we will still have a very
precipitous decline in the fed funds rate due to uncontrollable
factors? The question that I think we are still left with, which we
should face up to, is do we want to show some resistance in that area.
CHAIRMAN VOLCKER. Well, the resistance still comes at 13
percent, of course, in a firm way. I guess what we're saying is that
we don't want to manage the rate in this area. But from some points
of view--it depends upon how you want to argue--the $900 million of
borrowing could be considered to be too high if you really wanted to
push the money supply with maximum force. In that sense, we're taking
account of it.
MR. AXILROD. Mr. Chairman, with that level of borrowing, the
13 percent discount rate I believe is a very effective floor for the
funds rate. And so with the-CHAIRMAN VOLCKER. By "floor" you mean [the funds rate] is
not likely to go to 13 percent.

That's right.


Well, not below but it could be darn close

to it.
MR. AXILROD. You're talking about something like $400 or
$500 million borrowing above minimal levels. So we would expect some
spread of the funds rate above the discount rate--[a funds rate] in
the 13-1/2 to 14-1/2 percent area.

Without allowing anything for the

Yes, without allowing any resistance.

CHAIRMAN VOLCKER. Well, it's a fine judgment. I don't think
there is any obvious answer. It will be wrong if the money supply
very promptly goes up again in some sense. It will be wrong in the
other direction, I suppose, if the economy really is weak and the
money supply turns out to be as weak as some of the more pessimistic
views. The funds rate seems to me a little high relative to other
market rates. Is that a fair conclusion? I don't think a decline in
the funds rate in itself implies much change in other rates.
MR. STERNLIGHT. Well, looking at day-to-day rates, Mr.
Chairman, the funds rate has come down most recently to about 14



percent. I would have said a few days ago that funds had lagged a
little against some other market rates but I think it has had a fairly
substantial decline now.
CHAIRMAN VOLCKER. It depends upon which rates one looks at,
I suppose. It seems to me a little high relative to the bill rate,
and some government rates. It may be not high relative to the CD rate

MR. STERNLIGHT. I suppose that's right, but at 14 percent it
would be some 3-1/2 percentage points under last week's average. Mr.
Chairman, would I be right in inferring from the approach that you
suggested that there is no great reluctance to see the funds rate move
somewhat below 14 percent or down toward the 13 percent level?
CHAIRMAN VOLCKER. I think there's a reluctance by more than
half of the members of the Committee to see that happen. But we're
saying we're not guiding it that directly.

We're not going to panic.


If it happened in the pursuit of our paths--

CHAIRMAN VOLCKER. If it happened in the pursuit of a
conservative path, we're saying it's going to happen. But I assure
you, from my listening to the comments anyway, that more than half the
members of the Committee are not going to be joyous about it and would
be much happier if it stayed someplace around 14 percent. It's
roughly a 50/50 split. So I think we're reflecting that by not moving
the borrowing as rapidly as it could be moved.

Let's see how the figures develop.

CHAIRMAN VOLCKER. Yes. Okay, as I said, I don't think this
requires any vote. We're just confirming the [existing] directive.
Thank you.