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Federal Open Market Committee
Conference Call
October 16,




Greenspan, Chairman
Corrigan, Vice Chairman

Messrs. Boehne, Boykin, and Stern, Alternate
Members of the Federal Open Market Committee
Messrs. Black, and Forrestal, Presidents of the
Federal Reserve Banks of Richmond and
Atlanta, respectively

Kohn, Secretary and Economist
Bernard, Assistant Secretary
Gillum, Deputy Assistant Secretary
Mattingly, General Counsel
Prell, Economist
Truman, Economist

Messrs. Lindsey and Promisel, Associate Economists
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
Mr. Wiles, Secretary of the Board, Board of
Ms. Low, Open Market Secretariat Assistant,
Division of Monetary Affairs, Board of
Messrs. Doyle and Powell, First Vice Presidents,
Federal Reserve Bank of Chicago and
San Francisco, respectively

Transcript of Federal Open Market Committee Conference Call of
October 16, 1989
CHAIRMAN GREENSPAN. Good morning, everyone. As the clock
ticks toward 9:30, one gets the impression of looking at a Cape
Canaveral blast off. Before we get into any formal business, there
are a couple of announcements I want to make. One is that this may be
the first of several meetings the FOMC probably will have this week.
I thought that in October of 1987 there was considerable usefulness in
having the daily meetings that we had. And if we were to maintain
that sort of schedule during this crisis period, I think it will be to
Secondly, let me just
our advantage--if that's at all feasible.
indicate to those to whom I haven't spoken that those articles in The
Washington Post and The New York Times yesterday were not authorized
They were not done by myself nor anyone I'm aware of.
not sure at this stage particularly what damage was done, but it
I hope
clearly has very severely restricted our options, or it could.
that during this period everyone will endeavor to stay away from the
press. If you feel an absolute necessity to speak to them for
purposes of education, please make it off-the-record and make certain
they know that off-the-record means that no indication of that
conversation or relationship to the Fed is involved. The safest thing
to do is just not to say anything to anybody, because there is going
to be tremendous media hype on the Fed and I think we have to be very
careful about inadvertently exposing the markets to some statement
which was made in all innocence and which, as a consequence of the
media hype, is pushed all out of regard to what the underlying meaning
Anyone who speaks for
So, let me just say: Please be careful.
the Fed speaks for all of us and we have to be careful of that.
VICE CHAIRMAN CORRIGAN. Mr. Chairman, if I could, I'd like
It is clear to me
to add a point on those unfortunate press articles.
that they have already done some damage in terms of reducing [our]
It is
flexibility and undermining discipline in the marketplace.
absolutely essential, regardless of what the motivation for those
particular articles may have been, that there is only one person who
speaks for the Federal Reserve in these circumstances and that is you.
[Furthermore], I think
I regard those press reports as amateurish.
they undercut the character of the Federal Reserve as I have known it
for many, many years. The only saving grace that I can think of is
that, in a way, they are so amateurish that they probably will not be
The person, at least in
taken as seriously as they might have been.
The Washington Post, goes to the great length of having, in effect,
announced policy and then turns around and says that we aren't going
to make an announcement about policy.
I think it is very, very
unfortunate. And it does cut right at the very heart of the Federal
Reserve, as far as I'm concerned.
CHAIRMAN GREENSPAN. I think it would be useful this morning
to start off with Sam Cross bringing us up to date on international
Mr. Chairman, when we closed here in New York on
Friday, the dollar was trading at about 142 yen and 1.87 mark. Now,
that was at 4:00 o'clock, and the dollar did slip a little further
In Asia and in Europe
after that in fairly chaotic circumstances.
overnight last night, the dollar slipped a bit from the rates that I
mentioned, but all-in-all the performance, I think, has been


The lowest that we saw last night and this morning
reasonably good.
was in Asia where the dollar hit 1.83 or so in the mark and 139, or
around that level, in the yen. These rates were hit pretty soon after
markets began to open up in Asia last night. During most of the
evening and morning the rates were fairly steady and even drifted up
somewhat. So, at the present time, we have rates against the yen at
Obviously, they are
about 140.5 and against the mark at about 1.845.
all very edgy and very nervous and are anxiously awaiting what happens
to stocks.
But on the whole, the dollar has performed reasonably
stably. Thank you.


Peter Sternlight, are you there?

MR. STERNLIGHT. Yes, I am, Mr. Chairman. Let me start with
just a brief comment about what the markets had been doing from the
time of your last meeting at the beginning of October up until last
Friday. Rates had come off moderately--say, 10 to 40 basis points for
bills; 35 to 45 in the 2-to-5-year area; and about 20 basis points for
the long bond.
I think this was against the background of some
feeling in the market that perhaps a further easing move, which had
been lurking in the back of people's minds, was maybe becoming a
little more imminent, particularly when the employment report was
released in early October. Then on Friday, in the aftermath or along
with the very sharp drop in stocks, there was a flight to quality and
So, now the change--again from
rates came down appreciably further.
October 2nd--would be off about 80 basis points or so in the bill
area, about 65 to 85 in the short Treasury coupons, and about 35 to 40
basis points for the 30-year bonds.
This morning we are getting a small taking back of some of
those big gains late Friday, but there would still be these
Given that there
appreciable declines since the beginning of October.
was a kind of flight to quality, we didn't have that move across the
whole range of prices, so something like the [unintelligible] spread
has widened about 15 basis points or so, and the spread of Eurodollar
In other
CD rates against Treasury bills widened out a bit on Friday.
parts of the market, of course, the junk bonds were not sharing in the
moderate decline in rates earlier in the month and they came under
further pressure on Friday.
I don't have a particular yield change to
quote, because that market has been so illiquid it's very hard to get
a sensible reading; but clearly, that high-yield junk market has been
under pressure and there is very limited market-making in those bonds.
In terms of federal funds, we had been right around 9 percent at the
time of the Committee meeting at the beginning of the month.
then, rates have been a little under that, hovering around 8-7/8
percent. We were mostly in a reserve-draining mode through this
period. That included taking out a moderate amount of reserves this
past Friday. Rates softened further after that, despite our having
And this morning we started with a funds quote
taken some funds out.
I haven't
of 8-5/8 percent and it has drifted off at 8-9/16 percent.
seen any new reserve numbers yet, but based on what we were looking at
on Friday, we thought we still had a little more draining of reserves
to do. The market, of course, has seen these headlines that have been
referred to, and frankly, I'm not sure what they expect of us in light
of that, but also [in light of] the obviously comfortable funds
That's all I have, Mr. Chairman.


either Mr. Cross or Mr. Sternlight?

Are there any questions


This is Ed Boehne.
Peter, what's happening in
the corporate bond market other than the junk bond piece of it?
Well, the yields were coming off in the
early October week, kind of along with Treasury issues.
I couldn't
really get a good read on what happened to those in the Friday market,
Well, I just won't speculate on it.
It was certainly not like
the pounding that the junk market took, but I don't know that they got
the benefit of the big lift--I doubt it--that the Treasuries got
Any other questions for them?
If not,
Si Keehn, would you bring us up to date on what you think is going on
in Chicago?
MR. KEEHN. Mr. Chairman, the two main markets out here this
morning are viewed as being reasonably comfortable, under the
The margin calls following Friday's activity have been
At the Merc the [unintelligible] was about 808; foreign trading
was a little over $300 million and those are both up.
As I say, at
the opening of the Fedwire this morning [unintelligible] viewed both
of these changes as being especially helpful.
Other than that, banks
seem comfortable in providing funds to meet these margin calls.
you know, one dealer failed; he's not a major dealer, but there was a
[buyer] over the weekend.
The purpose was to get that behind them so
they wouldn't have that failure staring at them at the opening of
[Unintelligible] packages being put together, and that has
been doubled.
I think everyone out here views the key as being what's
going to happen on the New York stock exchange this morning.
Everyone's waiting; that's what's taking place here.
things seem to be reasonably comfortable.
that might be useful to us?

Jerry Corrigan, do you have anything new

First of all, in terms of European
stock markets, the general pattern is that stocks are down in the
range of 7 to 9 percent on the major exchanges.
London reached a low
of down 204, over 9 percent.
Right now it's down 175 or so, which is
just a shade under 8 percent.
That pattern pretty well prevails
through most of the other exchanges, although patterns of trade,
especially in Paris, are very, very irregular.
The reports we are
getting out of London in particular suggest that as of now and unlike
1987, there is no panic selling and there is not a widespread pattern
of names of individual counterparties for transactions being
questioned in the way that they were in 1987--although there, too,
everyone is waiting to see how markets open here in New York.
just been told that the New York Stock Exchange opening is going to be
delayed another 15 minutes.
I may have to pick up a call from
in just a second to see what he has to say.
The Tokyo markets
were typically Japanese: everything was very quiet, all things
considered in Tokyo; stocks closed down only about 1.28 percent with
very, very low levels of trading. Apparently, the institutions stayed
completely on the sidelines.


Here, as I said, market expectations about stocks are really
all over the lot. I think that [most of] these people--the last time
I talked to them about what they see--feel that stocks will open in
New York down maybe 60, 80, or 100 points. But there are speculative
judgments in the marketplace that are a good deal worse than that.
Some people [unintelligible] are talking about stocks opening down as
much as 200, but obviously those are just shots in the dark with
little appreciation of what's going on.
tells me that he thinks that, on balance, U.S. stocks in
London are about 3 percent below their close as of last Friday in New
York. The one technical condition that exists that is a bit troubling
is that the Chicago futures indexes at the close were about 5 points
below cash margins. Now, what would normally happen in those
circumstances, of course, is that the "arbs" would close them off.
Whether they will or not depends on a lot of things including
[unintelligible] judgments. Peter already mentioned the junk bond
market. I think it's quite obvious that that market, at least today,
will be rather totally illiquid. And that among other things raises
the question of whether some of these mutual funds, especially those
that have concentrated positions in junk issues, could come under some
pressure. We think there is about $40 billion of junk bonds in the
funds. Of course, it's not all of the funds. There are a few
[unintelligible] size are largely, if not exclusively junk; and of
those, few are open ended. So that could possibly be quite a concern.
But the prevailing attitude, at least at the moment, seems to me to be
one in which most people do not [see] that situation as having the
on the other phone, Alan.
I've got
same character as 1987.
Can I take it?
CHAIRMAN GREENSPAN. Sure. Why don't you take it and I'll
just continue on. Come on back, if you have time after you've
finished, and let us know what he had to say.
When I contemplated this call before the market broke, I had
been looking over a number of different things, including the
increasing evidence of continued deterioration in profit margins in
the third quarter and in orders, which have remained very soft and in
some instances are slipping. I had thought it would be advisable as a
consequence of that for us to initiate another small downward
adjustment in monetary pressures. But these last events obviously
Since we will be talking over the next several
have overtaken us.
days, I think any official policy position that we initiate can be
held off for a few days until this whole thing simmers down and we
know pretty much where we are.

Alan, could I interrupt?


VICE CHAIRMAN CORRIGAN. They are now open and it opened with
a tick to the high side. There are 62,000 orders in the system. By
way of contrast, the peak front load in 1987 was about 38,000. The
initial ticks are slightly on the up side but there is such a large
bunch of orders in the system that it will take another 10 or 15
minutes to know what they really have.
just before the opening?

You mean the delay was a rush of orders


to the

As I said, there are 62,000
in the system, and by way of contrast the peak in orders in the
at the opening in 1987 was 38,000. The first cut was slightly
up side but it will take another 15 minutes to know what they

The specialists are there.

CHAIRMAN GREENSPAN. As weird as that may seem. In any
event, let me just throw in a view here that that may or may not be
good news.
If we have washed out the illiquidation, that's fine; but
if this runs into selling resistance and starts its second tranche on
the down side later in the day, it could create some problems for us.
That is all the more reason why I think we should schedule another
[call] for tomorrow morning at the same time, if that's feasible for
everybody. But before we close are there any comments, questions, or
motions of any of the Committee members?
Jerry, how did CHIPS do?
MR. JOHNSON. Can I just make one?
Were there any problems settling there this morning at all?
We have been in touch with the
Clearing House and, as Alan and I talked yesterday, we also called all
the other Reserve Banks yesterday to make sure everybody had all their
ducks in a row and all their people on board. So far, everything is
just fine. There are no glitches anywhere that I know of. We'll just
keep our fingers crossed.


operating problems today.

One thing we don't want is any

Okay, thank you.

Jerry, I presume you've been in contact with the
money center banks who are backing up the dealers. What percent was
Presumably, they have read all the papers. What's
the tone of [unintelligible] saying?
VICE CHAIRMAN CORRIGAN. Generally, Ed, it would be along the
lines of what I started to say before I had to run off a moment ago:
that people generally are concerned but they also seem to think that,
in underlying terms, we may be a little better off than we were in
The major dominant concern is the spillover effects in highyield markets; there is always the possibility that with markets as
they are now, for firms that are trying to restructure an existing
deal in bankruptcy it wouldn't take much for that kind of situation to
get pretty ugly.
I do think that they know what their role is.
was at least an element of confusion, if I can put it that way,
growing out of some of those newspaper reports.
our role is.

They know what their role is and they know what

VICE CHAIRMAN CORRIGAN. Yes. As I said, I think there is
some uneasiness about those news reports. But basically my sense of
it is that I can't say they're comfortable, but I get no sense of a


really--"panicky" is a bad word, but I'll use it anyway--panicky
feeling. They seem okay at the moment.

They are still apprehensive.


Obviously, there is some

MR. KEEHN. Let me just add that the Bank went through the
dealer list over the weekend here in Chicago to see how much [the
banks] had advanced to each dealer. Apparently, they had no problems.
As I said earlier, the margin call was met with no problem. But if we
had another that would be different.
But as of now they were quite
comfortable with what they had to do to meet this margin call.
VICE CHAIRMAN CORRIGAN. The Dow is now down 16-1/2 points.
One other point in response to Ed Boehne's question: There are a
couple of situations--the bridge loans outstanding in the hands of the
investment banks in particular--that are a matter of some concern.
The total outstandings are down distinctly from their peaks, but they
are still not inconsequential.
And it is also true that a couple of
investment banks have rather sizable portfolios of junk bonds, which
of course they have to finance on a day-to-day basis.
One report, for
example, that I had earlier this morning had to do with a house, other
than the obvious one, with a portfolio into the several billion
Of course, that portfolio, when you have to take your
haircut of 25 or 30 percent, that's not trivial in terms of net
[unintelligible] or liquidity of the balance sheet.
So there are
concerns ahead but at least at the moment I would stand by my earlier
comment that the concerns are weighty but they are not overwhelming.
I think the crucial thing is how these markets behave over the next
few hours.

Any further comments?

MR. MELZER. Alan, this is Tom Melzer.
Peter mentioned that
the reserve projections would indicate a need to take out further
I presume that we'll provide a larger allowance for excess
or somehow amend the directive informally in approaching open market
operations today.
MR. STERNLIGHT. Well, that was the expectation based on
[what we had on Friday].
I didn't see any new projections from this
morning, President Melzer, but that was about what our outlook was.
I'm sure we're not going to go in and take anything out this morning.
I think the question will be how far we feel committed by any
expectations growing out of those newspaper articles.
I think we'll
have the necessary flexibility to deal with it.


CHAIRMAN GREENSPAN. Any further comments or questions?
not, let's adjourn until 9:00 a.m. Eastern time tomorrow.