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OF
SHADOW OPEN MARKET COMMITTEE
Policy Statement and
Position Papers
September 13-14,1987
PPS 87-02
CENTER FOR
RESEARCH IN
GOVERNMENT
POLICY &
BUSINESS
Public Policy Working Paper Series
U N I V E R S I T Y
OF
ROCHESTER
TABLE OF CONTENTS
Table of Contents
i
Shadow Open Market Committee Members
ii
Shadow Open Market Committee Policy Statement
1
Position Papers
9
The Federal Budget Tangle
Mickey D. Levy, Fidelity
Bank
9
Recent Behavior of Ml Velocity
Robert H. Rasche, Michigan State
Economic Outlook
Jerry L. Jordan, First
25
Interstate
Monetary Policy and the Outlook
Jerry L. Jordan, First Interstate
Tables
H. Erich
19
University
Bancorp
33
Bancorp
41
Heinemann,
Moseley
Securities
Corporation
i
SHADOW OPEN MARKET COMMITTEE MEMBERS
The Committee
September 13, 1987.
met
from
2:00 p.m.
to
7:00
p.m.
on
Sunday,
Members of the SOMC:
PROFESSOR KARL BRUNNER, Director of the Center for Research in Government Policy and Business, William E. Simon Graduate School of
Business Administration, University of Rochester, Rochester, New
York.
PROFESSOR ALLAN H. MELTZER, Graduate School of Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pennsylvania.
MR. H. ERICH HEINEMANN, Chief Economist, Moseley Securities Corporation, New York, New York.
DR. JERRY L. JORDAN, Senior Vice President and Economist, First Interstate Bancorp, Los Angeles, California.
DR.
MICKEY D. LEVY,
Pennsylvania.
Chief Economist,
Fidelity
Bank,
Philadelphia,
PROFESSOR WILLIAM POOLE, Department of Economics, Brown University,
Providence, Rhode Island.
PROFESSOR ROBERT H. RASCHE, Department of Economics, Michigan State
University, East Lansing, Michigan.
DR. ANNA J. SCHWARTZ, National Bureau of Economic Research, New York,
New York.
ii
SHADOW OPEN MARKET COMMITTEE
Policy Statement
September 14, 1987
AN OPEN LETTER TO ALAN GREENSPAN
Dear Mr. Chairman:
Congratulations
Governors.
Board
of
You have inherited an organization that will soon have its
75th birthday.
new
on your appointment as chairman of the
Organizations,
chairman, particularly
like people, get set in their ways.
one who is knowledgeable
about
A
economic
policy and new to the Federal Reserve, has an opportunity to make some
needed changes.
We
recommend major changes in three areas:
(1) monetary policy,
(2) international debt, and (3) financial regulation and reform.
MONETARY POLICY
For
the
year
ending
in August 1987, the growth
rate
of
the
monetary base was 7.5%, very near the recommendation of the Shadow Open
Market Committee.
the
The excessive growth during the two years ending in
fall of 1986 has been followed by relatively slow
after January.
of
growth
Real output has continued to grow at or slightly above
the long-term average for the U.S.
year.
average
economy.
Inflation has risen this
To limit further increases, we urge that the annual growth rate
the monetary base be reduced to 6% as the next step in a policy
of
achieving sustained price stability.
We
are
rate
of
urge
you
pleased that the Federal Reserve has reduced
the monetary base in 1987 from the high levels of
to
avoid
the
errors
that have
1
produced
the
growth
1986.
volatile
We
and
unpredictable changes in monetary growth.
compatible
fall
with
economic stability.
Monetary instability is not
The faster money growth in the
and the slower money growth this spring were both a result
policy to adjust the dollar exchange rate.
produced
slower
devaluation
money
First, faster money growth
of the dollar against
growth
boosted
of a
other
the value of the
currencies;
dollar
or
later
prevented
further declines.
This was a mistake.
Devaluation achieved by faster money
and
inflation will have little lasting effect on exports,
the
trade balance.
growth
imports and
Faster money growth to push the dollar down
not move toward a long-term solution but,
instead,
does
produces a short-
lived expansion, higher inflation and a lower standard of living.
Trying
to
maintain
the
dollar exchange rate
in
the
face
of
international differences in productivity, economic growth, real aftertax rates of return on investment,
is
no
less mistaken.
saving rates and rates of inflation
If the exchange rate is held within
major currencies,
adjustment of prices and
a narrow
range
against
production
costs
to real differences in productivity and saving rates in various
countries will occur through other, no less costly, adjustments.
Monetary
Raising
policy
interest
short-term
money growth.
on
short-term
objectives.
rates to stabilize the dollar and improve the
balance is a mistake.
the
should not be based
trade
Higher interest rates strengthen the dollar
mainly by slowing economic expansion and
by
in
reducing
Slower growth of output lowers imports. This effect on
trade is short-lived.
The
real.
problem with U.S.
trade and payments is not monetary;
Required adjustments in trade and payments can be achieved by a
fall in the real exchange rate, by increasing saving and
it is
2
productivity
or some combination of the two. Monetary policy can do little to force
or prevent a permanent decline in the real exchange rate.
Adjustment
real
of
the payments and trade balances by a fall
exchange rate will raise the U.S. price level.
one-time
increase
in
level,
not
a
return
of
in the
This rise is a
inflation.
This
distinction, often neglected, is important. The price rise following a
devaluation
will
not persist if the Federal
Reserve
maintains non-
inflationary policies.
Intervening
dollar
will
Allowing
way
to
not
prevent
avoid
a decline in the external value
an adjustment
in
the
real
of the
exchange rate.
exchange rates to adjust in response to market forces is one
to adjust U.S. prices and costs of production relative to foreign
prices and costs of production.
The main alternative to exchange rate
adjustment is to force prices, wages and other costs of production
fall
relative to prices and costs abroad.
to
This approach would likely
require a severe recession and will prove more costly.
The task you face is a hard one --to resist the pressures to
to
try
solve problems that you cannot solve and to concentrate on policies
that restore stable prices. The latter is something that only you and
your
colleagues at the Federal Reserve can accomplish.
succeed
if you avoid the attempt to set interest
You will only
rates
or
exchange
rates.
The alleged disadvantages of fluctuating exchange rates are widely
advertised;
the advantages are neglected.
fluctuating
rates
both
to
variability of real growth.
achieve price
Germany and Japan have used
stability
They have done this,
and
reduce
in part, by adopting
and following medium-term strategies for monetary policy.
3
to
The United States has taken a different approach to policy and has
experienced
Many
in
less stability of prices and output than Germany or Japan.
the marketplace refer to the U.S.
Standard."
approach as
the
A standard of this kind substitutes the decisions
person or a small group for predictable monetary policies.
lower
"Volcker
of one
The way to
the uncertainty and variability that people face is to
adopt
a
predictable monetary policy.
You
have
inherited
an
inflation rate
that has
been
reduced
substantially since 1981. However, inflation remains at rates that are
high by past standards.
rate
of inflation.
strategy
of
We urge you to adopt a policy of reducing the
This is best accomplished by adopting a long-term
consistently
lowering
the annual
growth
rate
of
the
monetary base and maintaining the fluctuating exchange rate system.
A
step
6% growth rate of the monetary base in the next 12 months is a
in
a program to achieve price stability.
They
talk about testing
Others urge
different
directions.
your
inflation
or your commitment to current exchange rates.
you
in
opposition
to
It is a mis-
take to be driven by the changing views of day traders and
speculators
in the markets. You cannot prevent changes in the value of the dollar,
you can only delay them.
It is a mistake to try.
INTERNATIONAL DEBT
For
five
years,
the
international
debt
resolving it.
Fortunately,
to
the
U.S.
government
talked
problem but has failed to develop a
about
the
strategy
for
the Baker Plan that calls for more lending
debtors appears to be moribund.
plans and opt for a market solution.
has
4
You should avoid
government
In
the
summer of 1982, when the problem first
came
to public
attention, the World Bank estimated the total outstanding external debt
of
developing
year,
the
countries at about $800 billion.
face value
nearly $1.1 trillion.
Mexico,
Brazil
faster.
By the end
of
of the debt will have grown more than
this
30% to
Even with relatively rapid growth of exports by
and some other debtor countries,
the debt has
grown
The ratio of the debt to exports is now higher in most debtor
countries
than
in 1982.
The table shows these data for
four
large
debtors.
Foreign Debt as a Percentage of Exports
Argentina
Brazil
Mexico
Venezuela
1982
1986
405
339
299
84
536
425
413
322
Source:
Morgan Guaranty Trust
A
debtor
real
depends
on
costs.
The
existing
real
country1s
debt.
554
471
366
278
ability to service
internal growth rates and
debt-to-exports
1987 estimate
ratio
real
its
foreign
external
often summarizes
the
debt
borrowing
burden
Each 1% increase in debt at a constant interest
requires a permanent increase in exports of 1% to prevent the
of
rate
debt- to-
export ratio from rising further.
A
reduced
common rule of thumb is that the debt-to-export ratio has to be
to
marketplace.
on
about
two before countries can return
A successful
financial
strategy
for
periodic rescheduling crises must encourage countries to foster
internal growth and limit the role of government.
the
In practice, a country's ability to service debt depends
its rate of growth and other factors.
ending
to
5
This will not occur
under
to
a policy of concessional lending and pressuring reluctant
lend.
borrows
could
The
U.S.
cannot lend to developing
more or sells assets to foreigners.
countries
unless
Even if these
pay the interest on their current debts,
it would
banks
it
countries
make
little
sense for the U.S. to sell its assets so as to lend more.
Large
creditor
banks have recently recognized that many of these
debts sell at a discount.
solution
Reserve
a
of
the debt problem.
The recent decision
by
the
Federal
to permit ownership by bank holding companies of up to 100% of
non-bank
step
This is a useful first step toward a market
toward
foreign subsidiary for up to five years is a
enhancing
the opportunities for
constructive
debt-equity
swaps
and
resolution of the international debt problem.
Markets
are
now working to develop debt-equity swaps
types of exchanges that lower the amount of the debts.
committee
the
other
Since 1982 this
has urged the Federal Reserve and the Treasury to
exchanges of debt for equity at market prices.
and
encourage
Exchanges will
shrink
value of the debt denominated in dollars and move debtor countries
in the direction of a return to the marketplace.
FINANCIAL DEREGULATION AND REFORM
The
Federal Reserve has been one of the roadblocks on the way
financial deregulation.
to
This has had two unfortunate consequences.
First,
the U.S. financial system has been hampered in its efforts
to adapt to changing conditions in the world marketplace.
Second,
adjustment and adaptation have come piecemeal, either in
response to particular problems, often bank insolvency, or through
state action.
The
Federal Deposit Insurance Corporation (FDIC) has now proposed
a complete restructuring of financial regulation.
for
Its proposal
repeal of the Glass-Steagall Act, which separates commercial
6
calls
and
investment
banking, and repeal of the Bank Holding Company
Act, which
sets the structure within which banks can expand into other activities.
The Federal Reserve should support this approach.
These are first steps.
past policies.
vent.
The financial system has been weakened by
Many thrift associations,
and some banks, are insol-
They continue to operate only because deposits are guaranteed by
government
agencies.
These technically insolvent
institutions
make
large, risky loans and investments knowing that losses will be borne by
the taxpayers.
The
Federal Reserve should press for reform of the deposit insur-
ance system to remove the incentive for weak financial institutions
make
high-risk
loans
and investments.
placed on market-based measures of risk.
risk-based capital requirements.
Greater reliance
to
should be
However, we do not
endorse
Greater attention should be given to
the development of market measures of valuation.
Financial reform and deregulation are urgent.
that
suggest
the Federal Savings and Loan Insurance Corporation (FSLIC) faces
losses
of
$40 billion, far in excess of the $10 billion
scheme that
recently
became law.
prolonged economic recovery.
risk
Estimates
of
larger
refinancing
Losses have been rising
during
a
Recognition of these large losses and the
future losses reveals the weakness
in
the present
system.
We
urge that saving association assets be valued at market, that
insolvent
association be closed as soon as possible to prevent
losses
that
mounting
thrift
are
institutions
should
associations
to
day by day.
be
retire
financed
The cost of
by a
surcharge
any debt incurred by the
process of closing insolvent institutions.
closing
7
on
failed
the
regulators
remaining
in the
THE FEDERAL BUDGET TANGLE
Mickey D. LEVY
Fidelity Bank
The
Fiscal Year 1987 deficit will dip below $160 billion,
billion
decline from the FY1986 deficit.
However,
this
a
$62
improvement
reflects one-time boosts to tax revenues and cuts in government outlays
that
will
not
legislation,
be sustained.
Without enactment
of pending
budget
the deficit will rise into the $180-$200 billion range in
FY1988-1989 before gradually declining again.
Faced with this outlook,
Congress attempted this summer to reach a compromise on deficit cutting
legislation, but failed.
The political battle over the FY1988 budget is resuming this fall.
In
order to keep the federal government functioning,
current
budget law,
Congress has to pass any appropriations
budget reconciliation bill,
gress
and another debt ceiling bill.
bill,
FY1988
budget,
or GRH).
including separate and very complex skirmishes on each
Clearly,
political
upcoming
Presidential
current
is
Presidency,
fiscally
(Gramm-
There is a heated political battle over the
these budget initiatives, which have important
ments.
a
Also, Con-
is trying to fix the ailing Balanced Budget Act of 1985
Rudman-Hoilings,
of
and to abide by
the
elections.
general
countered
maneuvering
interlocking
is being influenced
The most common
attempt
by
Democrats
ele-
by
the
political under-
to
embarrass
the
by Republican efforts to appear to behave in a
responsible manner while avoiding undesired tax increases
or
spending cuts in an election year.
The
requests
billion
President's budget (Mid-Session
a
Review of the FY1988
$35.1 billion deficit cut in FY1988, yielding
deficit.
It
includes the same requests made in
9
Budget)
a
$123.3
the
FY1988
Budget
presented
adjusted
by
in January 1987, with
the
revised economic assumptions and
magnitude
technical
of
savings
reestimates.
Approximately half of the requested savings would come from non-defense
spending
cuts.
The
remainder
of
savings would
come
from
higher
revenues achieved through tighter compliance, user fees, credit reform,
privatization
and other loan asset sales.
Included is a request
for
increased budget authority for defense, which declined in real terms in
both FY1986 and FY1987.
The Presidents projected deficit exceeds the
original $108 billion GRH deficit target for FY1988.
A
Congressional
Concurrent
Resolution
on
the
FY1988
Budget
(HConRes 93), passed in June 1987, calls for budget deficit targets of
$146
billion in FY1988, $140 billion in FY1989, and $108 billion
FY1990.
The
$146 billion target was based on a CBO baseline
in
deficit
estimate of $183 billion and would require $37 billion in deficit cuts.
The
resolution included $19.3 billion in tax increases for FY1988.
A
reconciliation bill detailing how the cuts in the concurrent resolution
would
be achieved was due July 28, but a compromise has not yet
been
reached.
Meanwhile,
a
GRH
progress
report issued
August
19, prepared
jointly by the CBO and 0MB, estimated the FY1988 deficit, calculated on
a
so-called "Gradison base," to be $153.4 billion. •!
GRH law, this
Under
original
would mean $45.4 billion of across-the-board cuts.
would require cuts of approximately 13% in
This
FY1988 defense spending and
•"The "Gradison base" essentially calculates the deficit without the
effects of inflation from the previous fiscal year.
The CBO deficit
estimate was $169.9 billion while 0MB's deficit was $136.8 billion.
Some policymakers believe the huge $33.1 billion difference, and the
averaging technique used to determine the magnitudes of across-theboard cuts, argues for an established cut in each year that does not
depend on such a base.
10
19%
in non-defense spending.
across-the-board
and,
in
However,
the process of the
cuts imposed by GRH has been
any case,
found
automatic
unconstitutional
the Administration and Congress oppose such
large
cuts.
Consequently,
GRH,
recent
Congressional efforts have sought to "fix"
making its sequestration process constitutional and relaxing
deficit
targets.
promise
on a "fix." However,
The House and Senate have not reached a final comthey agree generally to a modified
that would involve a substantially smaller deficit cut in FY1988
is required in Congress's concurrent resolution.
GRH
or
its
GRH
than
The House's proposed
fix would either raise the FY1988 deficit target to $144 billion,
cut
a maximum of $23 billion from the FY1987
deficit, while
the
Senate has proposed a $150 billion deficit.
The
Administration has stayed on the sidelines as the
House
and
Senate debate specific provisions of a modified GRH, repeating only its
standard
call for a balanced budget and expressing concern about main-
taining its defense authorization requests. One key issue of disagreement between the House and Senate is the amount of flexibility given to
the
have
the
President on defense spending.
While both the House
and
agreed to exempt military personnel outlays from automatic
Senate
cuts,
Senate also would allow the President to propose reducing cuts for
specific
defense spending accounts, while the House would
not
allow
this flexibility.
Earlier
Congressional initiatives to fix GRH were tied to federal
debt-ceiling limitation legislation (HJRes 324). Apparently, President
Reagan's rejection of a $23 billion deficit cut in FY1988 as part of a
GRH fix forced a breakdown of the compromise proposal.
The Administra-
tion asserted that the proposed GRH fix would "front-load" deficit cuts
11
into
FY1988
increase
in
or
order to force Republicans into
an undesirable
spending cut in an election year.
tax
This failure to com-
promise led to a temporary rise in the statutory debt ceiling, which is
scheduled to expire September 23, 1987.
Consequently,
the
Congress must immediately pass a bill that
debt ceiling limitation and a reconciliation bill that details the
deficit cuts established by the concurrent resolution.
ciliation
Pending recon-
instruction proposals by the House and Senate would
approximately $30.5 billion of the required $37 billion in
remainder must come from the appropriations process.
lies ahead.
President's
cuts.
debt
ceiling legislation.
added weight if the reconciliation bill is
Also,
some of the
Such
attached
actions
to
appropriating
and do not see eye-to-
legislation.
Moreover, proposed
appropriations are significantly different than those requested by
Administration.
a
the House and Senate disagree about
important details in the concurrent resolution,
tion
The
Much negotiating
opposition to tax increases may generate a veto.
carries
on
achieve
The concurrent resolution includes tax increases, and the
veto
eye
extends
the
For example, the House, which must initiate appropriain Congress has passed an authorization bill that would
provide $289 billion in defense budget authority in FY1988, compared to
$302.9
billion in the Senate bill,
and $312 billion requested by
the
21
President. J
21JThese differences involve substantive policy issues: for example, the
House bill would ban tests on space-based anti-ballistic missile
systems (ABMs), require the U.S. to resume observance of the SALT II
limits, and ban nearly all nuclear weapons tests, if the Soviet Union
observes the same restraints. In contrast, the higher budget authority
requested by the Administration and favored by Senate Republicans is
based in part on the belief that more testing should be acceptable
under the 1972 U.S.-Soviets treaty limiting ABMs.
12
If
Congress passes a GRH fix with lower required deficit cuts for
FY1988 before a reconciliation bill is passed, then the new GRH deficit
target will dominate. A GRH fix currently under consideration includes
a
$23 billion deficit cut in FY1988.
tax
required
revenue increase in FY1988 to approximately $11-12 billion, com-
pared
to
proposed
It
This would reduce the
$19.3 in the Congress's concurrent
resolution.
Whether
a
GRH fix is passed before a reconciliation bill is uncertain.
depends
in part
on whether a GRH proposal
is
attached
required debt ceiling legislation -- also an uncertainty.
Congress fails to compromise on a GRH fix,
tion dominates.
vetoed,
However,
budgeting
in
to
the
Moreover, if
then the concurrent resolu-
since it includes a tax increase and may be
FY1988
may be
conducted
under
a
continuing
resolution.
The
highly
bottom
line
uncertain,
is the final outcome for the FY1988
and this affects future budgets.
budget
Simply the
is
fact
that all of the major required initiatives may be bunched into a single
bill
reflects
a
faulty
political maneuvering.
process bogged
down by
pre-election
year
Is this any way to conduct fiscal policy?
BUDGET REVIEW
The budget deficit of $160 billion in FY1987 will be approximately
4.0%
of GNP,
1986.
This
down from 5.3% in FY1986 and an average 4.8% for FY1982will
be achieved by a rise in spending of only
2% from
FY1986, and a very rapid 11% increase in revenues.
This pattern reflects several special, one-time impacts that will
not
persist.
Economic
and
The Congressional Budget Office's baseline budget
Budget
OUtlook:
An
Update,
August
(The
1987) forecasts
deficits of $183 billion in FY1988 and $192 billion in FY1989 (3.6% and
13
3.2%
of
GNP).
The Administration,
using more
optimistic
economic
assumptions, also forecasts a rise in its current services deficit (see
table 1).
Several special factors generated the temporary improvement in the
FY1987 budget.
The Tax Reform Act of 1986, which boosted personal tax
revenues approximately $20 billion in FY1987, will reduce them approximately $12 billion in FY1988 and $18 billion in FY1989.
Additionally,
the tax reform generated an unanticipated surge in capital gains realization, which
future
provided added tax revenues.
capital
approximately
gains
taxes.
That will take away from
Consequently,
revenues
5% in FY1988, less than half of their FY1987
Also, spending growth will accelerate in FY1988.
repayments
Furthermore,
rise
increase.
Asset sales and loan
under the reconciliation bill of 1986 provided
saving to the FY1987 budget.
of
should
a
one-time
including the last payment
revenue sharing into FY1986, and postponing certain military pay-
checks
and Medicare payments into FY1988 have also temporarily lowered
FY1987 outlays.
Recent legislation will also add to higher deficits.
The Supple-
mental Appropriations Act of 1987 reflects the Administrations
trophic health insurance proposal,
several
other policy proposals.
provides
the
failing
banks
catas-
the timing of Medicare outlays, and
Recently enacted banking legislation
FDIC with alternative financing
methods
for
assisting
and contributes additional funds to the FSLIC fund
for
failing savings institutions.
A
sizeable
significant
Interest
rise
rise
rates
in
interest rates will
in net interest outlays
and
result
in
a
further
deficit projections.
have risen significantly since January 1987, and
14
the
Administration
and CBO have revised up their interest rate
forecasts,
particularly for the 10-year government bond (see table 2).
Presently,
rate yields are above 1988 forecasts and, unless they recede, will add
to deficits.
Moreover, higher inflation has raised outlay and deficit
forecasts by raising COIAs for social security and certain
programs.
entitlement
The Administration forecasts peak rates of CPI inflation to
occur in 1987.
If CPI inflation accelerates in 1988, as the CBO fore-
casts, outlays for indexed federal programs will be higher.
Under
current law,
FY1989, but
healthy
at
least
economic
the deficit should resume its
two caveats apply to
growth
must
continue,
adversely affect the budget outcome.
forecasts
though
include
since
forecast.
any
removing
deficit
First,
weakness would
and
benefits, even
the social security accounts will be removed from
surpluses,
after
Secondly, these declining budget
social security payroll taxes
budget beginning in 1990.
the
this
decline
the unified
Since social security is accumulating large
it from budget calculations adds significantly to
(the social security surplus will
be
approximately
billion in FY1988, and will rise to over $60 billion in FY1991).
implies
$38
This
that without deficit cutting legislation,the on-budget deficit
(excluding
social
security) will remain above
$220 billion
through
FY1992 (see table 1).
Clearly the budget outlook is not encouraging.
rise
in
federal debt and avoiding potentially adverse
sequences requires more deficit cutting legislation.
depend on political, not economic, considerations.
Stemming the rapid
15
economic con-
The outcome will
Table 1
Budget Projections
(in billions)
Fiscal Years
1989
1988
1990
1991
1032
1064
1080
1085
1131
1146
1129
1186
1212
1176
1244
1280
858
858
853
909
903
897
973
965
954
1049
1040
1036
1131
1121
1115
-158
-158
-157
-123
-161
-183
-113
-166
-192
- 80
-146
-176
- 45
-123
-165
Memo:
Deficit, On-Budget (Excluding
Social Security)
President's Current Services
CBO Baseline
179
177
-200
-221
-214
-236
-206
-229
-195
-227
Off-Budget (Social Security
Surplus)
President's Current Services
CBO Baseline
20
19
38
38
48
44
60
54
71
63
1986
1987
Outlays
President's Proposal
President's Current Services
CBO Baseline
CBO Estimate of President
989.8
989.8
989.8
989.8
1017
1017
1010
Receipts
President's Proposal
Current Services
CBO Baseline
CBO Estimate of President
769.1
769.1
769.1
769.1
Deficit (-)
President's Proposal
Current Services
CBO Baseline
CBO Estimate of President
-220.7
-220.7
-220.7
-220.7
16
Table 2
Administration and CBO
Economic Projections
1987
1988
1989
1990
1991
Real GNP
Administration
CBO
3.2
3.1
3.5
2.6
3.4
3.4
3.3
Nominal GNP
Administration
CBO
7.6
7.2
7.6
6.8
7.3
7.0
6.4
CPI-W
Administration
CBO
4.7
5.1
4.4
5.2
4.0
3.5
3.0
6.1
5.9
7.5
6.9
7.4
6.7
7.1
6.8
6.6
6.8
Real GNP
Administration
CBO
2.6
2.6
3.3
2.7
3.4
2.6
3.4
2.7
3.3
2.7
GNP Deflator
Administration
CBO
3.3
3.3
4.1
4.1
3.9
4.0
3.6
4.0
3.2
4.0
Interest
rates,
percent,
calendar year
averages:
3-Month T-Bill
Administration
CBO
5.7
5.9
5.5
6.6
5.3
5.8
5.0
5.7
4.5
5.7
10-Year Government Bond
Administration
CBO
8.0
8.1
7.6
8.5
7.0
7.8
6.3
7.4
5.5
7.1
Memo: January 1987 Estimates
3-Month T-Bill
Administration
CBO
5.4
5.6
5.3
5.6
4.7
5.5
4.2
5.3
10-Year Government Bond
Administration
CBO
6.7
7.2
6.1
6.6
5.5
6.2
5.0
5.9
Percent change, fourth quarter
over fourth
quarter:
Percent change, calendar
Nominal GNP
Administration
CBO
years:
17
RECENT BEHAVIOR OF Ml VELOCITY
Robert H. RASCHE
Michigan State University
At
our
research
last meeting,
on Ml velocity that I had prepared for
Carnegie-Rochester
behavior
since
I presented some updated results
Public Policy Conference.
the
of
November,
I concentrated
the
1986
on
the
of the monthly values of the ratio of personal income to Ml,
the relatively few post-sample observations on quarterly (3) and
annual (1) available at that time provided little information about the
great
velocity slowdown of 1986.
trate
on both annual and monthly data.
because
are
My present discussion will concenThe former
are
interesting
revised estimates of annual personal income for 1985 and
now available.
The latter are interesting,
that the month to month wiggles tell us much,
possible
to
because
1986
not because I think
or that it will ever be
forecast these wiggles with great
accuracy,
but
rather
they provide a larger sample of data with which to assess
the
question of whether the old relationships are stable.
You
will recall that last March I presented some
that
beginning
around the end of 1981 was probably part of a change in the
change
"shift in velocity drift" that I had
that
suggested
long-run
the
estimates
relationship between Ml velocity and
interest
can be characterized as an increase in the
elasticity
of velocity
rates.
long-run
brought about by a rotation of
velocity-interest rate relationship.
identified
the
This
interest
long-run
My conclusion was that since late
1981 Ml velocity will be roughly constant in the absence of trends
in
interest rates, but will respond with greater sensitivity to changes in
interest rates. You will also recall that at that time the latest data
available
were
through October 1986, and that
19
extrapolation
of my
estimated
relationship through the first ten months of 1986
indicated
large forecast errors for the period May through October.
The 1987 revisions of the money stock data have now been released,
and
apart from changes in the seasonal adjustments appear to have very
little effect on the estimates of the money stock.
of
The 1987 revisions
personal income were announced at the end of July
Wall
Street
Journal)
interpretation
interesting.
of
recent
and
appear
to be
(July
28, 1987
significant
velocity behavior.
The
annual
for
the
data
are
A comparison of old (March 1987) and new (September 1987)
annual estimates of personal income velocity is:
Old Estimates
New Estimates
Percent Change
Velocity
Percent Change
Year
Velocit
1983
5.5779
1984
5.7120
2.38
5.7161
2.33
1985
5.5800
-2.34
5.6020
-2.02
1986
5.1832
-7.38
5.2503
-6.48
5.5779
It is clear from these numbers that the 1984 and 1985 estimates are not
affected
to
any
significant
degree,
but
that
almost
an entire
percentage point of the great velocity decline of 1986 has been revised
away.
With
these
equation
for
a
that
it
is possible
to
reestimate
the
I constructed in the Carnegie-Rochester paper
change in the interest elasticity beginning
extrapolate
income.
estimates
in
annual
allowing
1982, and
to
the equation through 1986 on both the old and new personal
The resulting estimates are:
20
1986 Revisions
1987 Revisions
Constant
.0321
(.0024)
.0321
(.0024)
D82
-.0321
(.0024)
-.0321
(.0024)
AlnRTB
.0033
(.0008)
.0033
(.0008)
D82*AlnRTB
.0064
(.0031)
.0059
(.0031)
R2
se
d-w
.68
.0130
1.67
.67
.0130
1.68
.0218
.0531
.0207
.0442
Predicted (86)
Error (86)
This equation is estimated with the post 1981-drift constrained to
zero because of the limited degrees of freedom (4) in the annual data.
Clearly the equation did not catch all of the great velocity decline of
1986,
though
it did predict a decline in velocity from
the annual
from
1985 as a result of the decline in Treasury
bill
rates
from an average of 7.48 in 1985 to an average of 5.98 in 1986.
Since
average
the
estimates
revisions,
are essentially
the forecast
unaffected
by the personal
income
error has been reduced by nine-tenths
of a
percent by the data revisions.
As
of this writing sufficient data are available to extrapolate
the
monthly equation that I presented last March through
The
revised money stock data leave the estimates for the sample period
ending
in December
coefficients
period
1985 essentially
The
estimated
of the monthly velocity equation over the 53-85
sample
with the revised money data but unrevised personal income
are:
unchanged.
April 1987.
21
data
1986 Revisions
1987 Revisions
Constant
.0310
(.0024)
.0306
(.0025)
D82
-.0305
(.0071)
-.0297
(.0075)
AlnRTB
.0053
(.0006)
.0053
(.0006)
AlnY/P
.8351
(.0385)
.8225
(.0403)
D82*AlnRTB
.0122
(.0024)
.0114
(.0026)
R2
se
d-w
.62
.0434
1.84
.59
.0455
1.74
The
actual
velocity
and predicted
values
of monthly
personal
and the prediction errors for monthly velocity are shown in
the attached Figures for January 1985 through April 1987.
from
income
both
graphs
that
the equation
systematically
It is clear
overestimates
velocity changes for the period May 1987 through November 1987.
not
known at this time how the personal income revisions
will
It is
affect
these
forecast errors though from the annual results presented above I
expect
that the average forecast error over the twelve months of 1986
will be reduced.
Whatever is going on in the May through November 1986 period
is
that
not captured by our specification appears to have come to an end in
December.
given
Personal
income velocity dropped remarkably
the large jump in Ml at that time.
predicts that drop almost perfectly,
22
However,
in December,
the specification
and since November seems to have
tracked the behavior of velocity quite well.
am
prepared
namely
Based on this evidence I
to stick with the conclusion that I reached
last March,
that we should expect that over the long-run in the absence
of
significant interest changes that Ml velocity will exhibit zero drift.
23
Percentage Change in M1 Velocity
January, 1 9 8 5 -
April, 1 9 8 7
Time
Predicted Velocity
Velocity
M1 Velocity Errors
Jonuary, 1 9 8 5 -
time
2k
April, 1 9 8 7
ECONOMIC OUTLOOK
Jerry L. JORDAN
First Interstate Bancorp
I.
ASSUMPTIONS AND CONCLUSIONS
The disparity in the performance of world economies --by
by
region,
sector,
and by industry -- that was so pronounced in 1985 and 86,
began to narrow in 1987. In 1988 -- the sixth year of the current U.S.
economic
expansion
-- further
recovery in the
sectors,
regions and industries will be accompanied by further slowing
of the previously strong segments of the economy.
of performance continues through the next year,
previously
depressed
As this convergence
the current
expansion
will become increasingly vulnerable to potential destabilizing shocks.
Further ahead, the odds of a mild recession occurring in 1989 have
risen
substantially,
expansion
forecast
to
of
and
we do not expect this longest
reach its seventh birthday.
a modest
non-war-time
The primary reason
decline in economic activity
in
1989
for
a
is an
expectation that monetary policies will become sufficiently restrictive
after
inflation passes the 6% rate in the second half of next year
to
produce a downturn.
Vulnerable Expansion
Although
output
our
"most likely" forecast is for continued
at about a 3% rate in 1988, there is an increasing
growth
risk
of
that
some type of shock will throw the national economy into a nose dive. A
sudden
tightening
of monetary policy to "save the dollar" on
foreign
exchange markets, another "supply disruption" of oil flowing from
the
middle east, or a puncturing of one or more of the speculative bubbles
in a few of the world1s major financial and real estate markets, could
25
bring an end to the expansion before 1989, even if in the middle of a
presidential election year.
Debt. Debt, and More Debt
It
is well known that Federal budget deficits in the 1980s
pushed
debt
the national debt to the $2 trillion level.
stock
of
has risen relative to national income, and "real" interest rates
have trended higher,
risen,
the burden of servicing this mountain of debt has
as interest expense has become the fastest growing component of
the Federal budget.
to
As the
have
Not unrelated, the U.S. became a net debtor notion
the rest of the world in 1985 for the first time in over 70 years.
In 1986, the U.S. passed both Brazil and Mexico combined as the world1s
largest
early
debtor,
1989,
and by the time a new administration takes office
the U.S. will owe the rest of the world
trillion dollars.
about
in
one-half
Since we have been borrowing to finance consumption
of
other countries output, we have added greatly to foreigners claims
on
our
future
output without adding to our
ability
to meet
these
obligations.
Within the country,
the restructuring of corporate balance sheets
-- sometimes
as a result of and sometimes to head off
outs
added
-- has
corporate sector.
leveraged buy-
significantly to the debt-service burdens
of the
Furthermore, the consumer-spending led expansion of
1983-86 resulted in net consumer indebtedness rising to a record
share
of personal income.
While
of
the
economy,
that
the existing levels of debt incurred by the various sectors
U.S.economy
the
are still serviceable by
trends are not encouraging.
it has no fiscal discipline,
a
$5
dollar
The U.S. has demonstrated
and consequently
26
trillion
is unlikely
to
achieve
and maintain a non-inflationary monetary discipline.
world's
numeraire
biggest
debtor,
obligations
increase
1989.
the
reserve currency country,
and
now
the
also
the
the
real
temptation to attempt to inflate away
includes
an
of inflation from about 5% in 1987 to 5.5% in 1988 and 6%
in
We
of
and
As
debtors
expect
is considerable.
Our forecast
that once the 6% threshold has
been
reached,
monetary authorities will adopt a restrictive monetary policy,
the
even at
the expense of a relatively mild recession.
II.
U.S. ECONOMY -- SUMMARY POINTS
•Current expansion is already of record length for peacetime.
•Nearly 16 million jobs have been created so far in the expansion.
*U.S. is approaching
below 6%.
full employment as unemployment
drops
further
*Real GNP growth will average 3.2% in 1987-88, versus 2.75% in 1985-86.
--Consumers less dominant.
Auto sales average 10.4 million in 1987-88
vs. 11.2 million in 1985-86.
--Housing minus instead of plus. Housing starts average 1.6 million in
1987-88 vs. 1.77 million in 1985-86.
--On the other side, revival in business spending for new equipment.
--Narrowing rather than widening of trade balance.
--Moderate building of inventories instead of cutbacks.
•Revival of U.S. manufacturing key element in 1988 picture; disparity
among sectors, industries, and regions to remain, but less than in
1985-86.
•"Misery Index" of 11% in
inflation and unemployment.
1988
-- split
roughly
evenly
between
•Inflation moves from low point of 1986 to 4.8% in 1987, 5.5% in 1988,
and 6.2% in 1989.
--Important prices will be rising at rate of about 10% during all three
years, and employee costs will start to increase more rapidly.
27
^Increases in short-term interest rates with faster economic growth,
higher inflation, and stronger credit demand.
One percentage point
rise between end of 1987 and 1988.
*Much smaller increase in long-term rates as financial markets
already incorporated a higher long-run expectation of inflation.
III.
have
INTERNATIONAL ECONOMIC OUTLOOK -- SUMMARY POINTS
The mirror image of rising U.S. exports and declining real imports
is
an opposite shift within the Japanese and European economies.
The
strong currency countries have experienced a significant contraction of
net
exports
in 1987, and that trend is expected to continue
forecast period.
in most
other
in the
Meanwhile, strong monetary and fiscal "pump pricing"
countries is causing faster growth
in
real
domestic
purchases.
Better
been
consumption
accompanied
internationally
by
levels in a strong currency
a substantial increase
traded commodities.
in
environment
foreign
demand
The firming of dollar prices
has
for
of
most world-traded goods is, in part, a reflection of the sharply lower
foreign currency prices of such goods.
commodities
traded
The dollar prices of goods and
on world markets are expected to continue to
rise
from their 1986 lows.
industrial-country real GNP growth (large countries) continuing in the
2-3% range through 1988.
*However, this masks major shifts in the composition of growth. The
drop in the $ is hurting export industries, but domestic demand in
1986 grew more strongly in Germany and Japan than did GNP.
This
should continue, and implies major structural changes for those
economies.
*U.S. recession, if it were to occur by 1989, would cause some slowdown
in other industrial countries, but may not be severe. Countries will
allow currencies to depreciate rather than follow U.S. interest rates
upward.
They have lower inflation than the U.S. and therefore won't
mind a mild acceleration resulting from currency depreciation.
(This
is during the second half of 1989.)
28
^Effects of expansionary monetary policies followed in most industrial
countries (partly due to currency-market intervention) will cause
inflation to rise, but not by as much as in the United States.
^Dollar will continue to decline through 1988 and early 1989.
Could
lose another 15% against the yen during the coming 18 months.
Reasons:
U.S. inflation risking more than in other major countries;
trade deficit has remained large, implying further build-up of foreign
debt.
*U.S. trade deficit will fall in 1988 and 1989, after risking slightly
in 1987.
Continued large increases in the deficit in next external
investment position of the United States.
Japan will continue to be
the major source of funding.
*Developing-country debt:
Lack of new funds from commercial banks;
increasing resistance to making debt service payments under existing
conditions in a number of countries. Implies that banks may be forced
to use at least part of the reserves recently established.
However,
on balance, because of relatively good financial position of some
countries (Mexico and Chile), reserves are probably adequate for the
near term.
1989 recession likely to cause more problems. Demand for
paper in secondary market to pick up, but prices may remain weak.
29
GROWTH OF M1 NET OF OTHER CHECKABLES
(Percent change, annual rate)
-21
82:1
83:1
84:1
85:1
86:1
87:1
3e
GROWTH OF MONETARY BASE
(Percent change, annual rate)
82:1
83:1
84:1
85:1
86:1
87:1
3e
MONETARY POLICY AND THE OUTLOOK
U)
n>
Jerry L. Jordan
Senior Vice President & Chief Economist
First Interstate Bancorp
Shadow Open Market Committee
Harmonie Club
New York
September 13-14,1987
1
MONETARY BASE AND Ml NET OF OTHER CHECKABLES
MONEY GROWTH AND INFLATION
(Quarterly percent change over year ago)
(Four-quarter percent changes of four-quarter average levels)
-6.0 II111II tl H t II ft It I lift fit It ftl H III II It 1 It It W t It I I H I tt ft It Hf » ft t tf H It t It H MIH It III H ttt W III II
80:1
81:1
82:1
83:1
84:1
85:1
86:1
87:1
64
67
70
73
76
79
82
85
88 89
* Consumption fixed-weighted price Index
M\ narrowly defined to include only currency and demand deposits, has
tracked the monetary base relatively closely in recent years.
(JO
Money growth has tended to predict changes in the inflation rate which would
occur two years later. The acceleration in money growth during the past two
years points to higher inflation in *88 and '89.
NUMBER OF FAILURES PER 10,000 & THE INFLATION RATE
WAGES, IMPORT PRICES AND CONSUMER PRICES
(Percent changes, fourth quarter to fourth quarter)
1926 1931
The low point for inflation in terms of consumer prices was reached in 1986.
Import prices are climbing at a 10% annual rate and employee costs are also
expected to rise more rapidly.
1936 1941
1946 1951
1956
1961 1966 1971
1976 1981 1986
Business failures tend to be inversely related to inflation. During periods of
low inflation rates, failures per 10,000 concerns are higher.
2
REAL GNP
SPENDING VS. PRODUCTION
(Cumulative change from 2nd qtr. 1984, lndex»1.G0)
(Percent change, 4th quarter to 4th quarter)
ST
Real Domestic Final Sates
S
1.02
1.00
|i
III
IV
84
The current expansion will be of record length for a non-war period. GNP is
expected to be fairly strong through 1988 before the economy slips into a
recession in 1989.
I
II
85
III
IV
I
II III
86
IV
I
II III
B7*
IV
I
II III
88f
IV
I
II III IV
89f
The growth of spending has outpaced the increase in production
significantly since the middle of 1984. Expansive fiscal and monetary
policies have fueled domestic demand, which has been met in sizable part
by rising imports. Output growth, however, is now outpacing the increase in
domestic spending.
DOMESTIC FWAL SALES & LAGGED MONETARY BASE
SECTORAL CONTRIBimONS TO GNP GROWTH
(Quarterly percent change over year ago)
(Percent share of two-year real GNP growth, fourth quarter data)
Monetary Base
Lagged 2 Qtrs.
2.0 I I I I | | | i | | | | | | | | | | | t | | | | | | i l | | | | | | | i | | | | | |
80:1
81:1
82:1
83:1
84:1
85:1
86:1
87:1
88:1
Inventories
89:1
Domestic final sales is a good indicator of demand and it generally tracks the
monetary base lagged two quarters. The recent divergence reflected the
inpact of lower inflation and interest rates on money holdings during the past
two years. That pattern is now reversing.
Consumer
The consumer will be a much less dominant contributor to GNP growth in the
1987-88 period compared with 1985-86.
3
FEDERAL DEFICIT
(Billions of dollars, fiscal years)
NET INTEREST EXPENSE AS A PERCENT OF TOTAL FEDERAL OUTLAYS
(Fecal years)
86
The federal deficit reached a peak in 1986 of $221 billion. Deficits are likely
to remain large during 1988-89, exceeding significantly Gramm-RudmanHollings targets.
88(f)
The amount of federal outlays that is required to finance the debt has grown
at a rapid rate since the mid 1970s, reaching 14% in 1986, with a further
increase expected.
LO
PUBLICLY H a D DEBT OUTSTANDING AS A % OF GNP
NET INTEREST EXPENSE AS A PERCENT OF GNP
(Fiscal years)
(Fiscal years)
3.5
34
2.5 4
1.5
1 1 I I I I I I I 1 I I I I I I I I I I I I I I I > I I t
79
80
01
82
83
84
85
86
87e
88f
89f
Publicly held debt will continue to climb to nearly 40% of GNP by 1989.
62
64
66
68
70
72
74
76
78
80
82
84
86 88(f)
The share of GNP that is required to finance the deficit reached 3.4% in
1986, up from only about 1% in the early 1960s.
4
YIELD CURVE, ANNUALLY 1 TO 30 YEARS
1 YEAR TREASURY BILL & INFLATION RATE*
(Percent)
10.00 T
Percent
0.00 +
0.0 l l l l l l l t l l H I I I H I I I I I i l l l l l l l l l l i n H l l l l l l l l H H I I I I I H U l l l l l H I H t l l l t H l l l i n i l H I I I I I
80:1
81:1
82:1
83:1
84:1
85:1
86:1
87:1
* Percent change In CPI over year ago
The yield curve has steepened considerably since last year, as well as risen
over 200 basis points.
The one-year T-Bill rate also follows the trend rate of inflation. The increase
in prices over the previous year is here used as a proxy for the expected
inflation rate in the year ahead.
3-MOMTH TREASURY BILL & INFLATION RATE*
10 YEAR TREASURY BOND & EXPECTED INFLATION *
(Percent)
20.00
T
15.00
(Percent)
16.00
T
10 Year Bond
14.00 +
10.00 4
5.00
0.00
-5.00 IniiiiiiiiiiiiiiiiiiiniiniinwimHHuiiiiiiiiiiiwiniwiiiiniiiiiiiiiiiiiiitiiiiH
80:1
81:1
82:1
83:1
84:1
85:1
86:1
87:1
* Percent change In CPI from 3 months ago, annual rate
The 3-month T-Bill rate tends to track the 3-month inflation rate. With policy
actions that allow inflation to increase, interest rates also move upward.
4.00 11 im t m t ti 11 im n w t tt it i • m i ii imt 11111111 m m H i tt i m 111 m i it 11 H m i tt i tt t n t H
80:1
81:1
82:1
• Drexel Bumham Poll
83:1
84:1
85:1
86:1
87:1
The spread of the 10-year bond rate over the inflation rate expected for the
next ten years has been abnormally high over much of the 1980s. Some
narrowing occurred in 1986, but renewed uncertainty has caused the
difference to again widen in 1987.
U.S. NET INVESTMENT
M1 GROWTH AND THE TRADE-WEIGHTED DOLLAR
(% change from
prior year)
18
(Billions of dollars)
82
63
84
85
86
87e
881
891
The net position of the U.S. in international investment markets turned
negative in 1985 and 1986 after reaching a peak in 1981. For the first time
since 1914, the U.S. became a net debtor, the largest debtor in the world.
This trend will continue in 1987,1988, and 1989.
OD
(Monthly averages)
M l GROWTB-U.S., JAPAN, AND GERMANY
(Quarterly, percent change over year ago)
The Fed trade-weighted dollar on an inverted scale has been closely
correlated with monthly M1 growth in the past four years. More rapid money
growth in the U.S. has contributed to a weaker dollar.
GOLD PRICES AND THE TRADE-WEIGHTED DOLLAR
(Monthly averages)
(1973=100)
80
250 lit I H I I H H I M III II II III I III II II III I tit II II M i l III II I III 160
83
84
85
86
87
Monetary growth trends in Germany, Japan and the U.S. have followed
similar patterns in the past four years. It is difficult for other countries to
follow monetary policies independent of the U.S. because of the impact on
their exchange rates and export sectors.
Monthly average gold prices and the trade-weighted dollar (inverted scale)
have continued to move in tandem following a trough in early 1985.
Expansive money growth and a declining dollar have driven gold prices
higher.
6
GROWTH OF TOTAL BANK RESERVES
FEDERAL RESERVE DOLLAR INTERVENTION
IN FOREIGN EXCHANGE MARKETS
Four-Week Moving Average, Percent Change from 13 Weeks Ago, SAAR
(Positive denotes dollar purchases)
50
T
Week 2,1987
4,034
3,911
-7,502
-9.000 '
1/81 7/81 1/82 7/82 1/83 7/83 1/84 7/84 1/85 7/85 1/86 7/86 1/87 4/87 7/87
Period ends the last day of the month cited
Dollar intervention in foreign exchange markets under most of the Reagan
Administration has been minimal, with the exception of the latter portion of
1985 and the more recent interventions of 1987. In 1981 and 1985, the U.S
was selling dollars. In 1987, the U.S. has tried to support the currency.
-10-H1 5
I I I 1 1I I I I I I
I I I I I t I I I I I I I I I I I I I
9
13
17 21 25 29 33 37
1986
41 45
49
53
4
8
12 16
20 24 28 32
1987
Total bank reserves increased at an explosive rate during the first two
weeks of 1987, on a four-week moving average basis. They then slowed
abruptly over the next 14-week period and again in the most recent weeks,
indicating a tightening by the Fed to support the dollar.
u>
vo
EXCHANGE RATES - D M * , Y E W
U.S. BANK RESERVES AND FOREIGN EXCHANGE PURCHASES
(Weekly)
(Millions of Dollars)
(Weekly averages)
2.5 T
210.00
2.25 t
f 180.00
($Bill(ons, seas, ad).)
T59
$3,000
f 150.00
175 MiwiiiiiiiummmimtiiHiHiitHiiniiiHiininiiiiiiiiniiiiiiiiiiwiiiiitniil 120.00
J F M A
M
J J
1986
A
S
O
N
D
J
F
M
A M
J J
1987
A
The dollar has generally trended tower against the yen and the DM
throughout 1986 and 1987, with recent episodes of rapid decline causing
turbulence in financial markets.
87:2
87:6
*= Dollar Sates
Heavy U.S. purchases of dollars starting late in March could have caused a
contraction in bank reserves, but the official policy is "sterilization".
7.
QUARTERLY
MAJOR ECONOMIC INDICATOR 9
1987
II
IV
1
1988
II
III
4815.1
4712.2
4807.7
4905.1
IV
Forecast
5004.3
I
8.6
6.6
7.1
8.3
8.7
8.4
8.4
8.3
7.1
REALGNP
(Billions of 1962 S. a.r.)
% Change, annual rate
3772.2
3793.7
3824.6
3858.6
3894.7
3925.5
3952.7
3976.2
3986.1
4.4
2.3
3.3
3.6
3.8
3.2
2.8
2.4
1.0
REAL FINAL DOMESTIC SALES
(Billions of 1982 $, a.r.)
% Change, annual rate
3859.7
3889.3
3934.2
3966.7
3992.9
4017.3
4038.0
4061.2
4060.9
-3.8
3.1
4.7
3.3
2.5
2.7
2.1
2.3
III
IV
5167.5
5203.5
5250.8
6.2
2.8
3.7
3986.1
3955.9
3936.0
0.0
-3.0
-2.0
4064.3
4050.4
4020.9
0.3
-1.4
-2.9
1987
7.6
% Change
% Chsngs
88/87
1989
89/98
Forecast
5004.3
8.4 5250.8
4.9
3.4
3976.2
3.0 3936.0
-1.0
1.8
4061.2
2.4 4020.9
-1.0
% Change
•87/,08
Estimate
4377.7
4447.7
1989
II
5090.4
GROSS NATIONAL PRODUCT
(Billions of $, annual rate)
% Change, annual rate
REAL CHANGE IN
INVENTORIES
(Billions of 1982 $, a.r.)
1988
4615.1
3858.6
3966.7
0.0
47.6
37.8
16.0
10.0
17.0
20.0
23.0
18.0
24.0
16.0
-7.0
-2.0
10.0
N/A
18.0
N/A
-2.0
N/A
116.1
117.2
118.3
119.6
121.0
122.5
124.1
125.9
127.7
129.6
131.5
133.4
119.6
4.1
125.9
5.2
133.4
6.0
4.2
3.8
3.8
4.5
4.7
5.0
5.4
5.8
6.0
6.2
6.0
5.8
335.0
339.0
342.4
346.5
350.8
355.4
360.2
365.5
371.1
376.9
382.7
388.3
346.5
4.8
365.5
5.5
388.3
6.2
5.3
4.9
4.1
4.9
5.0
5.3
5.6
6.0
6.2
6.5
6.2
6.0
ALfTOSALES
(Millions, annual rate)
9.5
10.0
11.7
10.1
10.5
10.5
10.8
10.1
9.8
9.3
8.7
8.5
10.3 '
-9.8
10.5*
1.5
9.0*
-13.1
HOUSNGSTARTS
(Millions, annual rate)
1.79
1.62
1.61
1.60
1.60
1.58
1.57
1.50
1.38
1.35
1.37
1.50
1.65 '
-8.4
1.56*
-5.5
1.40*
-10.4
127.0
128.2
129.9
131.4
133.1
134.5
135.7
136.6
136.9
136.4
134.3
132.7
3.2
3.7
5.5
4.7
5.1
4.4
3.5
2.8
0.7
-1.4
-5.9
-4.8
101.1
101.7
102.3
103.1
103.8
104.5
105.2
105.8
106.3
106.8
106.5
6.6
6.1
6.0
5.9
5.8
5.8
5.7
5.8
6.0
6.2
294.0
296.5
298.0
300.0
305.0
307.0
308.0
309.0
309.0
306.0
2.1
5.0
4.1
6.7
3.7
3.5
3.4
3.0
1.3
NET CASH FLOW
(Billions of $, annual rate)
% Change over year ago
378.7
384.6
386.5
391.0
393.0
397.0
398.0
399.0
3.9
5.9
4.2
3.8
3.8
3.2
3.0
2.0
MONETARY BASE
(Billions of $, a.r.)
% Change, annual rate
243.7
247.8
250.8
254.8
259.5
263.3
267.8
11,8
7.0
5.0
6.5
7.5
6.0
7.0
GNP DEFLATOR
(1982-100)
% Change, annual rate
CONSUMER PRCE
INDEX
(1967-100)
% Change, annual rate
4w
O
III
Ettimatt
4524.4
4th QUARTER
INDUSTRIAL
PRODUCTION
(1977-100)
% Change, annual rate
NONFARM
EMPLOYMENT
(Millions)
UNEMPLOYMENT
RATE. ALL WORKERS (Percent)
CORPORATE
OPERATING PROFITS
(Billions of $. annual rate)
% Change over year ago
NOTE: All quarterly series are seasonally adjusted; % change, annual rate calculated from prior quarter;
calculations based on unrounded data; a.r. - annual rate; e - estimate.
131.4
4.3
136.6
3.9
132.7
-2.9
106.3
103.1
2.7
105.8
2.6
106.3
0.5
7.0
5.9
N/A
5.8
N/A
7.0
302.0
299.0
300.0
6.7
309.0
3.0
299.0
-3.2
-0.3
-1.9
-3.2
399.0
396.0
392.0
389.0
391.0
3.8
399.0
2.0
389.0
-2.5
1.5
-0.3
-1.5
-2.5
272.7
276.0
277.4
280.8
285.6
254.8
7.6
272.7
7.0
285.6
7.5
5.0
2.0
5.0
7.0
'Annual total; N/A • Not applicable.
Tables
H. Erich HEINEMANN
Moseley Securities Corporation
41
H-SOP-87
Table 1 - Part 1
Federal Reserve Action and Monetary Growth
M Billions)
(2)
(31
Monetary
Base
Currency
Total
Adjusted
Bank
Reserves
218.6
221.2
221.5
222.1
224.2
225.7
227.4
229.6
230.8
232.0
233.0
234.9
235.7
237.7
238.7
239.9
242.3
243.4
245.7
247.7
248.7
250.8
252.8
255.3
258.9
259.0
260.1
262.2
263.4
263.4
264.3
266.2
15°.5
160.6
161.3
161.9
163.1
164.5
165.3
166.9
167.8
168.7
169.9
170.6
171.8
172.7
173.8
174.4
175.8
176.7
177.6
179.0
179.7
181.2
182.4
183.5
186.0
187.2
187.7
188.9
190.2
191.1
192.1
193.2
(1)
Date
Jan 1985
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jar. 1986
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 1987
Feb
Mar
Apr
Hay
Jun
Jul
Aug P
(4)
59.1
60.6
60.2
60.2
61.1
61.2
62.1
62.7
63.0
/?
7
63.1
64.3
63.«
65.0
64.9
65.5
66.5
66.7
68.1
68.7
69.0
69.6
70.4
71.8
72.9
71.8
72.4
73.3
73.2
72.3
72.2
73.0
Detand
Deposits
397.4
403.8
406.3
409.2
413.5
420.3
425.0
431.3
437.8
439.5
443.7
450.5
451.2
453.4
460.6
467.6
477.7
484.6
492.7
501.6
506.9
513.8
523.7
540.6
545.2
543.7
545.0
554.6
556.1
548.6
548.7
550.8
(5)
Savings
I Stall
Tise
Deposits*
787.8
795.2
799.3
802.6
806.6
Sit."
822.8
826.0
828.7
831.6
836.1
841.0
847.6
849.1
854.0
859.7
862.8
869.0
873.8
878.8
884.1
888.4
892.0
898.2
906.2
905.5
906.5
905.1
900.5
903.2
905.2
907.3
* Includes Honey Market Deposit Accounts
« (445*647+8+9)
Source: Federal Reserve Board:tieineaannEconoiic Research
k2
(b)
(?)
(8)
(9)
110)
Large
Tiie
Deposits
Nondeposit
Liabil.
Foreign
Deposits
Treasury
Deposits
Total
Deposits
267.1
267.4
171.1
175.6
178.3
170.6
173.0
170.1
168.0
173.0
174.5
173.8
176.3
179.0
178.6
183.4
187.3
185.3
184.1
180.1
183.2
185.9
189.8
189.8
192.9
195.2
201.7
200.8
197.4
195.8
199.6
199.6
193.8
205.1
18.5
15.8
12.8
15.4
20.9
14.9
23.1
13.4
16.9
lt.S^.G
3668.6
1&78.».
1604.:'
l6g8.°
1705.1
171°.4
1726.4
1745.2
1741.1
1756.8
1779.8
1805.4
1815.1
1820.5
1834.6
1847.0
1850.3
1867.6
1878.7
1900.5
1907.3
1925.6
1956.7
1988.5
1986.1
1976.2
1994.6
2009.4
2003.5
1999.5
2009.8
•>T> 0
276.8
274.8
272.9
270.3
272.6
276.6
280.3
282.3
284.1
292.9
294.8
292.7
293.5
289.9
289.4
289.5
290.1
289.8
288.3
290.0
291.8
295.7
296.0
299.0
305.9
310.7
314.9
313.5
313.6
10.9
10.8
9.7
9.6
10.1
10.0
10.2
10.1
10.7
J0.5
10.6
10.7
11.0
10.1
10.1
10.6
10.8
11.1
11.6
11.2
11.7
11.8
11.7
11.7
12.2
11.6
11.2
11.6
11.7
11.8
11.7
11.4
5.4
7.8
14.5
24.1
24.3
15.8
17.9
21.7
16.1
16.8
11.1
18.2
15.2
15.3
19.2
27.5
28.5
17.1
21.6
30.8
25.4
26.6
21.6
Table 1 - Fart 2
federal Reserve Action and Honetary Growth
(11)
Date
3an 1985
Feb
Har
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 1986
Feb
MatApr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 1987
Feb
Hat
Apr
Hay
Jun
Jul
Aug
112)
(13)
Hi'
(15)
do)
(1?)
US)
Large
Tise
Deposit
Ratio
Nondeposit
Liabil.
Ratio
Foreran
Deposit
Ratio
Treasury
Deposit
Ratio
'.Honey
Multiplier
(2+4/1)
Adjusted
Reserve
Ratio
Currency
Ratio
Savings
I Stall
Tiie
Deposit
Ratio
(3/10)
(2/4)
(5/4)
(6/4)
(7/4)
(8/4)
(9/4)
0.4014
0.3977
0.3970
0.3957
0.3O44
0.3914
0.3689
0.3870
0.3833
0.3838
0.3829
0.3787
0.3808
0.3809
0.3773
0.3730
0.3680
0.364o
0.3605
0.3569
0.3545
0.3527
0.3483
0.3394
0.3412
0.3443
0.3444
0.3406
0.3420
0.3483
0.3501
0.3508
1.9824
1.9693
1.9673
1.9614
1.9507
1.9436
1.93*0
1.9151
1.8929
1.8922
1.8844
.1.8668
1.8785
1.672?
1.8541
1.8385
1.8062
1.7932
1.7735
1.7520
1.7441
1.7291
1.7033
1.6615
1.6621
1.6654
1.6633
1.6320
1.6193
1.6464
1.6497
1.6472
(U72!
0.6622
O.t.69"
0.6764
0.6646
0.6493
0.6360
0.6320
0.6318
0.6378
0.63o2
0.6306
0.6492
0.6502
Q.b355
0.6277
0.6069
0.5972
0.5876
0.5783
0.5717
0.5611
0.5538
0.5398
0.5424
0.5444
0.5486
0.5516
0.5587
0.5740
0.5714
0.5694
0.4305
0.434"
0.4388
0.4169
0.4184
0.4047
0.3953
0.401!
0.3986
0.3O54
0.3973
0.3973
0.3958
0.4645
0.4066
0.39o3
0.3854
0.3716
0.3718
0.3706
0.3744
0.3694
0.3683
0.36.1!
0.3700
0.3693
0.3622
0.3530
0.3589
0.3638
0.3532
0.3724
0.0274
0.0267
0.0239
0.0235
0.0244
0.0238
0.0240
0.0234
0.0244
0.0239
0.0239
0.0238
0.0244
0.0223
0.0219
0.022?
0.0226
0.0229
0.0235
0.0223
0.0231
0.0230
0.0223
0.0216
0.0224
0.0213
0.0206
O.O209
0.0210
0.0215
0.0213
0.0207
0.0466
0.0391
0.0315
0.0376
0.0505
0.0355
0.0544
0.0311
0.0386
0.0123
0.0176
0.0322
0.0534
0.0536
0.0343
0.0383
0.0454
0.0332
0.034!
0.0221
0.0359
0.0296
0.0292
0.0355
0.0504
0.0524
0.0314
0.0389
0.0554
0.0463
0.0485
0.0392
0.0358
0.0363
0.0359
0.0357
0.0360
0.0359
0.036)
0.0363
0.0361
0.0364
0.035"
0.0361
0.0354
0.0358
0.0356
0.0357
0.0360
0.0360
0.0365
0.0366
0.0363
0.0365
0.0366
0.0367
0.0367
0.0362
0.0366
0.0367
0.0364
0.0361
0.0361
0.0363
Source-. Federal Reserve Board; Heineaann Econoaic Research
43
2.54/t.
2.5515
2.5625
2.5714
2.5718
2.591!
2.5959
2.6054
2.6239
2.6216
2.6335
2.644!
2.6432
2.6340
2.6577
2.6761
2.6971
2.7169
2.7281
2.747?
2.7608
2.7711
2.7931
2.83o3
2.8243
2.8220
2.8170
2.8356
2.8333
2.8083
2.8029
2.7949
Table 1 - fari
3
federal Reserve Action and Hcnetary Growth
This is accounted for by changes in the:
Date
Jan 1985
Feb
Mar
API
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 1*86
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 1987
Feb
Har
Apr
Hay
Jun
Jul
Auq P
Federal
Reserve
Actions
Monetary (Monetary
Growth
Base
Growth)
IH-l)
10.5
17. 4
7.0
7.7
12.2
18.S
11.9
17.3
15.9
5.3
11.2
15.7
3.7
6.1
17.1
15.4
23.7
15.3
17.6
20.1
11.1
15.7
20.9
35.3
12.4
-0.5
3.0
19.2
4.6
-10.J
1.8
5.3
1983
9.56
1984
S.87
1985
12.54
1986
16.84
1987
4.4?
11.0
15.2
1.6
3.3
12.0
8.3
9.4
12.2
6.5
6.4
5.3
10.2
4.2
10.7
5.2
6.2
12.7
5.6
11.9
10.2
5.0
10.6
10.0
12.5
18.3
0.5
5.2
10.1
5.6
0.0
4.2
9.0
1983
9.35
1984
7.15
1985
8.47
1986
8.73
1987
6.61
tontiibution
of the
Money
Multiplier
-0.6
2.2
5.4
4.4
0.2
10.1
2.5
5.0
9.4
-1.1
5.9
5.5
-0.4
-4.5
12.0
9.2
11.1
9.7
5.7
9.9
6.2
5.1
10.9
22.7
-5.9
-1.0
-2.2
9.1
-1.0
-10.1
-2.4
-3.7
1983
0.21
1984
-1.28
1985
4.07
1986
8.11
1987
-2.15
Adiusted
Reserve
Ratio
-1.4
-5.1
4.3
1.1
-1.8
0.7
-2.1
-2.0
0 -)
-2.6
4.3
-2.0
2?.7
-4.1
1.6
-0.5
-3.1
-0.4
-4.0
-1.1
2.6
-1.9
-0.7
-1.4
0.4
6.4
-4.8
-1.1
3.5
3.2
-0.2
-2.1
1983
2.29
1984
-0.01
1985
-0.37
1986
1.21
198?
0.65
Currency
Ratio
1.8
5.1
1.0
1.9
1.5
4.8
3.6
3.1
5.8
-0.*
1.4
6."
-11.5
-0.2
5.7
7.1
8.7
5.7
7.1
6.4
3.9
8.1
18.0
-3.2
-6.7
-0.2
7.1
-2.7
-9.8
-2.9
-1.1
1983
-0.80
1984
-0.65
1985
2.98
1986
5.18
1987
-2.43
Source: Federal Reserve Board; Heineiann Econotic Research
HU
Savinas
I Stall
Tite
Deposit
Ratio
-1.0
1.1
0.2
0.5
0.8
0.6
0.6
1.9
2.0
0.1
0.?
1.6
0f5
i.?
1.4
3.1
1.2
1.9
2.1
0.7
1.5
2.6
4.5
-0.1
-0.4
0.2
3.3
1.4
-2.5
-0.3
0.2
1983
-2.10
1984
-0.41
1985
0.75
1986
1.46
1987
0.23
Large
Ties
Deposit
Ratio
1.2
0.8
-0.6
-0.5
0.9
1.4
1.1
0.4
0.0
-0.5
0.1
0.5
-6.1
-0.1
1.3
0.7
2.0
0.9
0.9
0.9
0.6
1.1
0.7
1.5
-0.3
-0.3
-0.4
-0.3
-0.8
-1.4
0.3
0.2
1983
1.21
1984
-0.49
1985
0.39
1986
0.37
1987
-0.3?
NonDeposi t
Liability
Ratio
0.3
-0.3
-0.3
1.8
-0.1
1.2
0.8
-0.5
0.2
0.3
-0.2
0.0
0.5
-0.8
-0.2
0.9
1.0
1.3
-0.0
0.1
-0.4
0.5
0.1
0.8
-1.0
0.1
0.7
0.9
-0.6
-0.5
1.0
-1.9
1983
-0.45
1984
0.30
1985
0.26
1986
0.32
1987
-0.14
Foreign
Deposit
Ratio
0.0
0.1
0.?
0.0
-0.1
0.1
-0.0
0.1
-0.1
0.1
0.0
0.0
-o.?
0.2
0.0
-0.1
0.0
-0.0
-0.1
e.i
-0.1
0.0
0.1
0.1
-0.1
0.1
0.1
-0.0
-0.0
-0.0
0.0
0.1
1983
0.03
1984
0.00
1*85
0.C3
1966
0.01
198?
0.01
Treasury
Deposit
Satio
-1.4
O.t.
O.o
-0.5
-0.9
1.4
-1.6
2.1
-0.7
2.4
-0.5
-1.3
-'.('
-0.0
i.7
-0.4
-0.7
1.1
-0.1
1.2
-1.3
0.6
0.0
-0.7
-1.6
-0.2
2.1
-0.8
-1.8
0.8
-0.2
0.9
1983
0.02
1984
-0.03
1*85
o.o:
i«8o
-0.44
l«lf.;7
-0.09
Table 1 * Part 3
Federal Reserve Action and Honetary Growth
THREE- IfdNTH H0VING AVERAGES
This is accounted for by changes in the:
Date
Jan
Feb
Mar
Apr
Hay
Jun
Jul
Auq
Sep
Oct
Nov
Dec
Jan
Feb
Har
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
Hay
Jun
Jul
Aug
1985
1986
1987
P
Federal
ReserveActions
Honetary (Honetary
Base
Growth
<H-1) Grctith)
9.43
12.49
11.63
10.70
8.95
12.77
14.18
15.88
15.03
12.82
10.79
10.72
10.21
8.52
9.00
12.87
18.74
18.14
18.89
17.66
16.27
15.63
15.92
23.97
22.88
15.73
4.98
7.23
8.93
4.57
-1.23
-1.00
6.53
9.70
9.31
6.73
5.63
7.86
9.90
10.00
9.38
8.37
6.06
7.32
6.57
8.3b
6.67
7.35
8.02
8.16
10.07
9.25
9.04
8.60
8.52
11.05
13.61
10.43
7.99
5.27
6.99
5.25
3.27
4.38
Cont
but ion
of the
Honey
Hult:iplier
?.%
2.7°
2.32
3.97
3.32
4.91
4.28
5.88
5.65
4.45
4.73
3.40
3.64
0.16
2.33
5.53
10.72
9.98
8.81
8.41
7.23
7.04
7.40
12.92
9.2?
5.30
-3.02
1.96
1.94
-0.69
-4.50
-5.39
Adjusted
Reserve
Ratio
1.63
-0.80
-0.73
0.13
1.21
0.02
-1.07
-1.14
-0.66
-0.80
1.31
-0.10
C^w7
7.16
8.38
-1.02
-0.6?
-1.35
-2.52
-1.84
-0.84
-0.12
0.00
-1.33
-0.59
1.78
0.66
0.16
-0.82
1.83
2.14
0.30
Currency
Ratio
1.83
3.30
2.62
2.66
1.4?
2.73
3.30
3.84
4.17
2.6'
2.09
2.41
-1.14
-1.68
-2.00
4.20
7.16
7.14
7.14
6.39
5.82
4.54
5.09
9.77
7.60
2.70
-3.36
0.10
1.43
-1.77
-5.12
-4.61
Source: Federal Reserve Board: Heineaann Econoaic Research
45
Savings
I Saall
Tiae
Deposit
Ratio
-0.90
-0.27
0.0c
0.5?
0.48
0.63
0.69
1.07
1.52
1.33
0.92
0.7?
-0.53
-0.59
-0!55
1.20
2.07
1.91
2.06
1.74
1.58
1.46
1.62
2.88
2.35
1.34
-0.09
1.02
1.62
0.72
-0.47
-0.85
Large
Tiae
Deposit
Ratio
0.75
0.80
0.44
-0.12
-0.10
0.57
1.12
0.96
.0.51
-0.05
-0.13
0.03
-1.81
-1.89
-1.61
0.64
1.34
1.20
1.26
0.91
0.81
0.87
0.81
1.09
0.65
0.32
-0.32
-0.33
-0.50
-0.83
-0.64
-0.32
NonDeposit
Liability
Ratio
0.13
0.10
-0.13
0.39
0.46
0.98
0.64
0.50
0.17
-0.01
0.12
0.04
0.11
-0.09
-0.16
-0.01
0.59
1.08
0.77
0.46
-0.09
0.09
0.08
0.46
-0.03
-0.04
-0.05
0.58
0.34
-0.05
-0.03
-0.43
.Foreign
Deposit
Ratio
-0.01
0.05
0.11
O.H
0.07
0.01
-0.01
0.03
-0.02
0.00
-0.01
0.02
-0.06
-0.00
0.00
0.05
-0.01
-0.03
-0.03
0.01
-0.00
0.02
0.00
0.05
0.02
0.04
0.04
0.06
0.01
-0.03
-0.01
0.01
Treasury
Deposit
Ratio
-0.53
-0.40
•\K'Jl
0.24
-0.2"
-P. 07
~0.3'"*
0.63
-0.04
1.30
0.44
0.23
-2/-'0
-2. ""5
-l.'A
0.46
C.24
0.03
0.13
0.75
-O.Ot
0.10
-0.21
0.00
-0.75
-0.84
0.09
0.37
-0.13
-0.56
-0.38
0.52
Federal Eeserve Action and Honetary Growth
(Heio)
Reserve
Growth
Three-tooth
Moving Average
Reset ve
Growth Rate
Month to Month
Jan 1985
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 1986
Feb
Har
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan 1987
Feb
Har
Apr
Hay
Jun
Jul
Aug P
Source:
Board: 1Hem
6.75
17.76
15.89
9.15
3.95
"Ut.
13.54
11.12
12.42
8.00
2.68
9.17
4.81
13.63
4.56
10.86
20.22
35.0"
-7.64
0.00
19.4"
1.98
19.15
1?.?3
5.90
5.87
-3.73
25.37
-7.21
22.73
-1.83
11.66
19.94
3.67
28.31
11.10
5.37
10.95
14.70
26.65
20.02
-16.68
10.50
15.96
-1.62
-13.80
-1.65
14.14
1983
7.17
1984
8.93
1985
11.16
1986
12.17
198?
3.36
1987
3.36
. . . V
11.76
L7.31
14.36
14.93
9.14
10.34
17.43
20.46
10.00
4.61
3.27
8.29
0.19
-5.69
-0.44
H6