STRICTLY COIWIDENTIAL (FR) CLASS I-FOMC

Material for

Staff Presentation to the
Federal Open Market Committee

July 2,1990

Chut 1

Basic Assumptions
Monetary policy aimed at a slowing of inflation over time, in the context of sustained economic expansion. Fiscal policy is moderately restrictive. Shlft in credit supply conditions has occurred, but it is of small proportions and its effects diminish in the coming year.

Key Flnanclal Varlables
Interest rates remain near recent levels. Money growth continues to be retarded by thrift resolutions and capital constraints.

-- M2 increases about 3-1/2 percent in 1990
and 4-1/2 percent in 1991

-- M3 increases about 1 percent in 1990 and
1-1/2 percent in 1991 Debt aggregate expands around 7 percent in 1990 and 6-112 percent in 1991. Dollar essentially stable.

ChM 2

7

- 4

-

-6a

-

- 3

- 67

LABOR PRODUCTIVITY
1982 dollars per hour onfarm Business Sector

Model Simulation

I
1976

I

I
1978

I

I
1980

I

I
1982

I

I
1984

I

I
1986

I

I
1988

I

I

1990

15

Chart 3

FOMC

Range Central Tendency
5-1I2 to 6-112
61/2Do6-1/2

"
Admlnlrtmtlon

SWC
8.0
6.7

_ _ -----NominalQNP
p v h n m .sUmate

P.mntoh.ng.. 041004
7.0

---- -- --1.8
1.6

5 to 6-112
4b7

6.7
2.2
2.6

Real QNP
p v h n m edmats

1 to2
1 t 244 o

1-112 to 2
1W4to2

CPI
pmvhnmudlmclte

4t05
8-1/2to6

4-112 to 5
Ito4-1/2

4.8
4.1

4.8
4.4

--------- A
Unemployment Rate
pnvhnm esblmste

~ k W l , 0 4 , ~ n t

-­- -- ---­
5.8
6.0

5-112 to 6-112
6-lnb 6 1 / 2

5-112 to 5 4 4
E-MtoW4

5.4
6.4

r

ECONOMIC PROJECTIONSFOR 1991 FOMC

Range

CWltrcll Tendency

Adminlrmon

Staff

--------NominalGNP
Real GNP
3-112 to 7
0 to 3

P.nmtchurg.. 041004

-- ---- -- 7.1 2.9 4.2 6.4 2.2 4.5

5-114 to 6-112
1-3l4 to 2-1/2

CPI

3-1 2 to 5 1

3-314 to 4-1 I2

- - - - - - - - - Average level, 04, parcent - - - - - - - - Unemployment Rate
5-114 to 7 5-112 to 6 5.6 8.1

Chad 4

REALCONSUMER SPENDING

&month percent change. SAAR

and Heating Fuels

\
I
1990

1 '
4

r
I
I

Real PCE
1988 1989 3.8 2.5 1.1 1.9 1.8 2.1

Income and Spending
Percent change. SAAR

Real DPI
4.0 3.6 2.1 .8 1.6 1.6

1990H1 H2

I

I
1988

I
1989

1991 H1 H2

INDEXES OF CONSUMER SENTIMENT

r

Index, Feb. 1966 I100

Michigan SRC Survey

1
"Expeaed Index"

Sentiment Index
1988 1990 02 Q2
97 Northcentral South 94 92 94
80

130 110

90

70

95 91 98

50

1976

1978

1980

1982

1984

1986

1988

1990

30

HOUSEHOLD ASSETS RELATIVETO DISPOSABLE INCOME
Ratio

5

4

3

2

1

1976

0

1978 1980 1982 1984 1986 1990

'Principally life inwrencaand pension fund reseryes. and equity in mmprate business.

ChM 5

MEDIAN PRICE OF EXISTING HOMES SOLD

r South
1988 1989

4quarIer percent change

T

-30

West

- 20
- 10
0
-

+

I
1986

I
1987

I
Percent

I
1990

10

MORTGAGE RATES
Conventional Fixed Rate

r
Nominal 30-year FRM

- 3

3.5

10-year Treasury

- 2.5
6

- 2

3

- 1.5

1986 1987 1988 1989 1990 Based on 1BmonIhchange in existing home plices.

0

HOUSING STARTS

r

Million unlts. SAAR

1

Total Starts
Millions of units, SAAR

c I ‘
1980 0
1989

_-------Multifamily
1990 1991

4

-1

0.6

0.3 1991 H1

1.27

Chad 6

REAL BUSINESS FIXED INVESTMENT
Percent change, SAAR

Total Real BFI

1990 H1

1991 H1

I

I
1990

I
1991

I

1.5 2.0

c
r

NONDEFENSE CAPITAL GOODS
Billions of dollars Excluding Alrcratt and Pans %Month Moving Average

CONTRACTS FOR NONRES. STRUCTURES
Billions of dollars

r s - M o m h Moving Average

i5

1986

1989

1990

0

1988

1989

1990

PRE-TAX ECONOMIC PROFITS AND CASHFLOW
Percent of gross domestic product Nonflnancld Corporations

1
Cashflow

c
I
1982 1983

I
1984

I
1985

I
1986

I
1987

I
1988

I
1989

I
1990

I
1991

1

3

RATING CHANGES ON CORPORATE BONDS

INTEREST PAYMENTS TO CASH FLOW'

Moody's Series

Number

-400

NonfinendalCorporations

Percent

-

80

50

Downgrades

I

d

-

40

30

1980

1992

1984

1986

1988

1990

L O
*

1979 1981 1983

I l l l l I l l l l l l l L
1985 1987 1989 1991

20

1980 cbselVa(i0n is o h q e s through May, st an annual rate.

Qmss InleresI lo cash flow lndudirq interest payments.

REAL INVENTORY-SALESRATIOS
Ratio 2.1

1.9 Manufacturing less Transportation 1.7

1.5

1.3

I
1981

I
1982

I
1983

I
1984

I
1985

I
1988

I
1987

I
1988

I
1989

I
1990

1.1

c

REAL INVENTORY INVESTMENT NonfarmBusiness

1982dollars, SAAR

Nonfarm Inventory Investment
1982 dollars, SAAR
15
0 -

198903

Q4
199001

16.2 18.0

+

a 2

H2
Auto Dealer S o k tcs
15 1991 H1

-7.8 4.4 9.2
16.6 20.6

H2

Chwi 8

r
Other

9

State and Local Operating Deficit
Billions of dollars
1988 1989 1990 1991 21.4 34.1 43.9

t

C o n S W d O n (Second bar)

34.7

1989

1990

1991

REAL FEDERAL PURCHASES
Defense

Nondefense less CCC &nd
ba

6

Percent change
Q4toQ4

-

Total Total ex. CCC

1988
0 -

-3
-3.1
-.2 -2.2

-. 1
-2.0 -1.6 -2.2

+

1989 1990 1991

1988

1989

1990

1991

6

FEDERAL BUDGFT OUTLOOK

BUDGET PROJECTION
($Billions)

1991 DEFICIT REDUCTION
($ -) s

FY1990 Receipts outlays
Deficit Deficit ex RTC

FYl991 1,132 1,318 186 116

T M Reduction

35 13 10 3 22 10 12

1,043 1,260 217 157

Added Revenues Corp. and I d . Income Excise outlay cuts

Defense
Other

Chut 0

Alternative Fiscal Scenarios

All scenarios assume deficit-reduction packages of $70 billion in FY1991 and FY1992--twicethe reductions in the Greenbook.
For FY1991, added reductions take form of 15$ hike in gas tax, $19 billion in expenditure cuts. For FY1992, added reductions take form of $16 billion in personal income tax hikes, plus miscellaneous outlay cuts.

INTEREST RATES HELDTO BASELINE PATH

Deviation from Baseline 1990 1991 1992 Real GNP (percent change, Q4 to Q4) Unemployment (percent, Q4) GNP prices (percent change, Q4 to Q4)

I I

-2
. I .3

-1.8

-1.9 1.6 -1 .o

-.

.7 1

INTEREST RATES ADJUSTED, STARTING IN 199OQ4, TO KEEP OUTPUT CLOSE TO BASELINE PATH

I

Deviation from Baseline 1990 1991 1992 Federal funds rate (Q4, basis points) Without “credibility” With “credibility” Bond rate ((24, basis points) Without “credibility“ With “credibility“ GNP prices (percent change, Q4 to Q4) Without “credibility” With “credibility”

I
-200 -90
-1 40 -75 -65 -75 -1 20 -75

-30
-65

-80
-75

.3 . 3

.3 .3

. 3 . 3

1. ‘Credibility“ effect: bond market anticipates lower deficits in future.

Chart 10

FOREIGN EXCHANGE VALUE OF THE U.S. DOLLAR Ratio scale, March 1973 100
170 1

-

Nominal Dollar Exchange Rates
Percant change

1me to 6/29/80

150

130

Pound sterling
Deutschemark
110

-9 -4
0

Canadian dollar Yen

6

90

S. Koreanwon Taiwan dollar

6 4

70 1985 1986 1987 1988 1989 1990

-

-

10 - 8

Percent

-

Nominal Interest Rates

Dec. June2! 1989 1990 Three -month Germany 8.06 Japan 6.93 U.S. 8.32 8.15 7.64 8.15

- 8

- 4

Long-term Germany 7.18 8.71 Japan 5.61 7.34 U.S. 7.84 8.43

I

I

I

I

I

I

L2

INDUSTRIAL PRODUCTION ABROAD'
12-monthpercent change

CONSUMER PRICESABROAD'
12-monthpercent change

1

9

i5

- 6

+

I1987 1980 1989 1990 1987

1QW

1989

1990

COMMODITY PRICES*'

r

Index,Jan. 1983-100, ratio scale 135

120

105

90

I
1883 1984

I
19s

I
1986

I
1987

I
1986

I
1989

I
1090

I

75

ECONOMIC POLICY ABROAD
Inflation has slowed, but concerns about wage and capacity pressures remain. Monetary policies cautious; further increases in German short-term interest rates expected; scope for some declines in interest rates as inflation eases. Fiscal policy essentially neutral in most countries except Germany.

Chad 12

CONSUMER PRICES

r

Percent change

l6

Percent change Q4 to Q4 Germany

Japan

1988
Foreign Industrial Countries'

16 .

15 . 2.9
3.7
3.1

A
1991

1989
~

31 .
3.4 3.9

1
"

1990 1991

1986

1987

1988

1989

lSs0

REAL GNP

Percent change. SAAR

-

G-10 Outlook Percent change, Q4 to Q4 1990 GNP June Jan. 1991 3.3 2.9
4.2

United States" Foreign industrial Countries' (Second bar)

31 . 2.8
4.5 3.7

CPI
June Jan. 3.8

Multilateral wade weigh=

1989

1990

1991

ECONOMIC ACTIVITY: ALL FOREIGN COUNTRIES"'

r

4-quar(er percent change
6

I
1988 1987

I
1 Q88

I
1989

I
1990

I
1991

Chart 13

Exports
\GRICULTURAL EXPORTS
latio scale, billions f 1982 dollars, SAAR

6c
50

­

Ratio soale, billions of dollars, SAAR

lW

Percent change Q4 to Q4

-

1989 1990 1991

40

Value
30

4

12 6

6
4
2

Price
1982$
20

-7
12

5

2

1986

1987

1988

1989

1990

1991

m

COMPUTER EXPORTS

130 100

r

Ratio scale, billions
of 1982 dollars, SAAR

Ratio scale. bllllons
of dollars, SAAR

Quantity

--_----

-

130
100 70

Percent change a 4 to Q4

1989 1990 1991

40

Value

-2

5
-8
14

5
-8
14

__---10

Price -10
1982$ 8

I
lQsS 1987 1988 1989 1990 1991

1
Ratio scale. billions of dollars, SAAR

10

OTHER NON-AGRICULTURAL EXPORTS

450

375

r

of 1982 dollars, SAAR

Ratio scaie, billions

1300

Percent change Q4 to Q4
1989 1990 1991

-

Value
225

11
0

10

12

Quantity

225

Price
1982$

3
8

3
10

11

150

I

I

I

I

I

I

Chart 14

Non-oil Imports
PRICES QUANTITIES

-

-

-

Percent change, Q1 to Q1 1989 Food -4 Industrial Supplies -3 Computers 14 Other Capital Goods 12 Automotive 1 Consumer Goods 1 Other 2 Total Non-oil 3
1990 16 0 31 15 -8 3 22 6

Percent change, Q1 to Q1 1959 1990 1. Food 1 -4 2. Industrial Supplies 10 -3 -4 -9 3. Computers 4. Other Capital Goods 3 1 5. Automotive 4 1 6. Consumer Goods 3 2 7. Other 5 0 8. Total Non-oil 5 0
NlPA nxed-weight indexes

1. 2. 3. 4. 5. 6. 7. 8.

NlPA acwunts

>OMPUTERIMPORTS
1oc

latio scale, billions f 1982 dollars, SAAR

-

Ratio scale, billions of dollars. SAAR
100

Percent change 0 4 to 0 4

7c
40

Quantity

-

1989 1990 1991

70

40

_----10

Value

25

1 -8
10

4 -8 13

10

Price -10
1982$ 39

500
450

Value

- 5w
, / -

Percent change Q4 to Q4

1989 1990 1991

: L :
450

- m

Quantity

-- I

350

Value Price

0

5

7

300

I

300

5
'I,
0

4 3

250

I

I

I

I

I

1982$
250

Chat15

Petroleum and Products PRICES

Dollars per barrel

Dollars per barrel

40

Spot Price West Texas Intermediate

30

US. lmpolt Price

20

10

lo

0

'

I
1982 1983

I
1984

I
1985

I
1986

I
1987

I
1988

I
1989

I
lee0

I
1991

1

0

OIL PRODUCTION

STOCKS IN OECD COUNTRIES
Million barrels per
35

t

r
1988

Days of consumption

Non-OPEC

30

25

20

1989

1990

15

U.S. IMPORTS

I

102

69

96

93

1988

1989

1990

a4 level
Price

MBD

'' r

Ratlo scale. mllllon barrels per day

80

($/barrel)
1988 1989 1990 1991 12.92 17.67 16.80 18.25 8.0 8.2 8.2 9.1
3
1986 1987

60

40

1688

1989

1990

1991

20

U.S. External Accounts
EXTERNAL SECTOR
Percent change. 04 to 04

OM GNP
Exports of goods and services
Expo~ofgood~ ~ l m p o r t of goods and services s
Imports of goods

1
X
I
15
10

25

5

Average

Avera&

1990

1

0

0 -

Billions of 1982 dollars, SAAR

EXTERNAL BALANCES
Billions 01 dollars. SAAR

Billionsof dollars annual rate, Q4
50

100

150

200

1986 1987

1989 1990 1991

Merchandise Trade -115

-96

-92

Current
-107

ACCOOnt

-83 -77

Real Net Exports

-47

-21

-9

1988

1989

lSs0

1901

200