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Federal Open Market Committee
Conference Call
June 17, 1981

Mr. Volcker, Chairman
Mr. Boehne
Mr. Boykin
Mr. Corrigan
Mr. Gramley
Mr. Partee
Mr. Rice
Mr. Schultz
Mrs. Teeters
Messrs. Balles, Black, Ford, Timlen, and Winn,
Alternate Members of the Federal Open Market
Messrs. Guffey, Morris, and Roos, Presidents of the
Federal Reserve Banks of Kansas City, Boston, and
St. Louis, respectively
Mr. Doyle, First vice President, Federal Reserve Bank
of Chicago
Mr. Altmann, Secretary
Mr. Kichline, Economist
Messrs. Ettin and Truman, Associate Economists
Mr. Davis, Associate Economist (New York)
Mr. Sternlight, Manager for Domestic Operations,
System Open Market Account (New York)
Ms. Greene, Deputy Manager for Foreign Operations,
System Open Market Account (New York)
Mr. Meek, Monetary Adviser, Federal Reserve Bank of
New York (New York)

Mr. Gramley and all participants from Reserve Banks (except
those noted from New York) participated on this call at the Kansas City
Reserve Bank where they were attending a Conference of Presidents.
A complete record of staff attendance at this meeting was not
available in the Committee's files.

Transcript of Federal Open Market Committee Conference Call of
June 17, 1981


MR. GUFFEY. Hello, this is Kansas City with a full
contingent of Presidents.
MR. ALTMANN. This is Murray Altmann. Good morning or
afternoon, as the case may be. As usual, for the sake of the record,
I would like to call the roll.
[Secretary's note:
The roll was
called to determine attendance at the Reserve Banks.]
Thank you. In
the Board Room we have all members of the Board except Governors
Gramley and Wallich, as well as Ed Ettin, Jim Kichline, Ted Truman,
and other members of the staff. In New York we have Peter Sternlight,
Gretchen Greene, Dick Davis, and Paul Meek.
CHAIRMAN VOLCKER. Gentlemen, I just thought it was a logical
time to review things. The money supply, M-1B anyway, has been rather
weak. We have reduced the reserve path to some extent, as [M-1B
growth] got below whatever number we put in the directive. What was
that--3 percent for-MR. ETTIN.

For April to June.

CHAIRMAN VOLCKER. It was 3 percent or lower, as you recall.
Up until now we've reduced the reserve path somewhat to reflect the
"or lower" part of the directive. There is a question of whether we
should continue doing that, given the current situation, and I don't
think we should. I'm not sure we require any decision on a directive
here in a formal sense--I'm not inclined to think we do--but I thought
it would be useful to have an exchange of views and a mutual updating.
So, why don't we have Mr. Ettin bring us up to date on where the
aggregates lie and where interest rates lie and then we'll have Mr.
Sternlight comment on the market situation.
MR. ETTIN. Thank you, Mr. Chairman. Our current estimate
for M-1B shift-adjusted is for a decline of about 4.3 percent in May
and [growth of] around 1 percent in June. For the April-June period,
where the target was 3 percent or less, our current estimate would be
about minus 1-1/2 percent at an annual rate, shift-adjusted. That
would mean that for the March-to-June period, growth in shift-adjusted
M-1B would be about 3-1/2 percent.
CHAIRMAN VOLCKER. As compared to the 5 percent or somewhat
less that we specified [in March]?

5-1/2 percent or somewhat less.


Okay, 5-1/2 percent or somewhat less.

MR. ETTIN. If that June level held, M-1B would be somewhat
below the lower end of its longer-run range. Our current estimate for
the 10th of June, which will be published this Friday, will only be a
couple hundred million above the large reduction that has already been
published for the week of June 3rd. M2 has also weakened, mainly
because of the reduction in M1.
We have a 4-1/4 percent rate of
growth in May and are anticipating a 6-1/4 percent rate of growth in


June. If that June level held, that aggregate, Mr. Chairman, would be
just above the upper end of its longer-run range. M3 has been running
considerably stronger, as banks have issued large-denomination CDs in
order to accommodate the credit demands that they have been facing.
M3 in May rose at an 8-1/2 percent rate; in June we're expecting it to
rise at a 10-1/2 percent rate. That aggregate would continue to be
considerably above the upper end of its range. On the basis of the
June projection, and making various multiplier adjustments, the staff
would anticipate that borrowing would fall to a level of about $1800
million. If money weakened further in June, borrowing could fall to
as low as perhaps $1700 million. In the intermeeting period to date
virtually every interest rate is below its level at the time of the
FOMC meeting and also below the highs for the intermeeting period, of
course. Corporate rates, for example, are off about 85 basis points
since the FOMC meeting and the three-month bill rate is down about
2-1/2 percentage points.

Mr. Sternlight.

MR. STERNLIGHT. Well, Ed has summarized what has happened to
a number of the market rates. That has developed essentially as the
market has taken heart from observing the weakness in the narrow money
supply. The market is in somewhat of a suspended state of animation,
though. They've observed the funds rate hanging at what they regard
as a high level--in the 18-1/2 to 19-1/2 percent range--and they're
somewhat puzzled about that. And that tends to temper what might even
be a stronger positive reaction to the weakness in money supply and to
some of the numbers in the economy that suggest softening as well. We
are winding up this week, because the banks tended to borrow rather
lightly early in the week, with some tightness. Funds were trading
around 20 percent today after averaging around 18-1/2 percent earlier
in the week. I would think that there might be a considerable bulge
in borrowing shaping up for today.
CHAIRMAN VOLCKER. Mr. Kichline, why don't you review the
feel and tone of the business situation as well as the statistics.
MR. KICHLINE. Well, it feels as though there's relatively
little growth in the current quarter, following the exceptionally
rapid pace of expansion in the first quarter. The principal monthly
indicators of activity rather consistently suggest a sluggish pace of
activity. Retail sales were revised downward in April and are now on
a preliminary basis indicated to have been about flat in nominal terms
in May. Auto sales were very weak in April and May, although they've
shown a slight uptick in early June. Nonfarm employment adjusted for
strikes has been unchanged for about the past three months. And
housing starts for May are reported to have declined. On balance, we
believe that we would not be making much of a change in our projection
of real GNP for the current quarter. On the price side, the numbers
coming in continue to point to a rather favorable performance, judging
from the PPI and the CPI. A good deal of the more favorable outlook
in the recent past has been attributable to developments in energy and
food and, in the CPI, the homeownership component. Other prices have
not shown much movement, although on average they seem to be doing
rather well under the circumstances. For the deflator, we would
probably be making somewhat of a small downward revision in our
forecast for the current quarter.



CHAIRMAN VOLCKER. Well, the overall situation seems to me
not entirely unsatisfactory. We're within no target range, if you
take those literally. Some [aggregates] are low; some are high. The
M1 numbers, of course, are somewhat fragile in terms of their meaning
with everything that is going on. M2 is just above the range, M3 is
further above the range, and bank credit is somewhat around the top of
the range. We're going to be above the ranges for the second quarter,
quite clearly, on all the aggregates except M1 on a quarterly average
basis. Interest rates have been coming down. The economy seems to be
softening a bit.
I don't think that's wholly undesirable in terms of
the speed of growth we had before and in terms of expectations. And I
guess we're a little more believable than we were earlier in the light
of recent trends in both interest rates and the aggregates. Just in
the normal course what we would do is to follow the path that Ed
suggested falls out of the numbers, which means somewhat lower
borrowings for these coming weeks--not too much lower if the money
supply is not weaker than projected. But if it comes out weaker than
projected--and I guess this last figure is somewhat on that side--we'd
have borrowings down in the $1-3/4 billion area fairly easily. That
would develop, I suppose, in the next week really. And in my
judgment, that doesn't require any change in the directive or anything
else; that's just what we're following in the normal course of events.
Let's just have your reactions to that.
MR. STERNLIGHT. Mr. Chairman, this is Sternlight. May I
just get in a clarification of what Ed Ettin laid out as the borrowing
prospect for the next three weeks? We were talking about it earlier
and when he said $1.7 or $1.8 billion for borrowing, that was before
the downward adjustment for the weakness we've been getting in M-1B.
This implies no discretionary
downward adjustment.
It says that we're happy with where the
aggregates are and we're not encouraging any further downward
adjustments, so to speak.
MS. TEETERS. May I ask a question?
out of the nonborrowed reserves to date, Ed?

How much have you taken

MR. ETTIN. We've taken out $180 million in the first fourweek period, reflecting the weakness in the monetary aggregates that
the Committee was permissive toward, and another $200 million for
overshooting borrowings in the first week when there was a very high
demand for borrowing. That was offset by a multiplier adjustment of
about $350 million that went the other way.
artificial adjustment.

That's right.

taken out.

Yes, the $200 million was somewhat of an

It's the $180 million that you've really

And the multiplier is standard, so that--


The multiplier is the normal thing.


MR. ETTIN. So, essentially, it's $180 million for the
weakness in money growth.
MR. STERNLIGHT. That $180 million applies just to the first
four weeks; I don't think that it carries through.
MR. ETTIN. That's right. It's in the first four-week
period. We've made no adjustments for the second three-week period
that starts tomorrow.
million back?

Does that imply that you're putting the $180



There are no further adjustments.

MR. PARTEE. There are no further adjustments. This is Chuck
Partee. I might just say, Paul, that I think your proposal is very
sensible. If I understand it, we now are looking at M-1B for April to
June of 3-1/2 percent, did you say? And that is assuming that there
is no more shortfall.

March to June is 3-1/2 percent.

MR. PARTEE. Yes, March to June, the three-month period in
our original directive, which we keyed back to last time and for which
the objective was 5-1/2 percent or somewhat less. Well, 3-1/2 percent
is certainly somewhat less than 5-1/2 percent and may be a little more
than somewhat less. So, it seems to me that we are at the lower end
of the agreed upon path that we talked about and, therefore, that the
growth in nonborrowed reserves should be permitted to show through in
lower borrowings, to the extent that that occurs. I would note that
my sense of the [situation] is that we've had a period of several
weeks--it's not just this week--in which we have had downward
revisions in the expected money supply numbers. As I recall, at the
meeting we were talking about May growth that was considerably higher
than -4.3 percent and June growth that was considerably higher than +1
percent. So, we are beginning to develop this somewhat ominous
pattern of shortfalls from staff expectations that has run for a
period of weeks. And I agree with the point that you've often made
that those revisions often indicate something as to what is happening.
So, our problem as we look into the next month or two, may in fact be
rather low-looking money numbers, lower than the staff is now
expecting. I don't think this has any of the dynamic characteristics
of last year when [money growth] went off so very sharply in April,
but it does seem to be pretty pervasive and it's a fairly ex ended
period of weakness in the money behavior. Of course, the market rates
are reflecting that by coming down, although we resisted or didn't pay
much attention to that market development in March and early April
because we sensed that there was considerable strength in the business
picture. Now it seems to me that the market is probably right because
there is developing weakness in the business picture. So, I think we
ought to do what you say. But we ought to be rather sensitive now to
significant shortfalls in the monetary aggregates because they're
probably going to be reflecting shortfalls in the economy.



CHAIRMAN VOLCKER. Well, I agree with a lot of the technical
analysis you provided. I don't consider what is happening very
ominous; I think it's rather happy.
MR. PARTEE. To this point I'm not bothered, but I'm worried
about what the next couple of months may show.
CHAIRMAN VOLCKER. Any other comment?
have out there? Somebody must be commenting.

How many people do we

MR. ROOS. Mr. Chairman, Larry Roos.
You're doing things
beautifully; just don't change what you're doing. I agree with you,
Mr. Chairman.
CHAIRMAN VOLCKER. Let me point out a couple of things. I
If we
did some calculations--or rather I had some calculations done.
don't look so carefully at these cones that we're so fond of examining
but at how we're doing in terms of trend, one way is to look at yearto-year changes. We are running high this year relative to last year.
We have had a couple of years of decline in annual average aggregate
growth. It's going to be very difficult to get a decline in the
If we ended up at the midpoint of our M1
annual average this year.
target--almost in a straight line from here on out, but only at the
midpoint--it would look fine in terms of the way we arbitrarily set
these targets.
On a fourth-quarter-to-fourth-quarter basis, we would
end up with 6-1/4 percent year-to-year growth or something like that.
And last year it was only--I haven't got the figure in front of me-5.9 or 5.7 percent, something like that. And it's almost certain that
the M2 and M3 numbers are going to be significantly higher in year-toyear terms than they were last year. I think that has some
significance apart from presentational. If we really are working
toward lower growth, it may be more meaningful to look at annual
averages in some sense than to put all the weight on particular
quarters, which is what the targets do somewhat inadvertently. I
don't like the feeling myself of coming out for the year with a higher
average growth in all these aggregates than we had last year. But
that's the way we're headed.
In talking
MR. BALLES. Mr. Chairman, this is John Balles.
with Lyle here, I'm trying to recall whether our published minutes for
the [March] meeting indicated, as I seem to recall, that we would be
putting more weight on M2.



Is that [recollection] correct?



CHAIRMAN VOLCKER. I'm not sure the formal directive did
I don't remember the wording, but I think it was
that, though.
I just don't remember
reflected in the tone of the discussion.
precisely how it came out in the directive itself.
MR. BALLES. The only reason I bring this up [unintelligible]
scrutiny with our current policy.
[Unintelligible] in spite of the
fact that M2 is [above its] range [unintelligible] end of June



probably will take some of the sting out of the fact that M1 is coming
in weak.
I don't know about the wording "take
It may take some of the joy out.
some of the sting out."
June, too, isn't it?

But, of course, M2 is fairly weak for May and

CHAIRMAN VOLCKER. Yes, if you look at it just in the
narrowest perspective from the last meeting, M2 is slightly below the
limit that we put on it. But if you look at it in the broader
perspective of the year as a whole, it is high and is running above
the range. M2, according to the current projections, is only slightly
below the figure that was put in the directive.

Thank you, Mr. Chairman.


End of conversation?

That's the end from Kansas City.

CHAIRMAN VOLCKER. Okay. Any more here in Washington?
we will proceed. Thank you very much.

Is anyone left on the line?
Was there anybody there in the first place?


Okay, that's it.