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Federal Open Market Committee
Conference Call
October 17,




Greenspan, Chairman
Corrigan, Vice Chairman

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

Kohn, Secretary and Economist
Bernard, Assistant Secretary
Gillum, Deputy Assistant Secretary
Prell, Economist
Truman, Economist

Messrs. Lindsey, Promisel, Simpson, and
Slifman, 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
Mr. Keleher, Assistant to Governor Johnson,
Office of Board Members, Board of Governors
Ms. Low, Open Market Secretariat Assistant,
Division of Monetary Affairs, Board of
Mr. Stone, First Vice President, Federal Reserve
Bank of Philadelphia

Transcript of Federal Open Market Committee Conference Call of
October 17, 1989
would start us off.

Good morning.

I wonder if Mr. Cross

MR. CROSS. Mr. Chairman, after our meeting yesterday
morning, the dollar did strengthen somewhat as the stock market
recovered during the course of the day, although the exchange market
continued to be rather nervous. The dollar came up by a couple of
pfennigs and 1-1/2 yen. In the markets overnight in Asia and Europe,
the currency was relatively stable as we saw the stock markets in
those countries generally recovering some of the losses--in some cases
about as much as 1/2 of the losses--in the stock market of the
previous day. But in the foreign exchange market, the players were
somewhat restrained prior to the release of the trade figures; they
were waiting to see what that was going to show when the other data
came out this morning. When the trade deficit was announced at $10.8
billion, that was well above the market's expectations, which had been
in the $9 to $9-1/2 billion range. The immediate reaction was for the
dollar to slip by a couple of pfennigs and one yen. It has continued
now to trade around those levels or a little higher. We're now
looking at numbers of about 1.85 on the mark and 141 plus on the yen,
which as I say is about 1-1/2 to 2 pfennigs and about a yen down from
where they were immediately prior to the release of the trade figures.
We do hear some concern that the trade figures may lead to a
resumption of declines in the stock market when it opens up; and the
immediate reaction as our trade figures were announced was some
slippage in the price of U.S. securities in London as well as in
London's own market. So that's where we are at the moment, Mr.
Chairman. Thank you.

Thank you.

Mr. Sternlight.

MR. STERNLIGHT. Thank you, Mr. Chairman. As you know, the
U.S. stock market rebounded considerably yesterday. The Dow
Industrial index came back about halfway from its big drop of Friday;
some other measures [showed] less of a recovery. As stocks came up,
the expectations of a flight to quality faded, so Treasury issues
actually gave back most of their big Friday gains. One press story
that I saw this morning talked about dealers having gotten caught
after loading up with securities on Friday and then they even used the
phrase "got slaughtered" yesterday. I'm rather skeptical of that:
we'll check into that more, but our spot checks during the day
yesterday did not suggest any big loss pattern like that. They made
quite a bit in the bond market Friday and gave back some of it
yesterday; but I don't think that there were massive moves. I don't
think there was the inventory around to have done that kind of loading
up on short notice.
This morning we've had some gyrations in the market. Bond
quotes were initially up moderately from the overseas trading; they
fell back on that bad trade number that Sam mentioned and then came
back a little most recently, so they were showing some very slight
gains over last night's close. Compared with last Thursday evening,
that leaves Treasury bill quotes down something like 20 basis points;
coupon yields backed down and then were up about 5 to 10 basis points.
The high-grade corporate area showed lesser swings than Treasury bonds


but broadly in the same direction. The junk market you have to think
of really as two different markets--or one market and one virtually
non-market. The better grade low-rated issues had been down sharply
on Friday and weakened somewhat further yesterday morning and then
recovered to show little change on the day for a number of issues and
even some net pluses on the day. Apparently, there was no big move to
redeem shares in junk bond funds, which had been one of the fears late
Friday and yesterday morning. And we were hearing of some buying of
the better grade junk issues by some of those high-yield funds. As
for the other so-called "punk junk," that market is still in the tank.
It's highly illiquid; there is a waiting calendar of high yield issues
to come in this quarter, and one hears repeatedly that there may have
to be considerable revamping or restructuring of some of those deals
before they can be successfully launched.
On our operations, we added some reserves yesterday,
essentially because the markets were so expectant of seeing us after
some of that weekend press. The reserve numbers showed us to be about
on path or maybe a shade over path after making some modest allowances
for excess reserve demands and borrowings earlier in the period. Fed
funds were fairly comfortably around 8-9/16 percent at the time, but
we added about $2 billion through a customer RP.
Funds were steady to
actually slightly firmer over the balance of the day. The effective
rate yesterday was 8.63 percent and that left us [averaging] 8.86
percent so far this reserve period. Funds started out today trading
at 8-11/16 percent, so there may not have been quite as much
overabundance as we thought we might be creating by putting in some
reserves yesterday. As to where the market now thinks we are or might
be heading in regard to policy, I would say that before the Friday
stock market plunge there already had been some sentiment developing-although certainly not a firm conviction--that we were encouraging or
allowing a little more accommodative stance, with perhaps something
like an 8-3/4 percent funds rate, as opposed to something around 9
percent, being permitted to emerge.
I think that view has gained some
further adherents in the last couple of days, though there are still
some participants who would say they are not yet convinced that we've
made any clear move away from something around 9 percent. At the same
time, because of the last couple of days, there are some who feel that
the rate is now more likely to settle in around 8-1/2 percent because
the Fed will be impressed with the stock market and the junk bond
market fragility as well as other factors that already had been there
in the general economy.
I think that you had a fair amount of support
early yesterday and maybe somewhat less so as the day went on, but it
has by no means disappeared. That's all I have, Mr. Chairman.
Cross or Mr. Sternlight?

I have one question.


Are there any questions for either Mr.

Go ahead.




MR. JOHNSON. One concern I had yesterday, and some others I
think expressed it here, was that doing a customer RP yesterday--even


though it was fairly small--with funds trading around 8-1/2 percent
looked like we were sort of confirming 8-1/2 percent in the market.
noticed there's a Wall Street Journal story this morning that says
that that might be the case and that we might go up to 8-3/4 percent.
I'm a little concerned, given that customer RP, that the market--or at
least half of the market--may be thinking more like 8-1/2 percent and
that now any attempt to discourage them from that is going to look
like a "whoops, sorry" thing. At least that's the impression I get.
What's your impression?
I would say that some do hold that view. As
I said, I was hearing more of that earlier yesterday. Later in the
day funds had firmed, and I was hearing less of that kind of talk.
Also, some of the people looking at what we did yesterday felt that
one really couldn't gauge it by the normal measures--that we were
dealing with the extremely jittery stock market and that it was almost
irrelevant where funds were at the point that we went in. As to the
decision to go in, even though the stock market was not tumbling
yesterday morning, it was so jumpy--it had come down early and then it
did come back--that I felt, because of the sense of expectation that
had come out of the weekend press, that not to do something when there
was that great widespread expectation of our coming in--.
If things
had turned sour in the stock market later in the day, I felt it would
have resounded very unfavorably on the Fed's supposed adherence to
what people had thought was some kind of commitment--however
inaccurate or accurate that perception might have been.
In any event,
I don't know that there is going to be that much of a problem of a
sense of whipsawing. As I say, funds are at 8-11/16 percent starting
this morning.
I don't know yet what the reserve outlook is; but if
we're able to stay out today, I think that might be a very nice
outcome for this whole situation.
I was just making a comment because I did
see a few comments about the market on the screen prior to our action
suggesting that there might even be a mild draining need. There was
some perception of a modest drain necessary in the market and that's
why I was asking.
MR. STERNLIGHT. There have been those views.
In fact, we
thought there was a draining need when we finished our operations on
Friday. Then, as I said, we got some revisions that put us just about
on path or with a very, very small draining need. Some others still
see that draining need. There have been a few analysts, though, who
thought there was an "add" need.
So there is a range of views there.

Okay, thank you.

the period?

Tomorrow is the end of the first week of

No, tomorrow is the [end of the]

have a new period starting on Thursday?

final week.

the final week, so we

MR. STERNLIGHT. Yes. And that is a period, incidentally, in
which we're looking at a very substantial overabundance of reserves
and we'll have to go in overtly and take some out.


CHAIRMAN GREENSPAN. Any further questions for either Mr.
Cross or Mr. Sternlight? Si Keehn, is there anything in Chicago that
you think warrants our attention?
MR. KEEHN. Not particularly, Mr. Chairman. Both the Merc
and the Board of Trade had busy days yesterday--not record volumes,
but still high volumes. And margin calls this morning were fairly
heavy but they were described as being easily met, I think, by the
banks in supporting the margin requirements by the dealers. The night
trading on the Board of Trade last night was light--supposedly very
steady as compared to a very heavy night Sunday night. And both
exchanges seem entirely comfortable this morning.

President Corrigan, are you there?

VICE CHAIRMAN CORRIGAN. Yes. I don't really have much to
add. I think there was a very measurable sigh of relief yesterday
but there still is an overhang of some anxiety. And the further away
from trading rooms you get and the closer to board rooms, I think the
anxiety level is probably higher among the more senior people. On
London stocks, I just saw a loss of around 33 points there, which
isn't dramatic if you allow for the fact that last Friday at best was
likely to have some overhang in terms of market openings here. All in
all, I think things did work very, very well yesterday at all levels,
including mechanical levels. One thing there is a lot of talk about
among the more senior people is the amount of restructuring of various
deals that is going to have to be done. You're talking big, big
money. Another point that's being raised already is that Friday is a
double-witching day--not a triple-witching day but a double-witching
day--and Thursday is also the day when there's a very, very large
prospective settlement of margins on foreign exchange contracts. As I
said, all in all, things have worked remarkably well, but I think
there is still an overhang of unease out there.
CHAIRMAN GREENSPAN. Yes. I don't know of any stock market
that falls 200 points, goes back 100 points, and then stabilizes.
This situation has significant gyrations still left in it to work
their way out. The presumption that the worst is over is a nice
feeling, but I wouldn't want to bet on it. My own view is that the
Desk ought to continue to operate flexibly. Barring any unforeseen
events, it's probably best that we emerge from this period with a
slight easing, probably of the order of magnitude of, say, $50 million
on borrowing and the equivalent of about 25 basis points [on the funds
rate]. But I think it's premature at this stage to do any locking in,
and we ought to reconvene again tomorrow at 9:00 a.m. But before we
close, I would like to throw open the floor--if that's what one would
call it--to any comments or additional thoughts since yesterday's
meeting by anybody.

Is Mike Prell there, Alan?

Yes, he is.


Mike, is that trade number as bad as

it looks?
I'll put it to him.

Well, Ted Truman is here and has the numbers.





MR. TRUMAN. Well, given the gyrations of these data, it's
not outside the realm of normal expectations. We don't have the
details yet but I don't think it's likely, in and of itself, to give
us a bigger trade deficit for the third quarter than we had been
anticipating. We had anticipated that it would be essentially
unchanged between the second and third quarters. If we did a straight
extrapolation, it would be going from $110 billion to $118 billion,
but that's a rather mechanical approach. There was an increase in the
carryover, which is what caused the revision in the July number; to
the extent that that goes back to a more normal number, you'll have
the opposite revision in August when the September number comes out.
So, there's a bit of fluff in the number, if I can put it that way.
MR. PRELL. President Corrigan, as Ted said, we don't have
this fully processed, but I might just note that up to this point the
expenditure data for the third quarter were running a tad stronger
than we had been anticipating. So, whether this in the end adds up to
a substantially different third-quarter GNP increase than we were
expecting, I'm not at all sure at this point.


Thanks, Mike and Ted.

CHAIRMAN GREENSPAN. Any other comments?
If not, can we
reconvene at 9:00 a.m. Eastern time tomorrow morning?
Thank you.