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Meeting of the Federal Open Market Committee

November 26, 1980

A meeting of the Federal Open Market Committee was held on Wednesday,
November 26, 1980, at 12:20 p.m., at the call of Chairman Volcker.

This was a

telephone conference meeting, and each individual was in Washington, D. C.,
except as otherwise indicated in parentheses in the following list of those

Mr. Volcker, Chairman
Mr. Solomon, Vice Chairman
Mr. Gramley
Mr. Guffey
Mr. Morris
Mr. Partee
Mr. Rice
Mr. Schultz
Mrs. Teeters
Mr. Wallich

(New York)
(Kansas City)

Messrs. Baughman (Dallas), and Eastburn (Philadelphia),
Alternate Members of the Federal Open Market Committee
Messrs. Black (Richmond), Corrigan (New York), and Ford
(Atlanta), Presidents of the Federal Reserve Banks
of Richmond, Minneapolis, and Atlanta, respectively


Altmann, Secretary
Bernard, Assistant Secretary
Petersen, General Counsel
Oltman (New York), Deputy General Counsel
Axilrod, Economist

Messrs. R. Davis (New York), T. Davis (Kansas City),
Eisenmenger (Boston), Ettin, Henry, Keir,
Kichline, and Truman, Associate Economists
Mr. Pardee (New York), Manager for Foreign Operations,
System Open Market Account
Mr. Sternlight (New York), Manager for Domestic
Operations, System Open Market Account

- 2-

Mr. Coyne, Assistant to the Board of Governors
Mr. Beck, Senior Economist, Banking Section, Division of
Research and Statistics, Board of Governors
Mrs. Deck, Staff Assistant, Open Market Secretariat,
Board of Governors
Messrs. Boehne (Philadelphia), Brandt (Atlanta), Burns
(Dallas), Fousek (New York), and Parthemos (Richmond),
Senior Vice Presidents, Federal Reserve Banks of
Philadelphia, Atlanta, Dallas, New York, and
Richmond, respectively

Transcript of Federal Open Market Committee Conference Call of
November 26, 1980
[Secretary's note:
At the beginning of the meeting the
Secretary called on each Reserve Bank in order to verify attendance.]
MR. ALTMANN. Thank you. If you will all stand by, we are
almost ready to go. We expect to have all members of the Board and
Let me give you the phone number to
the usual members of the staff.
use if you should become disconnected from the network. Call us on
another instrument at 202-452-3317 and we will try to get you back on
the network promptly. If you will bear with us for just another
minute or two, I hope we can get started.

Everybody's on and we're all here?


CHAIRMAN VOLCKER. Well, gentlemen--or rather, lady and
gentlemen--I think we ought to have a little review of the situation.
We may want to make a decision. Let me just say in a preliminary way
that there is not much we can do about it right at the moment but
these money supply figures have been plaguing us in terms of
revisions. We have known this for some time and it has just gotten
It's absolutely clear, in my judgment, that there is a
systematic bias in these numbers. When they go down, all the
estimates are successively revised down. And when they go up, all the
estimates are successively revised up. This [pattern] has cumulated
over a period of time [and] has become quite serious in my judgment.
Now, I don't know what theoretical reason there can be for
I don't think there can be a theoretical reason. The [errors]
should be random unless we are getting bad reporting. The only
plausible explanation I can see is that early reporters are not
reporting the right numbers in some cases.
I don't know, perhaps they
report last week's number or something, so when they are in an up
trend it is always low and when they are in a down trend it is always
high. But I will have some people here, as soon as they get out from
under, organize some way to look at this.
I suspect it's going to
have to be done by looking very carefully at the individual bank level
to see whether there is any systematic bias in reporting by some of
the banks. I don't know any other way to go about it, but we are
looking into it.
Did you know a characteristic is [that we have had
big revisions shortly after our meeting]? Maybe we shouldn't have any
more Federal Open Market Committee meetings so we can't have an eye on
money supply numbers that we discussed at a meeting! That's a part of
this general upward revision syndrome. We have had some upward
revisions since the meeting, so why don't I ask Steve to describe
where we are.
MR. AXILROD. Well, Mr. Chairman, as you suggested,
immediately following the meeting we had a considerable upward
revision in the money supply data, measured by M-1A. For the week of
[November] 5th we published a level that was $1.2 billion higher than
what was implied by the growth path adopted by the Committee, and for
the week of the 12th we had a level $1.8 billion higher. So the
markets [saw] an increase for the 5th--the final number--of $2.9
billion and a further increase of $1.8 billion for the 12th. The


preliminary data we had for the 19th had suggested no change from the
level of the 12th. The data we have as of about an hour ago, without
nonmember banks available, suggest a downward revision. [The numbers]
suggest that we may show a drop of $1-1/2 billion from the week of the
12th for M-1A and a drop of similar magnitude for M-1B. Even with
these latest revisions, money growth will be running above the total
reserve path adopted by the Committee. As of yesterday, it was
running about $400 million above on a weekly average basis, and this
increased demand for total reserves was pulling [up] the demand for
borrowing. The amount of borrowing was up from the $1.5 billion
initially assumed to $1.9 billion. We have not made any downward
revision in the nonborrowed reserve path to take account of the
increase in total reserves at this point, as we normally do not do
that this early in a period. In any event, as I say, we now have had
the first sign of a downward revision in the money supply. Whether it
will hold up, Mr. Chairman-CHAIRMAN VOLCKER.

I'll believe that when I see it.

MR. AXILROD. Only time will tell. With borrowing running
recently around $1.9 to $2 billion, the federal funds rate has moved
up. After the discount rate was raised on Friday, the funds rate
moved up to around 16-1/4 percent on Monday. It had been running at
around 16-1/4 to 17 percent and now, most recently, it has been
running between 17 and 18 percent. The average for the week to date
is 17 percent. Yesterday it was 17.28 percent and it was running very
high today, on Wednesday, the last day of the statement week--17-1/2
to 18 percent--and then moved above that later. Mr. Chairman, I think
that very briefly updates the Committee on the aggregates and related
reserve and money market conditions.
anything to that Peter.

I don't know whether you want to add

MR. STERNLIGHT. I have nothing very interesting. In some
very light trading, [the funds rate was] somewhere around 18 percent
and [unintelligible].
CHAIRMAN VOLCKER. The general problem, as I see it, is a
fairly simple if awkward one: The money supply is running
significantly higher than was assumed at the meeting. The kind of
borrowing assumptions we were using convert, without any discretionary
changes, into something like $1.9 or $2.0 billion. The question of a
discretionary change is at issue certainly. But even without that, if
we stick to the minimal "holding steady" on the nonborrowed reserve
path, we have a level of borrowing that obviously puts into jeopardy
the 17 percent funds rate ceiling. I would just propose, as a holding
action at the moment anyway, that we move that to 18 percent, subject
to review next week if we have to do it.
MR. EASTBURN. Paul, this is very different. May I ask Steve
a question? Are you revising the December [projections] for the
MR. AXILROD. We were in the middle [of those estimates]
before we got this very recent data. Our estimate for M-1A growth for
November was on the order of 9 percent or a little higher, and for
December it had been around 1-1/2 percent. Our estimate for M-1B was


around 12 percent for November and close to 3-1/2 to 4 percent for
December. Whether these latest data will cause any further downward
revision to that depends on the week of the 26th, for which I just
don't have any data. If they prove to be somewhat weaker also, I
suspect the December number will revise down, because the latest data
in November will be lower and that will tend to carry through somewhat
and lower the December average level. But that's highly tentative,
President Eastburn.

Thank you.

CHAIRMAN VOLCKER. I'm afraid those projections have had
virtually no informational content in the past 4 or 5 months.

Paul, this is Tony Solomon.

Can you

hear me?


VICE CHAIRMAN SOLOMON. I think the recommendation is a wise
one; I think we should go to 18 percent. The market view is that we
are already in a 17 to 18 percent range, and it seems to me that we
really have no alternative.
MR. GUFFEY. Paul, this is Roger Guffey. I have just a
couple of questions. When you were talking about an 18 percent cap,
[does] that conflict [with] no increase to the nonborrowed path?
CHAIRMAN VOLCKER. Well, that might depend upon how this next
money supply figure comes in. I think it is hard to defer [the issue]
if it comes in high. If it comes in low, maybe we could defer the
question. The preliminary indication is a little on the low side. If
we didn't have that, I would be very hard pressed to say we shouldn't
change [the nonborrowed path] a bit.
MR. GUFFEY. The other question--perhaps Steve could respond
to it--is [whether with] an 18 percent rate, [which we have] in fact,
we're still looking at about $2 billion in borrowing?
MR. AXILROD. Yes, the implied borrowing literally called for
in the path is $1.9 billion. And given the way the federal funds rate
has been running, [a funds rate of] 17 to 18 percent ought to be
generally consistent with that. But if the borrowing were to rise
significantly higher--if the money supply came in stronger--then of
course there would be a question about the 18 percent itself.
I might
also add that last week we had an unusually large amount of borrowing
from banks over $3 billion in size. Virtually half of the borrowing
was from them, and they are the banks more prone to try to avoid the
window because of the surcharge.
So it may be that we are getting
more pressure from the surcharge than we might have expected. That
may abate but, again, I'm not certain.
MR. GUFFEY. Well, I'm with you and Tony Solomon in
supporting the proposal.



MR. GRAMLEY. Mr. Chairman, could we get Jim Kichline to
interpret for us those [new orders] figures for durable goods? What
do you make of those?
MR. KICHLINE. The new orders figures in total were up a
little, following an exceptionally large rise in September. For
nondefense capital goods, they were down a little, but that was
dragged [down] by aircraft; if we strip that out, they were unchanged.
The October level of nondefense capital goods orders is little
different in nominal terms from the average in the third quarter, so
we don't perceive that a great deal is happening that differs from our
earlier expectations on new orders. I might say that the shipments of
durable goods were very large and were higher than we had assumed in
our GNP projection. So, on average, we don't believe there's much
different in the figures, except that there is some near-term strength
measured by the information available for shipments in October.
since last week?

Have you changed your GNP projection at all

MR. KICHLINE. No, we have not. We have received additional
information on housing starts, which were higher than we had assumed.
We have the second 10 days of auto sales for November, and they were
at a 7.1 million unit annual rate. On average, that's about what we
had assumed. So we think growth in the area of 2 to 2-1/2 percent in
real terms is still a reasonable forecast for the current quarter.
MR. MORRIS. Paul, this is Frank Morris. I would go along
with your 18 percent, but only very reluctantly. I think that we have
hit a level right now that [is inducing tightening] into the economy
and that we probably are going to produce results in demand or markets
beyond [unintelligible]. The rise in this kind of business always
leaves us [unintelligible]. After that it's no longer necessary but,
as I say, reluctantly I will go along with the 18 percent.
MR. CORRIGAN. This is Jerry Corrigan. I would tend to line
up with the remarks of Frank Morris. I do think we have to go to 18
percent, but I myself am reasonably uncomfortable without the
implications that we have great [unintelligible] of that. That is my
CHAIRMAN VOLCKER. Shall I go down the list?
alphabetical list, it so happens. Governor Gramley.

I have an

MR. GRAMLEY. I would associate myself with Frank's remarks
and Jerry's and Tony's too. I don't think there is much that we can
do, given the fact that the funds rate is already up at 17 percent or
over. If we try to push it back down again, in light of these money
stock numbers [that would] look rather strange. But I do think we
have interest rates as high as we need to have them. I'm going to
believe the [weaker] figures [for the week of the] 19th will [show]
up, and I'm going to pray between now and then.

[Mr. Partee.]

MR. PARTEE. I'll go along with 18. I guess I do it less
hesitantly than the others have suggested because I really don't know
what is happening in the economy. I don't know why bank credit demand


is so very strong and why we have repeatedly been unable to predict
the level of rates that would be consistent with the growth in
aggregates that we wish. So, I would say that we should certainly go
to 18 percent, and I would be prepared to go further if in fact Lyle
isn't right and the performance of the numbers does not show some

Governor Rice.

I don't see any
I would be prepared to go to 18.
realistic alternative, although I am uncomfortable with the present
level of interest rates.

Governor Schultz.

I don't think we have any choice on the 18
percent. What I find disturbing is the increasing evidence that
people in this country seem to be learning to live with higher
interest rates all the time. And that may become a greater problem as
time goes on.
Governor Teeters.

Mr. Solomon we have [heard from].

MS. TEETERS. Well, I am sufficiently uncomfortable that I
We already have the rates too high.
won't go along with 18 percent.
It seems to me that you are playing with dynamite. We are [fostering
So I would dissent.
another] cycle like last time.

Governor Wallich.

MR. WALLICH. Well, I was prepared to go to 19 percent last
time, so I certainly would be willing to go to 18 percent. It seems
to me that we are not getting the pressures on the financial
institutions or markets that we got last time around [when rates]
I think Governor Schultz is very right that
approached these heights.
people are learning to live with these rates because they are not
We have waited long enough for the
really [biting after tax].
[unintelligible] effects, and they may still come. But as I say, I
think we do have to move now at the minimum to 18 percent.

Mr. Baughman, who is alternate for Mr.

reluctance. Yes.

I have substantial uncertainty, but no

CHAIRMAN VOLCKER. I don't know whether any of the [nonvoting Presidents] want to make comments. Mr. Black, Mr. Eastburn,
Mr. Ford?
MR. FORD. Paul, this is Bill Ford. I just have one question
Are you thinking about the tolerance
I would like to [ask].
[unintelligible] level of the discount rate might have other

I can't quite hear you, Bill.


also happens fairly quickly

MR. FORD. The [unintelligible]
on the discount [unintelligible].

CHAIRMAN VOLCKER. Well, I'll just give you a brief answer,
and then I think you ought to make up your own mind basically. If
these figures don't come down, inevitably that question arises. But
it arises against a background--not a conviction--that if we do it, we
should not expect it to have any impact on market rates.
MR. EASTBURN. Paul, this is Dave Eastburn. I would go
along, but I am [unintelligible].
My [guess] is we will find
ourselves putting in a lot of reserves in if we don't. I would
One thing that we are
certainly favor another [unintelligible].
guessing is that the surcharge [unintelligible].
It's not having the
same impact as the surcharge [unintelligible].

Mr. Black.

MR. BLACK. Paul, we did a lot of the small [unintelligible].
We project that correspondents might be tightening in that direction;
it depends on where the borrowing really is. But I agree in that I
think we ought to go 18; I hope we don't have to go higher.
CHAIRMAN VOLCKER. First of all, [this is how] we are going
to play this in the short run or for the moment. We have a decision
on the reserve path and we will have another consultation next week.
This may be a very interim decision. Just in terms of this general
experience--apart from statistical and estimating and other problems-it seems clear to me that the real operating question here is what we
do with the discount window. And there's nothing we can decide on
that in the short run. But in that connection, how many of you have
put any administrative pressure on any banks at all?

We have in Philadelphia.

We have in Boston.


You have.


MR. FORD. Paul, this is Bill Ford. In Atlanta five of the
largest banks in our District are right on the edge of being subject
to the frequency rules. So we anticipate that it's likely to be
We have not been putting undue pressure of any kind

CHAIRMAN VOLCKER. I tell you, it's a bit of a mystery to me
how those rules are interpreted. We don't want any undue pressure but
I don't think we want to lean over backwards the other way either.
Any other comments?
MR. GUFFEY. We've had no problems in Kansas City and are
putting no pressure on the banks.
MR. BAUGHMAN. In the Dallas District we haven't felt that
the borrowing is at that level.

Same for Minneapolis.

CHAIRMAN VOLCKER. Well, we just have two or three Districts
that have been doing something, right?


VICE CHAIRMAN SOLOMON. Paul, we are seeing a rise in the
overall level coming from the [unintelligible]--not significantly,
just one or two Districts. Are you getting the pressure that we are?
I am not aware of any particular
concentration by District, but I am just not aware. Do you have any
comment, Mr. Axilrod?
MR. AXILROD. I don't think there is any particular
concentration by District. As I say, the only thing we noticed,
particularly last week, was that very large banks borrowed a little
more than usual, but borrowing by the smaller banks continued very
heavy. I might say that over the past four weeks, Mr. Chairman, [one
statistic we monitor]--the average number of weeks borrowed in the
past 13 weeks--has been creeping up. It's one indicator. It's up to
4.2 weeks; and if we do [the calculation] by size of bank, it looks as
if the large banks are very close to the sort of national guideline
that had been put out, which would indicate that some will be subject
to pressure.
CHAIRMAN VOLCKER. Personally, I am not at all sure that our
rules are appropriate for today's banking system. We don't have a
situation where a particular bank gets in trouble and has to borrow
repeatedly for weeks. All they do is pass the pea around among
So one bank borrows one
themselves; they know what the rules are.
week, and it says I am not going to borrow for a few weeks, we'll let
somebody else borrow. So we get no real pressure on any particular
bank because it's just a question of whether they buy more federal
funds this week or less. We just don't have the situation that
existed 20 years ago where a bank got into trouble in some sense and
more or less had no alternative to borrowing other than to make
portfolio adjustments. The last thing any of them do now is to make a
portfolio adjustment.
VICE CHAIRMAN SOLOMON. Paul, to answer your thoughts,
another [dimension] of the changing nature of the window that I
foresee is that the multi-bank holding company fringe has developed in
recent years, especially in our District and a few others with a lot
of very large multi-bank holding companies. They see a little less of
the money and avoid the surcharges relative to [what is] implied [by
their liquidity needs].
In fact, Citibank in New York may not
[unintelligible] holding companies. We have a lot of [unintelligible]
themselves in December.
CHAIRMAN VOLCKER. Well, there are a lot of questions to
consider in this area. But my overall impression is that we don't get
much [restraint].
Banks all have their business rate, so they never
have to restrain [lending].
They just change interest rates.
I think it may be important to observe, [that
if] we start putting pressure at the discount window [what we are]
doing is increasing the upward pressure on the funds rate.
CHAIRMAN VOLCKER. That is right, among other things.
we may be back in touch, but for the moment, that's where we are.
Thank you. Happy Thanksgiving.