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Federal Open Market Committee Conference Call January 5, 1988 PRESENT: Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Ms. Mr. Greenspan, Chairman Corrigan, Vice Chairman Angell Boehne Boykin Heller Johnson Keehn Kelley Seger Stern Messrs. Black, Forrestal, Hoskins, and Parry, Alternate Members of the Federal Open Market Committee Messrs. Melzer and Morris, President of the Federal Reserve Banks of St. Louis, and Boston, respectively Mr. Bernard, Assistant Secretary Mr. Bradfield, General Counsel Mr. Truman, Economist (International) Messrs. Lindsey and Prell, Associate Economists Mr. Sternlight, Manager for Domestic Operations, System Open Market Account Mr. Cross, Manager for Foreign Operations, System Open Market Account Mr. Coyne, Assistant to the Board, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Mr. Czerwinski, First Vice President, Federal Reserve Bank of Kansas City Transcript of Federal Open Market Committee Conference Call of January 5, 1988 The conference call began with a report [Secretary's note: from Mr. Sternlight that was not transcribed.] In view of what we've been observing of CHAIRMAN GREENSPAN. late, what I would like to do is to close out our directive of the December 15-16th meeting by posing a rewording of the second sentence in our draft operational paragraph, which I think all of you have It sort of captures the report that I'll just repeat it. received. we have heard today and it reads: "The Committee agrees that the passing of the year-end should permit further progress toward restoring a normal approach to open market operations, although still sensitive conditions in financial markets and uncertainties in the economic outlook may continue to call for some flexibility in This would be in lieu of the sentence currently, or operations." preliminarily, in the operational paragraph which reads: "The Committee recognizes that still sensitive conditions in financial markets and uncertainties in the economic outlook may continue to call Does for a special degree of flexibility in open market operations." anyone have any objections to that replacement? I'm not convinced that we've progressed that much MS. SEGER. toward normality, myself. That's just my gut reaction. CHAIRMAN GREENSPAN. Well, that's basically what the paragraph says we should be sensitive towards. It seems to me that that would be an appropriate MR. ANGELL. In fact, that's not really very far away from what we change. I think it makes it a little more anticipated when we were doing it. clear. And it seems to me, at this point, that it would be unfortunate for us to give a wrong signal to the market that we either have attempted to ease or have attempted to tighten. I think this restatement gives us a continued ability to be flexible in that regard until the next FOMC meeting and yet not over-encourage the notion that we are pegging the fed funds rate. I like the MR. JOHNSON. I think the statement is fine. idea. As you know from the last FOMC [meeting], my concern was that trying to ease into a borrowing target didn't seem to make a lot of sense to me. Why wouldn't we just continue to pursue the same spread we had, and see if borrowings normalize, rather than try to hit a I think that sentence better borrowing number we're not sure about? characterizes that concern. I quite MR. KELLEY. Mr. Chairman, this is Mike Kelley. agree with the thrust of the statement, but I'd raise the question of whether using the phrase "the passing of the year-end" might not raise questions to persons in years down the line about where that's coming from. I don't think there is any other clear reference to that point in the trail we are leaving. CHAIRMAN GREENSPAN. I think the abnormalities that we expected were discussed and will be discussed in the minutes of the 1/5/88 previous meeting, as I recall. I think you're quite right; better make certain that it is clear in that context. I think we MR. KELLEY. I may be wrong, but I don't remember a previous reference to the significance of the year-end. We have discussed it, of course, but is it-CHAIRMAN GREENSPAN. Yes; that will appear in the minutes. MR. ANGELL. That will show up in the minutes. MR. KELLEY. I guess in the full minutes there will be some-- CHAIRMAN GREENSPAN. MR. KELLEY. Yes. Okay, if that's the case then. CHAIRMAN GREENSPAN. We will make certain that it does. MR. ANGELL. So, what we're doing here is making a change in the directive which does not amend the original. What we have is the directive up to now; now we have a new directive from here to the end of this FOMC period. CHAIRMAN GREENSPAN. That's correct. It includes the previous directive with the substitution of this second sentence for the old second sentence. MR. ANGELL. December 15-16? But the minutes will show what we did on CHAIRMAN GREENSPAN. MR. ANGELL. Yes, of course. And the minutes will now show what we're doing now? CHAIRMAN GREENSPAN. That is correct. VICE CHAIRMAN CORRIGAN. Mr. Chairman, this is Jerry [Corrigan] in New York. I certainly would support a change. And with respect to Governor Kelley's point, I would throw out the idea that the sentence could read "the Committee agreed that with the passing of time and the year-end", or something like that, but-CHAIRMAN GREENSPAN. I have no objection to that. Does anybody? MR. HOSKINS. This is Lee Hoskins. I think I agree with moving back to this language. I guess I question doing it in this reserve period, when there is massive intervention going on and there's a possibility the funds rate will stay substantially above 7 percent, giving the impression to the market that we are, in fact, evolving policy in order to support the dollar. CHAIRMAN GREENSPAN. I think that we can make it fairly clear that that is not the case, because it is not. 1/5/88 MR. ANGELL. Well, but you don't want any statement in the minutes to that effect. CHAIRMAN GREENSPAN. No, I don't. I think that that would be a very important misinterpretation of policy. I think we would work to avoid that becoming the market's perception. What means would be required, I don't know; but we would do that. MR. TRUMAN. To put it the other way around, Mr. Chairman, if the Committee were to tighten policy because of what's going on in the foreign exchange market, then that fact would have to be reflected in the discussion in the policy record, as has been the case in the past. So, I think people who are knowledgeable about our procedures would know that the absence of any statement that there was any tightening because of the dollar would be left with the interpretation that there wasn't. That's essentially the status quo. That's certainly the way it was done, for example, in September. The September action--that that tightening was, in part, associated with the conditions in late August in the foreign exchange market--was clearly acknowledged in the policy record. MR. HELLER. For the rest of the period, where would you see reserves and the fed funds rate in the absence of any additional fires? MR. STERNLIGHT. Well, we hear about continuing operational problems, and they may be having their further effects today. I think we will work our way past them and I'd expect to see funds coming back down to roughly the area they were in the last few full reserve periods. MR. HELLER. So, back to 6-3/4 percent? MR. STERNLIGHT. MR. HELLER. And the borrowing then would be-- MR. STERNLIGHT. very high, as I say-MR. HELLER. About the 6-3/4, 6-7/8ths area, yes. Well, borrowing is clearly going to average No, I mean for the rest of the period, from now on. $1.3 MR. STERNLIGHT. In the $300 million area. or $1.4 billion in this period. MR. JOHNSON. It would average No, he said the rest of the period. MR. HELLER. For the rest of the period, from now on, it would be $350 million--is that right? Or $400 million? MR. JOHNSON. MR. HELLER. Well, the target is $300 million. $300 million? MR. STERNLIGHT. We use $300 million in the path. MR. HELLER. $300 million. 1/5/88 MR. STERNLIGHT. As I say, mathematically, if it dropped down to the $300 million area for the rest of the period, it would still come out $1.3 or $1.4 billion for the period, on average, because it averages now over $3 billion for the first, whatever it is, 5 days. CHAIRMAN GREENSPAN. I'd like to proceed to vote. Okay, if there are no further questions, Normand. MR. BERNARD. Chairman Greenspan Vice Chairman Corrigan Governor Angell President Boehne President Boykin Governor Heller Governor Johnson President Keehn Governor Kelley Governor Seger President Stern Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes CHAIRMAN GREENSPAN. If there are no other questions, I think that we have completed our agenda. Unless anyone wants to pick up any other subjects, I will assume that the meeting is closed. We look forward to seeing you at the next Open Market Committee meeting--on what date? MR. BERNARD. February 9 and 10. CHAIRMAN GREENSPAN. February 9 and 10. MR. ANGELL. Just to be sure I understand: these words we have adopted now will be shown as substitutes for the other words? CHAIRMAN GREENSPAN. MR. ANGELL. Right. directive back out again? CHAIRMAN GREENSPAN. MR. ANGELL. MR. BERNARD. show the vote. MR. ANGELL. No, both will be in the-But we're not going to put the whole No; that won't be necessary. Okay. We will reproduce the operational paragraph and Yes. CHAIRMAN GREENSPAN. gentlemen. Good night. Thank you very much, ladies and END OF SESSION
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