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For Release on D e l i v e r y F r i d a y , March 19, 1971 8:30 p.m. C.S.T. (9:30 p.m. E.S.T.) THE ECONOMIC OUTLOOK AND MONETARY POLICY I N 1 9 7 1 Remarks By Andrew F . B r i m m e r Member Board o f Governors o f the F e d e r a l Reserve System Before the E l e v e n t h Assembly o f Bank Fairmont Dallas, March 19, Hotel Texas 1971 Directors THE ECONOMIC OUTLOOK AND MONETARY POLICY I N 1971 By Andrew F . I on am d e l i g h t e d monetary p o l i c y such a d i s c u s s i o n , t o s h a r e my v i e w s on t h e i n the current it the outset tradition, t a k i n g up t h i s that the views when members o f t o such m a t t e r s and n o t for flows their (FOMC) as f o r e c a s t i n g both t r a d i t i o n s however, colleagues. try of the well. I m u s t make i t By they speak f o r A l s o by t r a d i t i o n , clear long themselves themselves B o a r d members and s e r v i n g on t h e F e d e r a l Open M a r k e t t o a v o i d m a k i n g comments t h a t m i g h t be the f u t u r e for review the F e d e r a l Reserve Board address i n r e m a r k s s u c h as t h e s e , bearing p a s t a n d t o make a n e x p r e s s e d h e r e a r e my own. F e d e r a l R e s e r v e Bank P r e s i d e n t s Committee to present a b r i e f i n the recent task, conditions To p r o v i d e a f r a m e w o r k t h e g e n e r a l e c o n o m i c o u t l o o k as Before at year. w o u l d be h e l p f u l r e c o r d o f money a n d c r e d i t assessment o f Brimmer* course of monetary p o l i c y . are well-founded, and I p e r s o n a l l y interpreted I believe try to abide that by them. It is also well and d i v e r s e v o i c e s t o remember t h a t -- despite the t h a t m i g h t be h e a r d u r g i n g a p a r t i c u l a r ^Member, B o a r d o f G o v e r n o r s o f the Federal Reserve numerous course for System. I am g r a t e f u l t o M r . F r e d e r i c k M. S t r u b l e a n d M i s s H a r r i e t t Harper f o r a s s i s t a n c e i n the p r e p a r a t i o n of these remarks. In addition, M i s s M a r y J a n e H a r r i n g t o n d i d some o f t h e c a l c u l a t i o n s t o o b t a i n p a r t o f t h e d a t a on b a n k c r e d i t f l o w s . -2monetary p o l i c y with -- two c l e a r l y the r e s p o n s i b i l i t y f o r m o n e t a r y management d e f i n e d and s t a t u t o r y b o d i e s : the seven-member F e d e r a l R e s e r v e B o a r d a n d t h e 12-member F e d e r a l Open M a r k e t (consisting of Presidents). t h e s e v e n B o a r d members a n d f i v e T h e r e i s no n e e d ( n o r on t h e d i s t r i b u t i o n of which monetary p o l i c y is this tasks between the i s made. It is Committee the Reserve the occasion) to t w o g r o u p s o r o n t h e way sufficient to r e c a l l f o u r weeks, a n d open m a r k e t o p e r a t i o n s a r e e n g a g e d i n v i r t u a l l y is a n d m o n i t o r e d d a i l y b y t h e B o a r d and t h e FOMC. continuous opportunity a t i m e l y and f l e x i b l e I develops about from time of all stability. action, is for the achievement the that t o w e i g h and assess a l t e r n a t i v e Again, in confusion time) it H a v i n g made is these i s a component the Federal Reserve, degree of o f an it is courses by overprice Congressional independence which must t h e F e d e r a l G o v e r n m e n t and n o t a p a r t I believe deal of m u s t be c o n d u c t e d as p a r t endowed w i t h a s i g n i f i c a n t same t i m e , daily there o f economic g r o w t h w i t h r e a s o n a b l e Expressed d i f f e r e n t l y , be e x e r c i s e d w i t h i n At t h a t monetary p o l i c y e c o n o m i c p o l i c y and i t strategy on a t o be s u c h a f o r monetary p o l i c y . the F e d e r a l Reserve System. I m u s t go on t o s t r e s s national because a g r e a t (and the p r e s e n t appears of r e s p o n s i b i l i t y of or fashion. to time the r e s p o n s i b i l i t y the three Thus, in t o f o r m u l a t e and e x e c u t e m o n e t a r y p o l i c y w a n t e d t o make t h e s e p o i n t s the locus points, t h e FOMC m e e t s e v e r y that several -- Bank dwell Board meets basis t i m e s each week, of rests from it. i n c u m b e n t on t h e F e d e r a l o f n a t i o n a l economic Reserve policy -3and t o keep t h e consequences o f the d i f f e r e n t choices i n mind a t all times. Against this background, o f m o n e t a r y management a t we s h o u l d c o n s i d e r what appears the present the c o n s t r a i n t s juncture? which might m o n e t a r y p o l i c y as w e l l as t h e o p p o r t u n i t i e s monetary p o l i c y expansion. weight is constraint despite One to contribute factor to which I the serious d e f i c i t is further the p e r s i s t e n c e to of capacity. t h e s e unused r e s o u r c e s which they represent. How t o "balance o f f the proper p r i o r i t i e s T h e y c a n be s u m m a r i z e d of for for economic considerable Another pressures -- o f unemployment On t h e o t h e r and hand, c r e a t e s an o p p o r t u n i t y the r e a l cost to the these competing q u e s t i o n t r o u b l i n g economic p o l i c y I n the r e s t rate task question, t h a t m i g h t be open the s t i m u l a t i o n o f high to help reduce this t h e scope personally attach employ monetary p o l i c y the basic limit strong i n f l a t i o n a r y a s u b s t a n t i a l b a c k l o g o f excess p l a n t is To a n s w e r i n our balance o f payments. the e x i s t e n c e o f an u n u s u a l l y the very existence of t o be t h e p r o p e r economy objectives makers. t h e s e comments, my own v i e w s w i t h r e s p e c t among t h e s e o b j e c t i v e s a r e to spelled out fully. here: - W h i l e t h e economy h a s b e e n o p e r a t i n g w e l l b e l o w i t s p o t e n t i a l f o r more t h a n a y e a r , we s t i l l h a v e made l i t t l e l a s t i n g p r o g r e s s i n t h e c a m p a i g n t o check i n f l a t i o n . Thus, a good p a r t o f t h e t a s k remains ahead o f u s . - A t t h e same t i m e , t h e e x c e p t i o n a l l y h i g h u n e m p l o y ment r a t e and t h e s i z a b l e b a c k l o g o f excess c a p a c i t y i n d i c a t i o n s o f the r e a l costs of n a t i o n a l p o l i c i e s a d o p t e d i n t h e f i g h t a g a i n s t i n f l a t i o n - - have l e d -- to -4t o a new s c a l i n g o f p r i o r i t i e s w h i c h a s s i g n more w e i g h t t o t h e e x p a n s i o n o f o u t p u t a n d l e s s weight to moderating the r i s e i n p r i c e s . - Under t h e s e complex c i r c u m s t a n c e s , t h e t a s k o f monetary p o l i c y i s obviously d i f f i c u l t . I n my j u d g m e n t , t h e m o d e r a t e r a t e o f g r o w t h o f money a n d c r e d i t i n t h e l a s t y e a r has a l r e a d y r e s t o r e d much o f t h e e c o n o m y f s l o s t l i q u i d i t y . I believe i t has a l s o h e l p e d t o l a y a f o u n d a t i o n f o r t h e g r o w t h o f r e a l o u t p u t a t a pace a b o u t as r a p i d as c a n be s a f e l y e n c o u r a g e d w i t h o u t r e k i n d l i n g t h e i n f l a t i o n a r y p r e s s u r e s t h a t a r e o n l y now beginning to abate. - F i n a l l y , t h e l a r g e and c o n t i n u i n g d e f i c i t i n o u r b a l a n c e o f payments s h o u l d a l s o be a cause o f c o n c e r n - - a p o i n t w h i c h monetary p o l i c y must also take i n t o account. - B u t , i f f u r t h e r s i m u l a t i o n p r o v e s t o be n e e d e d , i n s t e a d o f p r e s s i n g f o r even g r e a t e r monetary ease, I t h i n k i t i s p r e f e r a b l e t o adopt f i s c a l m e a s u r e s t o s t r e n g t h e n t h e p r o p e n s i t y o f consumers t o s p e n d and t o e n c o u r a g e b u s i n e s s e s t o i n c r e a s e investment i n f i x e d assets. We c a n now t u r n t o t h e m a i n b o d y o f C r e d i t F l o w s i n 1970: more t r a d i t i o n a l c h a n n e l s — the previous year. Likewise, c o n d i t i o n s was p a r t of flows from the p o l i c y of o f c o u r s e , was n e c e s s a r y as p a r t inflation. credit i n 1970 r e t u r n e d thus c o r r e c t i n g a s i g n i f i c a n t the d i s t o r t i o n which r e s u l t e d followed analysis. An O v e r v i e w To a c o n s i d e r a b l e e x t e n t , restraint the i n 1970, of part of severe monetary The p o l i c y o f r e s t r a i n t t h e n a t i o n a l campaign t o the p o l i c y itself, check o f moderate easing i n the n a t i o n a l e f f o r t credit t o c u s h i o n t h e slowdown t h e economy and t h e r e b y p r e v e n t a l a r g e d e c l i n e i n o u t p u t and a n excessive r i s e the p a t t e r n of i n unemployment. f l o w s was a b y - p r o d u c t economic objectives. In both years, of concerted e f f o r t s to to achieve national in credit -5I n 1970, a c c o r d i n g to p r e l i m i n a r y funds a c c o u n t s p r e p a r e d by t h e B o a r d ' s nonfinancial in $11.4 b i l l i o n raised. public -- I n 1969, amounted $100 funds r a i s e d (See T a b l e 1 , (or 5 1/2 per c e n t ) set aside, over i n the budget. -- 12 p e r c e n t - - in the by level of t h i s amount, In contrast, of funds debt $ 1 . 3 b i l l i o n was last year, indirect of Federal the Federal It of decline the volume o f i n t h e amount o f $ 1 2 . 7 b i l l i o n . in direct of attached.) t h e r e was a y e a r - t o - y e a r a n d $ 2 . 4 b i l l i o n was i n i s s u e s agencies Government raised d e b t w h i l e b u d g e t a g e n c i e s made n e t repayments million. Setting aside Government, the c a p i t a l market a c t i v i t i e s other nonfinancial compared w i t h $ 9 4 . 1 b i l l i o n o n l y S t a t e and l o c a l t h e amount o f sectors raised g o v e r n m e n t s and a g r i c u l t u r a l I n t h e case o f b y o n l y $100 m i l l i o n of $3.7 b i l l i o n 1969. Their share o f cent. So l a s t year, the farms, period of credit in sectors, increased was On t h e other in 1970, an above t h e amount r a i s e d S t a t e and l o c a l u n i t s stringency 1970, the r i s e t o t a l advanced f r o m 9 p e r c e n t t o w a r d m a k i n g up t h e s h o r t - f a l l in businesses to $3.3 b i l l i o n . o r 45 p e r c e n t , Federal Among m a j o r S t a t e and l o c a l governments r a i s e d $12.2 b i l l i o n increase of the $82.7 b i l l i o n i n the previous y e a r . funds o b t a i n e d . v e r y modest - hand, total flow H o w e v e r , when t h e b o r r o w i n g a c t i v i t y a drop of issues, $12.8 b i l l i o n from the the Federal Government's n e t repayment was a n e t b o r r o w e r of is to $3.7 b i l l i o n ; debt included $5 b i l l i o n the previous year. t h e F e d e r a l Government of staff, s e c t o r s amounted t o $95.4 b i l l i o n . T h i s was a n i n c r e a s e o f raised figures registered in to about some progress i n borrowing which occurred during 1969. 15 p e r the -6The l a r g e s t households. drop i n volume o f Last year, they obtained $21.3 b i l l i o n , $10.9 b i l l i o n or accounted one-third of declined for one-third to one-quarter $15.7 b i l l i o n ) Both of these total funds r a i s e d in A substantial i n 1970 c e n t e r e d a n d consumer c r e d i t types of borrowing i n part $1.2 b i l l i o n year. because o f But, financial sectors f r o m 42 p e r principal In that the g r e a t e r as a g r o u p , gainer i n funds r a i s e d their relative the share of t o 46 p e r c e n t . modest g a i n s , In traditional I n 1969, and net terms o f both of the sources o f h o l d s and n o n f i n a n c i a l year. funds substantially billion). $37.9 b i l l i o n i n the corporate to in previous businesses rose s e c t o r was to the finance strong registered only accordingly. supplied in restored. 1970, t h e more I n 1969, and t o w a r d funds. The there houses reverse nonslightly terms. finance a responded b u s i n e s s e s as s o u r c e s o f of i n b o r r o w i n g by the corporate institutions billion goods. these a c t i v i t i e s corporate borrowing p a t t e r n was a l s o last $9.3 h e a v y b o r r o w i n g was u n d e r t a k e n p a r t l y Last year, ($12.7 i n b o t h a b s o l u t e and r e l a t i v e was a s h a r p s w i n g away f r o m f i n a n c i a l was t r u e reduced the lower r a t e shrinkage e x p a n s i o n i n c u r r e n t o u t p u t and p a r t l y i n v e s t m e n t boom. the of t h a n t h e amount r a i s e d cent year, a sizable less raised households share ($4.3 b i l l i o n vs. turn reflected of their i n home m o r t g a g e s corporate businesses 1970, about While 1969, s p e n d i n g o n home c o n s t r u c t i o n and c o n s u m e r d u r a b l e Nonfinancial a decline from the proceeding year. i n 1970. borrowing by households vs. f u n d s r a i s e d o c c u r r e d among -- -7- As shown i n T a b l e in 1, t h e r e was a m o d e s t e x p a n s i o n l a s t f u n d s s u p p l i e d by t h e F e d e r a l Reserve System. $4.2 b i l l i o n slight i n 1969 t o $ 5 . 2 b i l l i o n increase in the System1s in share of 1970. The a m o u n t r o s e This total to 5.2 per c e n t ) . that r e p r e s e n t n e t changes r e c o r d e d funds a c c o u n t s , its of share in supply of funds commercial banks. total) the sources, I n 1970, total), I n 1969, from what i t time deposits In the r e l a t i v e i n 1 9 6 9 , and t h e i r commercial before. lost i n economic a c t i v i t y and t h e y i n c r e a s e d g r e a t l y of l e n d i n g a b i l i t y was (especially P r i v a t e nonbank f i n a n c i a l at billion p o s i t i o n of toward moderate ease, Last year, half of monetary r e s t r a i n t , 1970, w i t h a s l o w i n g s a v i n g s and l o a n a s s o c i a t i o n s ) raising (one-seventh t h e move o f m o n e t a r y p o l i c y time accounts), -- supplied $31.1 had b e e n t h e y e a r a s i z a b l e amount o f funds s u p p l i e d . the turnaround occurred compared w i t h $ 1 2 . 2 b i l l i o n which bore the b r u n t accordingly. year Somewhat o v e r the most s t r i k i n g These i n s t i t u t i o n s , funds s u p p l i e d . of agencies. these i n s t i t u t i o n s the previous y e a r . banks shrank d r a s t i c a l l y constrained stressed i n the flow last to about 5 per cent. t h e e x p a n s i o n was a c c o u n t e d f o r b y c r e d i t Among o t h e r the i t m u s t be The U . S . G o v e r n m e n t p l a y e d a m o d e r a t e l y the aggregate from 3 per cent (one-third of supplied a n d t h e y s h o u l d n o t be i n t e r p r e t e d a s m e a s u r e s o f impact o f monetary p o l i c y . enlarged role Here a g a i n from represented a funds (from 4.7 per cent these f i g u r e s year they gained institutions deposits the volume of (particularly a l s o e x p a n d e d somewhat t h e v o l u m e t h e a m o u n t p r o v i d e d b y S & L f s came to of and -8$14.9 b i l l i o n (16 p e r c e n t o f (12 p e r cent of mance o f these savings the total) in institutions the total), 1969. compared w i t h $ 1 0 . 4 Again, reflected billion t h e much s t r o n g e r the g r e a t l y perfor- enhanced f l o w t o them (as w e l l as t o m u t u a l s a v i n g s banks and o t h e r of financial intermediaries). In contrast private households, funds for supplied. over t h e amount o f especially financial these sources governments) two-fifths of 8 per cent of reflect the total funds $39.5 as i n v e s t m e n t the outflow of funds channeled i n t o market supplied. with respect outlets. to as m a r k e t y i e l d s particularly the v a l u a t i o n of -- b u s i n e s s e s and i n d i v i d u a l s issues. these billion including highly sentiment both of market D u r i n g 1969, a s u b s t a n t i a l d e c l i n e d and i n v e s t o r after mid-year, In the a t t i t u d e s f r o m c o m m e r c i a l banks and s a v i n g s securities In The d e c r e a s e was part of institutions was attractive F e d e r a l agency i s s u e s and s h o r t - t e r m commercial p a p e r . billion them d r o p p e d t o $ 7 . 5 the t o t a l . in (businesses, provided a f u n d a m e n t a l change i n b u s i n e s s e s and i n d i v i d u a l s market institutions, n o t i c e a b l e among b o t h b u s i n e s s e s a n d h o u s e h o l d s . the flows securities I n 1969, funds o r i g i n a t i n g w i t h and r e p r e s e n t e d o n l y of sources experienced a sharp d e c l i n e and S t a t e and l o c a l and accounted cases, the expanded r o l e domestic n o n f i n a n c i a l the volume o f 1970, to During deteriorated f l o w s were r e v e r s e d , and c o n s t i t u t e d much l e s s h o s p i t a b l e 1970, somewhat, nonfinancial outlets for -9S o u r c e s a n d Uses o f At this point, the behavior o f institutions policy this C o m m e r c i a l Bank Funds we m i g h t l o o k somewhat m o r e c l o s e l y commercial banks. that on c r e d i t It is i n the response of one c a n t r a c e m o s t g r a p h i c a l l y flows. The f i g u r e s these the impact of i n T a b l e 2 can be used monetary for purpose. The e x p a n d e d r o l e o f commercial banks as a s o u r c e o f i n 1 9 7 0 , d i s c u s s e d a b o v e , was made p o s s i b l e b y a s i z a b l e in at their resources. these resources $18 b i l l i o n As m e a s u r e d b y t h e n e t rose by n e a r l y the year b e f o r e . t h e same i n b o t h y e a r s However, denominations of t h i s was p a r t l y types of total rise) in negotiable time deposits. certificates respectively). dramatically to nearly experienced $10 billion. in ( C D ' s ) was a b o u t $12 1 / 2 billion; $ 3 billion the banks1 o f w h i c h $15 b i l l i o n time (two-fifths Again, the sharp the changing posture As m a r k e t y i e l d s s e t by t h e s u p e r v i s o r y a u t h o r i t i e s about deposit I n 1970, flows r e f l e c t e d was with of was a c c o u n t e d f o r b y C D ' s . in both years. rose in of in deposits of the swing monetary 1969 a b o v e t h e on t h e maximum r a t e s w h i c h c o u l d be p a i d on t i m e d e p o s i t s , amounting o f f s e t by an i n c r e a s e o f n e a r l y i n these deposit policy i n demand d e p o s i t s -- liabilities, compared i n 1969 c o m m e r c i a l b a n k s $100,000 and o v e r j u m p e d b y $38 b i l l i o n , year, increase their t o t i m e d e p o s i t s was i n time deposits the d e c l i n e last in ( $ 6 . 4 b i l l i o n and $ 5 . 2 b i l l i o n , As a l r e a d y m e n t i o n e d , a sizable a t t r i t i o n other The r i s e the s i t u a t i o n w i t h respect different. Actually, $40 b i l l i o n increase funds the banks l o s t of funds. ceilings interest In 1970 -10(and p a r t i c u l a r l y respect a f t e r m i d - y e a r when t h e c e i l i n g s w e r e s u s p e n d e d t o CD's w i t h m a t u r i t i e s of less t h a n 90 d a y s ) , interest with rates o f f e r e d by t h e banks were a g a i n c o m p e t i t i v e w i t h m a r k e t y i e l d s were d e c l i n i n g sharply -- The f i g u r e s b a n k s made o f of financial the of total their their and t h e banks g a i n e d i n Table 2 a l s o the preceding year. funds went into U.S. fact, I n the Government latter amount, over and s w i t c h e d r o s e by a p p r o x i m a t e l y $5 b i l l i o n accounted f o r $5 b i l l i o n - Well $18 b i l l i o n . government of the r i s e securities, loans and a b o u t two-fifths year $9 1 / 2 b i l l i o n into in loans. Of this over loans t h e r e was the of In 1969. expanded by n e a r l y ($11.2 b i l l i o n ) loans. during the (including I n 1970, double proportion than i n t o t h e n e t i n c r e a s e was i n But bank i n v e s t m e n t s over one-half funds $27 b i l l i o n and o t h e r acquisition an overwhelming 1970 r a t h e r the the 1970 - - m o r e t h a n represented r e a l estate mortgages, modest g r o w t h i n bank l o a n s , of in uses Their net the banks l i q u i d a t e d $3 b i l l i o n was c o n s u m e r c r e d i t , businesses) in year. to the banks1 behavior period, securities bank loans Moreover, investments T h i s was i n m a r k e d c o n t r a s t before. last a s s e t s a m o u n t e d t o $42 b i l l i o n for funds. show t h e p r i n c i p a l enlarged resources which to only neighborhood $20 billion. was i n S t a t e a n d were i n U.S. local Government issues. Finally, portion of their f o r e i g n branches. borrowings) last year, the commercial banks employed a enlarged resources D u r i n g 1969, to repay liabilities these l i a b i l i t i e s r o s e b y $7 b i l l i o n a s U . S . banks (mainly to substantial their Euro-dollar sought a c t i v e l y for -11alternative The r i s e net resources i n the face of i n such b o r r o w i n g s accounted f o r n e a r l y increase domestic costs), t o expand l o a n s i n the banks1 liabilities a considerable During the course o f to t h e i r proportion of the year, of these unfolds. share o f I n the l a s t even more by f u r t h e r to t h i s it subject w o u l d be h e l p f u l look for the economy's few months, too e a r l y l a s t month or not likely was unwound. liabilities financial their is clear n e e d s as t h e p o s i t i o n has b e e n conditions. section of it that year strengthened A g a i n we s h a l l t h e s e comments. of to return I n the meantime, t h e economic out- GNP P r o j e c t i o n s quarter of 1971 i s n e a r l y o v e r , t o have a d e f i n i t e v i e w o f economic p r o s p e c t s Yet, the i n f o r m a t i o n so seems t o i n d i c a t e t o be g e n e r a t e d i n suggests that come up t o the beginning of lower 1971. current year. also (and a t enhanced c a p a c i t y to sketch the main features Although the f i r s t not year as billion. easing i n c r e d i t The E c o n o m i c O u t l o o k : still last the foregoing a n a l y s i s , i n the f i n a l the Subsequently, liabilities c o m m e r c i a l banks e n t e r e d 1971 w i t h a g r e a t l y meet a s i z a b l e deposits. of commercial banks reduced the f o r e i g n b r a n c h e s b y $6 On t h e b a s i s two-fifths i n 1969. f u n d s became m o r e r e a d i l y a v a i l a b l e shrinking t h a t has become a v a i l a b l e the the near f u t u r e . for in the the The u n f o l d i n g is evidence t h e economy i n 1 9 7 1 may t h e more o p t i m i s t i c year. is t h a t a boom i n e c o n o m i c a c t i v i t y the performance of some o f it e x p e c t a t i o n s advanced at -12While i t factual basis is still too e a r l y f o r an assessment o f f o r m a n c e , a bumper c r o p o f the p u b l i c . or t o e x a m i n e them i n d e t a i l . we r e t u r n There i s of t o have a h a s a l r e a d y b e e n made no n e e d h e r e t o s u m m a r i z e t h e s e However, it firm per- available extensively w o u l d be h e l p f u l to the d i s c u s s i o n o f monetary p o l i c y general outline in the year the economy's p r o s p e c t i v e forecasts to in -- -- t o have i n mind a t h e e x p e c t e d l e v e l and p a t t e r n o f economic the c u r r e n t year -- as seen i n t h e o f f i c i a l Federal forecasts. between these p r o j e c t i o n s h a s b e e n commented o n q u i t e w i d e l y . the d i f f e r e n c e s are i m p o r t a n t , p o l i c y are significant. t o compare t h e Table Thus, two s e t s o f it divergence and t h e i m p l i c a t i o n s for m i g h t be w o r t h p a u s i n g a t forecasts. Never- this The f i g u r e s a r e shown public point in 3. For reviewed, this purpose, forecast The o f f i c i a l forecast forecasts that are As a b e n c h m a r k , were o f GNP and selected Federal Government's ( p r e p a r e d by t h e C o u n c i l o f Economic A d v i s e r s ) , a few k e y c o m p o n e n t s shown. a number o f p r i v a t e and f r o m t h e s e a " c o n s e n s u s " c o m p o n e n t s was d e v e l o p e d . is The n o t i c e a b l e activity Government p r o j e c t i o n and i n p r i v a t e theless, when s a i d t o be c o n s i s t e n t w i t h t h e a c t u a l GNP e s t i m a t e s for "target" along with such a target, 1970 a r e listed. As i n d i c a t e d , GNP i n c u r r e n t dollars the o f f i c i a l for 1971 i s projection of $1,065 b i l l i o n $15 b i l l i o n a b o v e t h e c o n s e n s u s for -13forecast year of $1,050 b i l l i o n ^ . increase forecast, the gain i s p r o j e c t e d a t few c o m p o n e n t s , underpinnings it forecast is not possible i n a s s u m p t i o n s on t h e p a r t o f Perhaps consensus a rise of consumers. faster billion, estimates I n the o f f i c i a l to r i s e -- the a number o f is forecast, the economic How- # crucial of major compared sectors projected personal by $ 5 8 . 3 b i l l i o n a rate of smaller This would represent a gain of $665 than i n 7.8 per c e n t . billion; expansion i n GNP a s a w h o l e . o r $10 b i l l i o n consumption t o $675 consumer s p e n d i n g i s p r o j e c t e d a t o f $48.3 b i l l i o n for only a year. than the p r o j e c t e d r i s e forecast, projection. cent. t h e F e d e r a l Government i s an i n c r e a s e o f about 9 1/2 per cent - - slightly year-to- expected to r e s t ^ ) the most s t r i k i n g d i f f e r e n c e expenditures are estimated this $73.5 the probable b e h a v i o r t h e economy d u r i n g t h e c u r r e n t behavior or 9 per t o s a y v e r y much a b o u t o n w h i c h t h e g r o w t h i n GNP i s w i t h most o t h e r e c o n o m i s t s a b o u t of includes t h e b r o a d e s t i m a t e s p r o v i d e d do s p o t l i g h t differences the cent. Since the o f f i c i a l ever, forecast, i n GNP w o u l d amount t o $ 8 8 . 5 b i l l i o n , I n t h e consensus or 7 1/2 per I n the o f f i c i a l In the billion, the The official stronger ( 1 ) I n p a s s i n g , I s h o u l d m e n t i o n t h a t my own a s s e s s m e n t o f t h e e c o n o m i c o u t l o o k l e a d s me t o c o n c l u s i o n s n o t e s s e n t i a l l y d i f f e r e n t f r o m the consensus f e i m c a s t . (2) I n t h i s p r e s e n t a t i o n , I see no need t o e n t e r t h e c o n t r o v e r s y o v e r t h e " b e s t " way t o f o r e c a s t GNP - - i . e . , w h e t h e r t o p r o j e c t comp o n e n t s s e p a r a t e l y a n d a d d t h e m up t o g e t t h e t o t a l o r w h e t h e r t h e t o t a l s h o u l d be f o r e c a s t i n d e p e n d e n t l y o f t h e c o m p o n e n t s . But i n p a s s i n g , I w o u l d o b s e r v e t h a t - - f o r b o t h a n a l y t i c a l and p o l i c y d e t e r m i n a t i o n p u r p o s e s - - some i n s i g h t i n t o t h e e x p e c t e d b e h a v i o r o f t h e components i s e s s t e n t i a l . I t s h o u l d be n o t e d t h a t t h e C o u n c i l s u p p l i e d t h e e s t i m a t e s o f components a f t e r t h e $ 1 , 0 6 5 b i l l i o n GNP t a r g e t was submitted i n the Annual Report. The c o m p o n e n t s a d d up t o $ 1 , 0 6 7 b i l l i o n , b u t t h i s d i f f e r e n c e does n o t a f f e c t t h e b a s i c a n a l y s i s . -14performance by the household s e c t o r v i s u a l i z e d p r o j e c t i o n assumes t h a t p e r s o n a l personal cent in income w o u l d d e c l i n e 1971. Principal the saving r a t e confidence, higher level include and r i s i n g of hold equipment, pressure -- assumes a much l a r g e r after taxes) wise, the o f f i c i a l projection the increase $55 b i l l i o n , a much f a s t e r and $6-$8 b i l l i o n ) in consumer Reflecting of furniture, the last house- downward becomes c l e a r it explicitly income i n t h e consensus i n personal in the o f f i c i a l respectively), the o f f i c i a l i n personal or greater relief income also and Other- in the 1971 i n the income a t about $48 b i l l i o n , Since and consensus the projection and saving forecasts t h e much l a r g e r expansion presupposes ( p e r h a p s on t h e i n personal the consumer included income i n in after-tax -- forecast. rise Most e s t i m a t e s that (both before to around 7 per c e n t . shown i n rise stating the r i s e t h e same i n i n consumption outlays it o f a $58 b i l l i o n the saving r a t e essentially for i n consumer e x p e n d i t u r e s a t ( 6 . 9 p e r c e n t and 7 p e r c e n t , of conditions i n personal the r i s e $50 b i l l i o n , either however, although not of is per rate. neighborhood rate 1970 t o 6 . 9 t h e assumed d e c l i n e consumer e x p e n d i t u r e s increase put disposable c o n s t r u c t i o n and t h e a f t e r - e f f e c t s c a n n o t be s u s t a i n e d . in in consumer a s s e t s and l i q u i d i t y . than that projected forecast the decline underlying examination, projection concensus official a n d a u t o m o b i l e s a r e a l s o assumed t o e x e r t On c l o s e r expenditures from 7.3 per cent i m p r o v i n g economic strike, on t h e s a v i n g official the s a v i n g as a p r o p o r t i o n o f factors residential year's automobile in income t a x e s order -- or -15some c o m b i n a t i o n o f b o t h . m i n d when j u d g i n g behavior with significant such o u t l a y s $29.7 b i l l i o n (or nearly contrast, relates starts w i l l two s e t s o f i n assumptions construction. $41 b i l l i o n Thus, an i n c r e a s e residential in the neighborhood o f The much s t r o n g e r the o f f i c i a l i n 1971, apparently flows of performance of -- c a n be t r a c e d funds to savings I n the an i n c r e a s e o f year. (at roughly the housing sector 1 0 0 , 0 0 0 more s t a r t s least in part) institutions i n t h e consensus There i s respect total to business about little In official 1.43 The million central in 33 p e r cent. visualized in i n spending t o an e x p e c t a t i o n o f and l o w e r m o r t g a g e r a t e s d i f f e r e n c e between the in housing i n 1971 a n d $2 b i l l i o n -- of -- both credit two p r o j e c t i o n s Both expect such o u t l a y s 1971, r e f l e c t i n g an i n c r e a s e o f - stronger forecast. fixed investment. $106 b i l l i o n compared The o f w h i c h i n t u r n seem t p p r e s u p p o s e a g r e a t e r a v a i l a b i l i t y than a n t i c i p a t e d official billion compared w i t h forecast puts housing s t a r t s 1.9 m i l l i o n , forecast the c o n s t r u c t i o n e x p e n d i t u r e s assumes t h a t to about 2 m i l l i o n the consensus about to $9.3 b i l l i o n than o n e - t h i r d ) . i n 1 9 7 0 , a n i n c r e a s e o f a b o u t 40 p e r c e n t o v e r l a s t estimate leading $11.3 of in forecasts. estimate. suggested a r i s e less point i n 1970, of i s assumed i n t h e o f f i c i a l ( o r an advance o f climb the important to expectations are projected at the consensus f o r e c a s t for of residential last year. two-fifths) t o $39 b i l l i o n estimate for t o keep t h i s difference i n the p r o j e c t i o n s of expenditures forecast, is well the reasonableness Another differences It with to 3 1/2 to -164 per cent business from the previous inventories, more v i g o r o u s such s t o c k s rise. is year. however, With respect the o f f i c i a l I n the o f f i c i a l put at $8 b i l l i o n , consensus forecast. following the automobile double last a l s o assumes a much m o r e e n e r g e t i c expansion. of This inventory in to fairly close The o f f i c i a l in of the consensus on e x p e c t a t i o n s In addition, the o f f i c i a l some catch-up forecast lift to economic the rate forecast. spending f o r i n Federal grants sharing, the current that increase The o f f i c i a l capital Federal rise spending estimate in Federal improvement i n S t a t e and l o c a l availability of improvements. the o f f i c i a l year. in credit stimulus assumption of a sizable would not begin u n t i l tax assumed In passing, the main source o f respect governments. i n S t a t e and l o c a l expected to provide e x t r a enacted - - calendar S t a t e and l o c a l as w e l l as on t h e p r o j e c t e d i s made a l t h o u g h if projections somewhat w i t h o f an e x t r a o r d i n a r y is both l a r g e r decrease increase the greater projection s h o u l d be p o i n t e d o u t they diverge the Federal vs. a n d a somewhat l a r g e r S t a t e and l o c a l of However, t h e economy a n d t h e c o n c o m i t a n t revenue in the t h e pace o f government purchases, t o S t a t e and l o c a l u n i t s revenues. for the o f f i c i a l expansion i n f o r e c a s t assumes a s l i g h t l y rests heavily of total together. t h a n i s assumed i n grants increase accumulation. the expected behavior spending - - allow t u r n would g i v e an a p p r e c i a b l e I n t h e case o f are the t h a t assumed i n year, in f o r e c a s t assumes a much projection, While both projections strike to investment to it rise the expansion the f o u r t h -- quarter -- -17The a b o v e a n a l y s i s following conclusion: t h a n the consensus is also clear. of t h e two p r o j e c t i o n s the o f f i c i a l forecast, projection outlook visualizes for residential construction. assumption of a s i g n i f i c a n t the already easier of this these f a c t o r s is the satisfactory easing i n monetary oonditions the d i v e r g e n t forecasts Again, Instead, the focus for is s t a t e d t h a t a $1,065 b i l l i o n progress is real on a l o n g e r t h e end 6 f increase t o w a r d an unemployment r a t e output, projections in 1971 t h a n i t was a t the close of i n p r i c e s w o u l d be d e c l i n i n g into quantitative estimates. expectations in are 1971 w o u l d assure per cent range real output by would lower 1970, and the r a t e through the run the 4 1/2 the 3 per to changes t h e u n e m p l o y m e n t r a t e w o u l d be s u b s t a n t i a l l y These q u a l i t a t i v e GNP i n G i v e n t h e assumed g r o w t h i n GNP i n 1 9 7 1 , strongly, from operations the o f f i c i a l and o n l y the g e n e r a l d i r e c t i o n o f c e n t zone a n d a n i n f l a t i o n r a t e a p p r o a c h i n g mid-1972. as critical i n f o r m a t i o n on e x p e c t e d d e v e l o p m e n t s w i t h r e s p e c t d u r i n g 1971. It from as w e l l unemployment, and r e a l o u t p u t d u r i n g the c u r r e n t y e a r indicated. rise thrusts t h e GNP P r o j e c t i o n s h o r i z o n — mid-1972 - prices, difference inventories Underlying both p r i c e s and unemployment a r e w o r t h n o t i n g . little optimistic year. The c o n s e q u e n c e s o f provide the c o n d i t i o n s achieved through monetary p o l i c y by t h e b e g i n n i n g o f Implications further the powerful consumer s p e n d i n g w h i c h w o u l d s t i m u l a t e b u s i n e s s outlays to i s much more and t h e e x p l a n a t i o n o f The o f f i c i a l leads at of year. c a n n o t be t r a n s l a t e d However, by d r a w i n g on t e s t i m o n y easily and -18coraments b y F e d e r a l G o v e r n m e n t o f f i c i a l s derived of from the o f f i c i a l changes official in output, unemployment, GNP p r o j e c t i o n . i m p l i e d by t h e of estimates, in real 5 1/2 vs. 4 1/2 per correct, If paths the o f f i c i a l point which is gain in real most likely the other to The I m p a c t expansion of 2 3/4 per sharp focus and a l a r g e r that following cent; increase This -- is zones: in prices, of -- in it two of i n unemployment large projections. 1971 - - section of must larger On checking the of rate national face. these a than would the outcome. framers -- vs. the would probably y i e l d a the rise approximately p r o g r e s s w o u l d be l i k e l y ^ the c l o s i n g the 5 per cent i m p l i e d by t h e f o r e c a s t were the dilemma w h i c h sets unemploy- the p r o b a b l e consequences and the c o u n t r y a t issue changes t h e two the r a t e are only reduction the consensus of Monetary In the these e s t i m a t e s hand, v e r y l i t t l e this m i g h t be i n b y no means c e r t a i n if contours the the forecast a c t u a l l y shouldbe achieved during occur economic p o l i c y the broad consistent with suggest o f economic p e r f o r m a n c e output of I n f l a t i o n . return Even i f into and p r i c e s analysis 6 , and t h e r a t e o f they put alternative o f my own 4 per cent vs. cent. one c a n s k e t c h inferences forecast. respectively, output, -- a s w e l l as b y These c a n t h e n be c o m p a r e d w i t h consensus The r e s u l t s ment, forecast -- We shall remarks. Policy t h e case o f m o n e t a r y p o l i c y , bank r e s e r v e s it is clear that the moderate t h a t has been underway f o r more t h a n a year -19has a l r e a d y had a s i g n i f i c a n t evidence is summarized i n T a b l e 4 . by t h e s e f i g u r e s , the f i r s t is of place, crucial any s i n g l e but if several one i s importance t h a t one a v o i d b e i n g t r a p p e d i n t o 1969. was c l o s e quarter, This is particularly During the As i n d i c a t e d i n Table 4 - - 5 1/2 per cent first i n 1970, n i n e months o f to 6 per cent a t an annual r a t e . this year. observers t h a t monetary p o l i c y more trends, if am p e r s o n a l l y that advice. of monetary growth. s i d e r a b l e amount o f gratified Instead, the plus i n the and i t of fourth fell the further narrowly comment w i t h a number s h o u l d be made of significantly form of banks and s a v i n g s institutions. 8 per cent. final was p o i n t e d o u t I n 1970, quarter of in such d e p o s i t s s a v i n g s banks last year, not pace t h a t a con- a n d much o f t i m e and s a v i n g s d e p o s i t s and a t S&Lfs and m u t u a l I n the the F e d e r a l Reserve d i d had been c r e a t e d , s h o w i n g up i n t h e 18 1 / 2 p e r c e n t , it the expansion the System adhered t o a moderate Simultaneously, liquidity that it that stimulative. I follow In so d e f i n e d - - This behavior led to a great deal of suggested (currency year, However, d e f i n e d money s u p p l y suggesting are compared w i t h 3 p e r last the annual r a t e dropped t o 3 1/2 per c e n t , to 1 per cent i n January of The following true t o b e t h e n a r r o w l y d e f i n e d money s u p p l y demand d e p o s i t s ) . in conclusions t o have a c l e a r v i e w o f m o n e t a r y money s u p p l y r o s e b y a b o u t cent A number o f flows. s h o u l d be m e n t i o n e d e x p l i c i t l y . s t a t i s t i c a l measure. measure happens private i m p a c t o n money a n d c r e d i t it was commercial rose by the r i s e the increases was were -20a t annual rates groups, of 22 p e r c e n t a n d 12 p e r c e n t , the annual r a t e Officials effects of in the F e d e r a l Reserve a l s o strike last o n t h e demand f o r money a n d c r e d i t . a p p a r e n t l y was g i v e n l i t t l e by induced of to urge more l i q u i d i t y . of stressed that While this the F e d e r a l Reserve as a d j u s t e d bank c r e d i t proxy) January. the impact and were it r o s e a t an a n n u a l r a t e of of the 13 p e r d e f i n e d money s u p p l y a t a n a n n u a l r a t e even evident the quickening of fascinated* effects became e v e n m o r e (as measured by cent 14 1 / 2 per cent. If J a n u a r y and F e b r u a r y changes a r e combined, the growth of a l l 6f the monetary v a r i a b l e s 1970 a s a w h o l e , a n d some o f in the third them e v e n e x c e e d t h e quarter of The i m p a c t o f further total first growth is loans a t cent during the last the also fall's conditions automobile i n Table 5. strike -- fourth quarter this 10 p e r c e n t ) of expansion -- As t h e s e w h i c h were on t h e b e h a v i o r figures commercial banks d e c l i n e d a t an a n n u a l r a t e ( f r o m an annual r a t e rapid rates rates year. reflected two months o f of growth of than for noticeably s l u g g i s h economic d e p r e s s e d by l a s t bank c r e d i t are higher it there- t h e economy w i t h t h e economy b e g a n t o show t h e bank c r e d i t spreading t h o s e who h a v e become flood production, I n February, that both p o i n t appears obvious, a n d money w o u l d e x p a n d a l o n g w i t h economic a c t i v i t y . in w o u l d have an a d v e r s e t h e n a r r o w l y d e f i n e d money s u p p l y - - the resumption of automobile and the n a r r o w l y fall w e i g h t b y many o f By F e b r u a r y , t h a t bank c r e d i t For o f g r o w t h j u m p e d t o a b o u t 25 p e r c e n t the automobile by t h e b e h a v i o r respectively. but show, of 1 per then a sharp turnaround occurred year. A marked swing i n b u s i n e s s of decline of was m a i n l y 9 per cent responsible for shift over loan t o an a n n u a l this of in rate credit -21growth. i n the In addition two p e r i o d s , c a p i t a l market to the c o n t r a s t financing during of business loan this that toward p r o v i d i n g liquidity fact, lost as I during year, enough l i q u i d i t y its for the these trends t h e economy w i l l on t h e enormous s t o c k o f business I firms, and o t h e r t h i n k we can - - in 1969. short-term assets sectors and s h o u l d — and t h i s w i t h o u t rekindling have While C a p i t a l F l o w s , and t h e Balance o f from the sharp f a l l month U.S. t r e a s u r y b i l l s on output in inflationary growth of Currently, are i n the neighborhood In contrast, d u r i n g 1969, y i e l d s 8 per cent. I n 1970, in credit on t h e s e i s s u e s of stems interest in short-term rates, t e r m r a t e s have a l s o d e c l i n e d a p p r e c i a b l y . whether Payments t h a t has a l r e a d y o c c u r r e d t h e d e c l i n e has b e e n m o s t d r a m a t i c federal which accumulated consider the In subsiding. My c o n c e r n f o r a v o i d i n g a n e x c e s s i v e partly I the h a s a l s o b e e n c r e a t e d t o see t h e economy w e l l year - - Rates, differing need t o r e s t o r e the p e r i o d o f monetary r e s t r a i n t p r e s s u r e s w h i c h a r e o n l y now Interest up i n money a n d c r e d i t , way t o w a r d g e n e r a t i n g a c o n s i d e r a b l e e x p a n s i o n i n r e a l the c u r r e n t of growth. the reserves reflect the l a s t the proceeds t h e F e d e r a l R e s e r v e has a l r e a d y gone a l o n g way banks, households, in conditions the f o u r t h q u a r t e r and a sharp l e t y e a r was r e s p o n s i b l e F r o m my e x a m i n a t i o n o f am c o n v i n c e d the s t r e n g t h o f business heavy repayment o f bank l o a n s o u t o f i n such repayments e a r l y rates in rates. long- yields on 3 - 3.50 per cent. reached a h i g h t h e a v e r a g e was c l o s e t o 6 1 / 2 p e r c e n t . funds r a t e has a l s o dropped t o a b o u t 3 . 5 0 p e r c e n t — of The from a -22high of year. 9.68 per c e n t i n 1969 a n d a n a v e r a g e o f The d i s c o u n t rate at reduced from 6 per cent the F e d e r a l Reserve Banks has to 4 3/4 per I n the c a p i t a l markets, cent yields w i t h a 1 0 - y e a r m a t u r i t y have d e c l i n e d interest rates Reflecting on t h e s e rates example, yields November. Government to 5 3/4 p e r c e n t . climbed to a high of o n new c o r p o r a t e Subsequently, 7.54 per cent. 1970 t o a b o u t i s s u e s r a t e d Aaa d e c l i n e d think -- outflow of particularly obtained primarily But, the l e v e l in of off in in For from a week flotations, the first to a current level (as measured 9.36 per cent the -- in f o r e i g n branches. rates, already an from the United as i n d i c a t e d a b o v e , further new short-term as t o s t i m u l a t e the repayment by U.S. banks o f through t h e i r some stream of the case o f short-term capital extent, if for s h o r t - t e r m y i e l d s may a n d so r a p i d l y To a c o n s i d e r a b l e f l o w has c e n t e r e d i n eased t h e r e m i g h t be an o p p o r t u n i t y that have d r o p p e d so f a r undesirable cent. currently. e a s e s up somewhat. personally these r a t e s have decreased f r o m a h i g h o f long-term rates, flotations 1969, the l a s t Rates on r e s i d e n t i a l mortgages 7.43 per cent On b a l a n c e , in In the decline i n 1970 t o 6 . 7 6 p e r c e n t d u r i n g b y FNMA a u c t i o n y i e l d s ) decline securities 7.84 per b a c k e d up s h a r p l y and c l i m b e d t o 7 . 7 9 p e r c e n t of about been However, under the impact o f a l a r g e volume o f week o f M a r c h . I on U . S . last last o n c o r p o r a t e bonds has b e e n somewhat s m a l l e r . 9.30 per cent of January. yields issues since t h e c o n t i n u i n g h e a v y v o l u m e o f new i s s u e s , interest high of 7.17 per cent States. this out- Euro-dollars As shown i n T a b l e 5, -23total Euro-dollar year, of b o r r o w i n g s r o s e b y $8 1 / 2 b i l l i o n such b o r r o w i n g s t h i s amount ($4 1 / 2 b i l l i o n ) y e a r , when d o m e s t i c and r e l a t i v e for the p o t e n t i a l continued was r e p a i d rates rates abroad), t o be p a i d down. t h e second h a l f sharply the costs (both to the progressive cost of of decline of of F o r a number funds rates in ( p e r h a p s on t h e o r d e r o f ( i n c l u d i n g borrowings 1 9 7 0 , b y $2 b i l l i o n two months o f i n the this fourth, year. year there appears rate of repayments, although to f o r e i g n branches $2 the of As o f M a r c h b r a n c h e s a m o u n t e d t o abQUt J a n u a r y 1970 17, o u t s t a n d i n g $4-8 b i l l i o n , to this second-half special o f U.S. banks liabilities to third a b s o r b e d d o l l a r s w h i c h m i g h t w e l l h a v e e n d e d up i n t h e r e s e r v e s c e n t r a l banks. third billion So f a r slowing from 1970fs the sales of $1.5 b i l l i o n Bank s e c u r i t i e s institutions o f banks in was i n the and by a n o t h e r i n the f o u r t h q u a r t e r . t o be no a p p r e c i a b l e afford 1 per- from other The l i a b i l i t i e s this liabilities d e c l i n e d b y $2 1 / 2 b i l l i o n 1 9 7 0 , and $3 1 / 2 b i l l i o n Export-Import base regulations interest own f o r e i g n b r a n c h e s d e c l i n e d b y $ 1 1 / 2 b i l l i o n of the absolutely the banks and a s u b s t a n t i a l amount o f E u r o - d o l l a r These l i a b i l i t i e s first quarter of advantage o f m a i n t a i n i n g a r e s e r v e - f r e e as w e l l a s f r o m f o r e i g n b r a n c h e s ) their three-quarters a g r o w i n g number o f b a n k s d e c i d e d t h e y c o u l d no l o n g e r centage p o i n t ) , the in Last appealing. t o pay t h e d i f f e r e n t i a l in However, b o r r o w i n g s under F e d e r a l Reserve Board Yet, with quarter declined 1969. s u c h f u n d s became i n c r e a s i n g l y b u r d e n s o m e . Euro-dollar country, interest to i n t e r e s t h o l d i n g on t o of banks, shrank by $ 5 . 9 b i l l i o n . in has of foreign foreign compared t o $14 1 / 2 b i l l i o n ( t h e peak f r o m w h i c h the c u r r e n t d e c l i n e b e g a n ) . Even in -24when t h e , $ l 1/2 b i l l i o n of Ex-Im s e c u r i t i e s o u t s t a n d i n g o n M a r c h 17 ( $ 6 . 3 b i l l i o n ) just over a year ago. moderation continued in At some p o i n t , t h e pace o f t h e head o f f i c e s this less included, cost however, of maintaining expectation o f U.S. banks a s w o r k i n g b a l a n c e s and t o is the than one-half the -- that despite of the liabilities. t h e n e e d on t h e p a r t the a c t i v i t i e s of The of t o h o l d a c e r t a i n amount o f facilitate amount one m i g h t e x p e c t a repayment o f E u r o - d o l l a r s somewhat h i g h e r reason underlying is are some of Euro-dollars their foreign branches. capital balance to f i n d most the that is When t h i s 1970, What I fact happens, of this foreign i s a deepening of amounted three-fifths to $10.7 b i l l i o n , in Neither ( i n c l u d i n g branches of the total. their international reserve assets certainly their dollar (especially would not gold or like problems which could a r i s e if United States anything continues at accumulations banks we c a n in a substantial scarcely ris6 in such for SDR's). short-term capital t h a t anyone would argue liabilities indefinitely to over-emphasize like In in to hold a to r e f r a i n U.S. institutions) central reserves, the basis. t h a n r e l u c t a n t t o see a s i g n i f i c a n t c a n t h e y be e x p e c t e d f r o m e x c h a n g i n g some a f doubt While of U.S. have d e m o n s t r a t e d a w i l l i n g n e s s t h e m t o be o t h e r in and t h e d e c l i n e amount o f d o l l a r s I the d e f i c i t banks. deficit countries theless, short-term settlements number o f I of f u n d s end up i n f o r e i g n c e n t r a l commercial banks holdings. these o u t f l o w s p a y m e n t s , m e a s u r e d on t h e o f f i c i a l for other the the r e s u l t accounted expect t r o u b l i n g about outflow the r e c e n t that the the potential from rate. the Never- international monetary -25system i s s t r e n g t h e n e d by such f l o w s . make m o r e d i f f i c u l t and payments. number o f under contribute industrial process in the months ahead, to the Economic P o l i c y impact for Despite still believe However, of Stable to bring I believe their own a inflations of the Federal Reserve should give close d e c i s i o n s on c a p i t a l outflows. on m o n e t a r y p o l i c y efforts described have a c o n s t r u c t i v e to spur a f a s t e r that role rate of certainly liquidity. t h a n t h e economy c a n u s e p r o d u c t i v e l y However, t h a t judgments the sharp d e c l i n e increased a v a i l a b i l i t y suffering effective i n the near c a n - - and w i l l -- in short-term interest of c r e d i t certainly from a shortage of Instead, i n my o p i n i o n , demand. Neither term. growth. require some observers reserves I on t h i s realize, point. r a t e s and t h e do s u g g e s t to institutions In fact, differ role does n o t t o swamp c o m m e r c i a l b a n k s a n d s a v i n g s flood of additonal above, economic h a v e a r g u e d t h & t t h e S y s t e m may have a l r e a d y p r o v i d e d more course, monetary Growth i n my p e r s o n a l o p i n i o n , w i t h an u n b r i d l e d not of the conduct its that, the monetary a u t h o r i t i e s the F e d e r a l Reserve is trade in the c o n s t r a i n t s play i n our n a t i o n a l of in control. attention I undoubtedly to undermining the e f f o r t s countries For these reasons, policy they a n a l r e a d y hampered a d j u s t m e n t They a l s o other Instead, that the greatly economy money. there is a serious shortage of b u s i n e s s e s n o r consumers appear w i l l i n g to -26s t e p up t h e i r in rate of turn stimulate decline in t h e b a c k l o g o f unused p l a n t pessimistic likelihood to about f u t u r e of a foreseeable capacity, to benefit equipment in operations. a large are s t i l l This p a r t l y Reserve B o a r d ' s index of in In fact, from l a s t Under fall's explains automobile these circumstances, to Since participants the major required — that income we is, the economic substantial and l i t t l e the too may f a c e a c l a s s i c -- outlook. excess chance g i v e n t h e weakness i n in and consumer current the production i n February - - Federal contrary r i s e as t h e economy c o n t i n u e d to strike. t h e s i t u a t i o n may w e l l call demand i n t h e p r i v a t e sector to provide case t h a t I n my o p i n i o n , if might (households and t h e autonomous that call for for economy. support b y s p e n d i n g more and s a v i n g l e s s o u t o f a the F e d e r a l Government. -- i n the p r i v a t e apparently are u n w i l l i n g reflect -- s p e n d i n g o n new p l a n t strengthen e f f e c t i v e businesses) the Businesses the moderate d e c l i n e industrial d i r e c t measures Moreover, c u t t i n g b a c k on t h e volume o f to a general expectation of a further rebound and a employment p r o s p e c t s and need f o r increase would c o n s u m e r s seems t o squeeze and f a c i n g the near term. d e m a n d , many f i r m s of check t o i n f l a t i o n . t h e y see l i t t l e from - - capacity. from a p e s s i m i s t i c view of i n a severe p r o f i t s - - which r i s i n g employment, spend on t h e p a r t expectations seem t o b e s u f f e r i n g plant goods and s e r v i c e s increased production, sluggish propensity Caught spending f o r given action a c t i o n should be by -27tequired, that it it could take a v a r i e t y work d i r e c t l y There i s list recommended b y o t h e r s the p o i n t . Just to business purpose, no n e e d t o disposable It taxes legislative The e f f e c t plans this scheduled t o year, of both of fixed other in their seem t o e x p e c t b u t a few e x a m p l e s the essence of should It quickly simultaneously The base f o r 1971. The change was d e l a y e d a c t i o n s h o u l d be a $ 1 . 4 b i l l i o n these reduction i n business scheduled reductions the beginning of next year, for $2 1 / 2 b i l l i o n income are that were of this to income. e f f o r t s have been urged t o s t r e n g t h e n t h e While d i f f e r e n t estimates the rate of surveys of investment of planned expenditures, increase most t o be i n t h e n e i g h b o r h o o d rate intentions observes of in costs. i n personal increases from gain these p r o j e c t e d r e d u c t i o n s w e r e moved f o r w a r d t o investment. vary widely promising. t h e t a x r e d u c t i o n p r o g r a m i n t h e Tax R e f o r m A c t spendable Still t h e most — was s c h e d u l e d t o be r a i s e d t h e y m i g h t p r o v i d e an a d d i t i o n a l b o o s t o f consumer's investment. The p e r s o n a l e x e m p t i o n and t h e s t a n d a r d d e d u c t i o n increase at a d o p t e d as p a r t If f i n a n c e them. p e r s o n a l i n c o m e and a s i m i l a r be a c c e l e r a t e d . of of to is consumers fixed i n S o c i a l S e c u r i t y p a y m e n t s and has a l s o been suggested t h a t 1969. catalog here, to t h e Congress t o o k two s t e p s w h i c h in payroll in earlier year. to undertake c a n be s u m m a r i z e d t o i l l u s t r a t e $7,800 to $9,000 e f f e c t i v e January, a full inducements t o consumer s p e n d i n g i n t h e m o n t h s a h e a d . postponed the r i s e -- firms an e x t e n s i v e p a s s e d a 10 p e r c e n t b o o s t taxes H o w e v e r , a key r e q u i r e m e n t f i s c a l measures a r e c l e a r l y t h i s week, l e n d some s u p p o r t forms. through the p r o v i s i o n of t o spend and i n d u c e m e n t s For t h i s of taxes -283 1/2 p e r , c e n t . Hence, w h a t more v i g o r o u s there appears effort. a l r e a d y been u n d e r t a k e n business in 1970. ment equipment. will This a c t i o n w i l l Beyond t h i s , restored, short-run investible the d e c i s i o n - - (which i s not i m p a c t on a f t e r - t a x certain at this be g i v e n t o t h e f i s c a l a p p r o a c h - e a s i e r monetary p o l i c y . insure that rekindling that is far before profits tax c r e d i t and t h u s the has been e f f e c t i v e l y a b a t e d . we s t a y w i t h i n it. -- flow on a is not very wide, the near of stability. the f u e l for I am p e r s o n a l l y — without and i t still careful the F e d e r a l Reserve System w i t h i n e x p a n s i o n o f money a n d c r e d i t pressures were consideration the achievement f r o m c h e c k e d , we m u s t n o t p r o v i d e to i n f l a t i o n a r y long- t o be n e e d e d than to the r e l i a n c e longer-run objective: it time, billion. On t h e o t h e r h a n d , we m u s t be e x t r e m e l y t h e zone open t o to allow a further that economic g r o w t h w i t h a r e a s o n a b l e degree o f p r i c e Since i n f l a t i o n convinced the I urge t h a t c a r e f u l rather At billion invest- t h e s t e p s we t a k e a n d t h e i n s t r u m e n t s we u s e i n t e r m do n o t d e f e a t o u r sustainable If t h e economy p r o v e s time), the b e c a u s e we f o r e s a w t h e incentives. stimulation of for o f a b o u t $3 two y e a r s a g o . f u n d s m i g h t be a r o u n d $2 1 / 2 further If its y i e l d a stimulus Congress has been u r g e d t o r e s t o r e strengthen investment the t h a t a move h a s depreciation guidelines t a x c r e d i t w h i c h was r e p e a l e d n e a r l y r u n need t o to be r e c a l l e d to l i b e r a l i z e some o f u s a r g u e d a g a i n s t of It t o be r o o m t o e n c o u r a g e a some- is which adding important that T a b l e 1. Amount a n f r ^ o u r c e s o f Funds Raised i n C a p i t a ^ j M a r k e t s by M a j o r S e c t o r s , 1969 and 1970 (Amounts i n b i l l i o n s o f d o l l a r s ) 1969 Per c e n t Amount o f t o t a l Sector T o t a l f u n d s r a i s e d by sectors nonfinancial 1970 Per c e n t Amount o f t o t a l 95.4 100.0 4.0 1.4 2.6 12.7 12.8 - 0.1 13.3 13.4 - 0.1 94.1 104.0 82.7 86.7 94.1 100.0 82.7 100.0 8.5 32.2 49.7 39.1 7.4 3.2 3.7 9.0 34.2 52.9 41.6 7.9 3.4 3.9 12.2 21.3 46.3 37.9 5.1 3.3 2.8 14.8 25.8 56.0 45.8 6.2 4.0 3.4 90.4 100.0 95.4 100.0 F e d e r a l Reserve System 4.2 4.7 5.0 5.2 U.S. Government Direct C r e d i t agencies (net) Funds advanced Less funds r a i s e d i n market 2.7 2.5 0.2 9.0 3.0 2.8 0.2 9.9 4.5 3.3 1.2 8.8 4.7 3.5 1.2 9.2 8.8 9.7 7.6 8.0 12.2 16.5 13.5 18.3 31.1 29.3 32.6 30.7 4.3 4.8 P r i v a t e nonbank f i n a n c e Savings i n s t i t u t i o n s , n e t Insurance Finance, N.E.C., net 30.4 10.4 21.8 - 1.8 33.7 11.5 24.2 - 2.0 37.3 14.9 23.3 - 0.9 39.1 15.6 24.4 - 0.9 P r i v a t e domestic n o n f i n a n c i a l Business S t a t e and l o c a l g o v ' t . , gen. Households Less n e t s e c u r i t y c r e d i t 39.5 13.8 6.1 18.0 - 1.6 43.7 15.3 6.7 19.9 - 1.8 7.5 1.9 - 2.7 7.0 - 1.2 7.9 2.0 - 2.8 7.3 - 1.3 1.3 1.4 10.0 10.5 U. S. G o v e r n m e n t ^ Public debt s e c u r i t i e s Budget Agency i s s u e s A l l other nonfinancial - sectors D i s t r i b u t u i o n among s e c t o r s S t a t e and l o c a l governments Households N o n f i n a n c i a l business Corporate Nonfarm n o n c o r p o r a t e Farm Foreign Sources o f funds advanced credit (2) Commercial b a n k s , n e t v ' Funds advanced Less funds r a i s e d i n c r e d i t market Foreign (1) E x c l u d e s sponsored c r e d i t (2) I n c l u d e s 90.4 3.7 1.3 2.4 agencies. u n c o n s o l i d a t e d bank a f f i l i a t e s . 100.0 - - 1.8 - 1.9 Table 2. u r c e s and I ces o f Funds by C o m m e r ^ ^ . ' ~ 1969 a n d 1970 (Amounts i n b i l l i o n s o f d o l l a r s ) O 19 69 Per c e n t Amount o f t o t a l Source o r Use Net a c q u i s i t i o n o f f i n a n c i a l assets 100.0 41.9 100.0 16.5 83.8 29.3 69.9 17.7 9.5 9.3 1.1 - 1.3 89.9 - 48.2 - 47.2 5.6 - 6.6 27.5 8.2 5.2 3.7 - 0.7 65.6 19.6 12.4 8,8 - 1.7 2.0 0.5 15.2 11.7 16.8 90.4 2.5 11.2 0.5 0.9 1.0 1.9 0.6 3.2 26.7 1.2 2.1 2.4 4.5 1.4 7.6 5.6 1.8 4.3 - S t a t e and l o c a l o b l i g a t i o n s C o r p o r a t e bonds Home mortgages Other mortgages Consumer c r e d i t Bank l o a n s , N.E.C. Open market paper Security - - credit 19 70 Per cent Amount o f t o t a l 19.7 T o t a l bank c r e d i t C r e d i t market i n s t r u m e n t s U.S. G o v ' t , s e c u r i t i e s Direct Agency i s s u e s Loan p a r t i c i p a t i o n c e r t i f s . Banks, 0.4 0.1 3.0 2.3 3.3 17.8 0.5 - 1.1 - 0.6 3.0 V a u l t cash and member bank reserves 0.4 2.0 2.2 5.3 Miscellaneous 2.2 11.2 10.5 25.1 18.0 100.0 39.8 100.0 5.2 i< 5.2 28.9 28.9 6.4 2.7 3.7 16.1 6.8 9.3 53.9 70.0 16.1 38.0 15.2 22.8 95.5 38.2 57.3 0.1 0.6 0.6 0.1 4.2 3,3 0.6 23.3 0.7 0.2 - 0.1 1.8 0.5 - 0.3 - 1.9 - 4.8 0.1 17.4 7.0 10.4 0.6 96.7 38.9 57.8 - 0.1 3.7 6.1 2.4 - 0.1 Loans t o a f f i l i a t e Net i n c r e a s e i n banks assets liabilities Demand d e p o s i t s , n e t U.S. Government Other Time d e p o s i t s Large n e g o t i a b l e CD's Other F e d e r a l Reserve f l o a t Borrowing a t F e d e r a l Reserve Banks Loans from a f f i l i a t e s Bank s e c u r i t y i s s u e s Commercial paper i s s u e s P r o f i t tax l i a b i l i t i e s Miscellaneous l i a b i l i t i e s L i a b i l i t i e s t o f o r e i g n branches Other - - 9.7 12.6 2.9 * Discrepancy 0.3 Current surplus P l a n t and equipment 3.1 1.0 Note: http://fraser.stlouisfed.org/ * Not Federal Reserve Bank of St. Louis Data show available - * - 0.1 - * 0.2 * - - 0.3 9.3 15.3 6.0 3.0 1.1 combined statement f o r commercial banks and a f f i l i a t e s . Table 3 P r o j e c t i o n s o f Gross N a t i o n a l P r o d u c t f o r (Amounts i n b i l l i o n s o f d o l l a r s ) 1970 (Actual) Category< 1971 F o r e c a s t Official Adm. Consensus 1971 Change: Amount Official Adm. Consensus 1970 - 71 Percentage Official Adm. Consensus 976.5 1050.0 1065.0 73.5 88.5 7.5 9.1 Personal Consumption Expenditures 616.7 665.0 675.0 48.3 58.3 7.8 9.4 D u r a b l e goods N o n d u r a b l e goods Services 89.4 264.7 262.6 97.0 234.0 284.0 n.a. n.a. n.a. 7.6 19.3 21.4 n.a. n.a. n.a. 8.5 7.3 8.1 n.a. n.a. n.a. 135.7 149.5 155.0 13.8 19.3 10.2 14.2 102.5 29.7 106.5 39.0 106.0 41.0 4.0 9.3 3.5 11.3 3.9 31.3 3.4 38.0 3.5 4.0 8.0 0.5 4.5 14.3 128.0 3.6 3.5 4.0 0.1 0.4 2.8 11.2 220.5 232.0 233.0 5.2 5.7 99.7 76.6 23.1 98.5 73.5 25.0 98.0 n.a. n.a. 120.9 133.5 135.0 Gross N a t i o n a l Gross P r i v a t e Investment Product Domestic Business f i x e d investment Residential construction Change i n b u s i n e s s inventories Net Exports Government Purchases Federal Defense Other S t a t e and n.a. Not local Available. - 12.5 11.5 - 1.2 3.1 1.9 12.6 - - 1.7 n.a. n.a. 14.1 - 1.2 4.0 8.2 10.4 - 1.7 n.a. n.a. 11.7 Table 4. Trends i n Selected Monetary V a r i a b l e s , 1 9 6 9 , 1970 a n d J a n u a r y - F e b r u a r y , 1 9 7 1 (Per c e n t , a n n u a l r a t e s o f change) Annual Dec.'70 Feb.'71 -1.6 6.4 -2.9 2.6 19.1 6.6 12.2 11.1 11.7 -3.0 9.5 -0.4 4.1 24.4 9.4 8.8 14.9 11.9 3.1 5.4 5.9 5.8 6.1 3.4 1.1 14.5 7.8 -5.0 18.4 1.4 14.1 32.2 21.8 25.5 28.6 27.3 -53.3 132.4 9.5 61.8 256.2 79.4 50.9 12.4 31.9 savings 1.4 11.5 0.9 11.3 16.5 15.4 22.3 30.5 26.7 Savings d e p o s i t s a t mutual s a v i n g s banks and S&L's 3.4 7.8 2.5 7.0 9.3 11.5 25.3 13.4 19.5 n.a. 8.3 0.5 6.5 17.2 8.3 10.5 13.3 12.0 3.1 5.4 5.9 5.8 6.1 3.4 1.1 14.5 7.8 2.4 8.2 3.4 8.4 11.0 9.2 11.5 22.4 17.0 2.8 7.9 2.7 7.9 10.3 9.7 14.2 21.5 18.0 2. Nonborrowed 3. Currency plus deposits 6. Q u a r t e r l y and M o n t h l y 3rd Q. 4 t h Q. Jan. Feb. 1970 1970 1971 1971 1970 Total 5. 2nd Q. 1970 1969 1. 4. 1 s t Q. 1970 reserves reserves private Commercial bank time savings deposits a. large CD's b. other t i m e and A d j u s t e d bank c r e d i t demand and proxy C o n c e p t s o f Money 7. Mx: (3) 8. M2: (3) + (4b) 9. M3: (3) + (4b) + n.a. Not available. (5) ! Table 5. Changes i n Bank C r e d i t a n d R e l a t e d M e a s u r e s , 1 9 6 9 , 1970 a n d J a n u a r y - F e b r u a r y , 1 9 7 1 1969 Year T o t a l bank c r e d i t U.S. 1/ Government securities Other securities Loans 1/ Business loans 1/ 1970 First Second Third Qtr. Half Half Year (Seasonally adjusted annual r a t e ) Fourth Qtr. 1971 First 2 months (per cent) 4.0 7.4 4.5 10.1 13.9 6.1 15.2 -15.7 11.8 8.5 14.4 25.9 2.8 16.5 20.1 10.4 28.3 20.3 34.5 29.4 9.9 3.4 2.4 4.4 9.8 -1.0 10.9 13.1 2.1 8.1 -3.7 1.8 -9.2 9.7 In billions of dollars Euro-dollar borrowing (including from other than branches) 8.5 -5.9 -1.4 -4.5 -2.5 -2.0 -2.1 Bank-related commercial 4.3 -1.9 3.3 -5.3 -3.0 -2.3 -0.4 1/ for Adjusted paper transfers of l o a n s b e t w e e n b a n k s and t h e i r affiliates.
@FedFRASER