APPENDIX

Notes for FOMC Meeting February 4-5, 1992 William .T. McDonoueh

The period since your last meeting has seen some significant rate movements in the foreign exchange market. The dollar’ decline that began in the summer of 1991 continued s through the end of the year and brought the dollar close to its all-time lows. Then, in a sudden reversal, the dollar strengthened upward movement Japanese in the first weeks of January. As the dollar’ s

seemed to slow, at the initiative

of the U.S. Treasury the U.S. and to sell dollars. That

monetary authorities

surprised the market by intervening

settled the dollar into a new trading range centered around 125 yen and 1.6 DM. The dollar’ continued decline in December is relatively straightforward s to explain.

Around the time you last met, sentiment toward the prospects for a U.S. recovery were still rather gloomy. Thus, most market participants believed dollar interest rates still had room to fall. In contrast, the prevailing view on Germany was that policy tightening had yet to run its course. Although a further reduction in Japanese interest rates was expected, the

timing was thought to be well into the first quarter. The market was surprised by the rapid succession of monetary policy decisions at year end. The Bundesbank raised official interest rates 50 basis points on December Federal Reserve lowered the discount rate a full percentage 19th, the

point on December 20th, and

the Bank of Japan cut its official rate by 50 basis points on December 30th. In terms of direction, none of these changes came as a surprise. But their timing and magnitude had

-2-

certainly not been anticipated.

The dollar

declined from December 18th through the first percent on a trade-weighted basis, and

weeks of January by roughly two and three-quarters

slightly more than three and a half percent against the mark. Then why did we experience the sudden reversal that occurred at the end of the first full week of trading in January? Most market participants concluded in early January that interest rate differentials

had become about as stretched as they were likely to get. They held the view that there was sufficient monetary accommodation need for any further reduction in the pipeline for the Federal Reserve to avoid the Moreover, the Bundesbank’ s December rate

in rates.

increase appeared to be its final tightening.

In part, this view grew out of early evidence

that the German economy was beginning to turn down and the strong, negative reaction of Germany’ European s neighbors to the Bundesbank’ December s rate hike. Japan is still

considered to have further to go in reducing interest rates. Shifting sentiment on expectations for interest rate differentials alone, however,

cannot account for the speed and magnitude of the reversal. These appear largely to be the result of the market’ technical condition. s sixth month of an uninterrupted downtrend. By late December, the dollar was well into its Market participants of all types had built up

substantial oversold positions. Thus, as sentiment shifted on the interest rate outlook, the need to cover short positions accelerated The short position the dollar’ rise. s on the morning of

of the overall market was demonstrated

January 8th, when several news services announced that President Bush had “collapsed” at

a state dinner in Tokyo.

Such reports would normally cause a substantial

dollar sell-off.

But the dollar moved only slightly lower and recovered within about 30 minutes, indicating that market participants were unwilling to extend their existing short positions. In fact, there were two waves of short covering which carried the dollar to its period high on January 16. On January 17, what on the surface appeared to be very good trade figures for

November were interpreted gloomily, attributing the better numbers to lower imports caused by a weak economy. The dollar weakened somewhat. Then, at the initiative of the

Treasury, the U.S. and Japan intervened

based on Treasury’ view that the still significant s The desk sold

strength of the dollar was excessive in relation to economic fundamentals.

$100 million against yen, half for Japan and half shared equally by the Treasury and the Federal Reserve. We entered first at 127.20 yen and went as low as 125.40, with the

average yen rate at 126.09. There are several reasons why the market was surprised by the intervention. First,

the dollar was about steady at the time we entered the market,but had weakened during the morning. Second, the intervention occurred at an unusual time. The operation began in

the afternoon

of a Friday just preceding a long weekend and, thus, at a time when the

market tends to be relatively illiquid. Third, by pure chance, the wire services began carrying a report of a speech Bundesbank President Schlesinger was giving in Toronto, which was bullish for the mark and gave the impression that the U.S.-Japanese intervention was being

given verbal support by the Germans and that this must have been all planned in advance.

Fourth, the market did not think any official action would take place until after the G-7 meeting. Because of the surprise, market participants searched for a reason. the intervention Some saw it as as an effort to

a direct result of the Bush visit to Japan and interpreted counter calls for protectionist to the Administration’ s measures against Japan.

Others believed that it was linked

world growth initiative and, perhaps, was designed to demonstrate in German interest rates

the dollar’ weakness in order to make the idea of a reduction s more palatable to the Bundesbank. about the G-7 meeting.

Most just scratched their heads and decided to worry does seem to have had the positive effect of

The intervention

lessening the appetite for large speculative positions going into that meeting and of the continuing uncertainty move. There is a lot of confusion on likely exchange rate developments, which I fully share. The macrosituations of the three major countries and interest rate differentials suggest that since, resulting in choppy intra-day trading without a major one-way

the present exchange rate ranges could endure for the period until your next meeting. The major uncertainty now comes from capital flows which could be triggered by political

concerns about all three major currencies.

The weakness of the Miyazawa government

causes nervousness about the yen, but concern about President Bush’ fiscal proposals and s what the Congress may do to increase them creates an overhang for the dollar. Yesterday’ s wage settlement of a 6.4% increase for German steelworkers is more than German

-5-

productivity itself well.

improvement

justifies and further dents Germany’ reputation s

for managing

These uncertainties,

especially

with the speculators

not having big positions

and

therefore having their ammunition an unanticipated justify.

fully available is rather menacing because it means that

event could move the market a lot more than the event would appear to

Careful watching is in order. On another point, I would like to inform the Committee that we have begun

discussions with the Bundesbank on the possibility of another exchange of reserve balances. The final leg of last year’ DM 10 billion exchange settled in December and, in January, s Jerry Corrigan and I proposed a similar transaction to Dr. Tietmeyer for 1992. At the same time, Dr. Tietmeyer is pressing us to agree to a restructuring of both the System’ and the s

U.S. Treasury’ investment facilities to fit our deposits with the Bundesbank better into their s asset-liability structure and their domestic monetary operations. We are also discussing

moving a portion of our mark holdings from the Bundesbank to the B.I.S. to help reduce the size of the Bundesbank’ balance sheet. On each of these three issues, both sides have s already agreed in principle that these changes will be made and I hope we will be able to reach consensus on the details before your next meeting. Committee of the proposals. of renewal When we do, I will inform the

I would also like to inform you that we have now received confirmation of all of the System’ reciprocal swap arrangements. s
. . . .

-6-

Mr. Chairman, I request the Committee’ approval for the Federal Reserve’ sale of s s $25 million against yen on January 17th, our only operation on behalf of the System during the period. authorities This represents the Federal Reserve’ half of the $50 million sold by the U.S. s as part of the joint intervention with the Japanese monetary authorities.

Notes for FOMC Meeting February 4-5, 1992 Washington, D.C. Peter D. Sternlight

The System's following December performance pressures entailed and the December 20--an of

policy

stance

was

initially

held

unchanged

17 Committee move was the

meeting, made

but soon afterward--on in light of of the weak

easing the

economy,

subsidence money

inflationary This move rate, to funds on

slow

growth

in the broad point

measures.

a full percentage and

reduction cut

in the discount

3 l/2 percent, rate, the

a l/2 point as outlined 20th.

in the expected

Federal

to 4 percent, morning of the

in a Committee with

conference the move,

call the

Associated

path the

borrowing

allowance

was raised

by a net $25 million Fed funds rate

to reflect the

re-emergence rate, partly

of a spread offset of lower by a

in the small

over

discount in the

downward

technical Later

adjustment

recognition borrowing recognition

seasonal was

borrowing. back by

in the period,

allowance of the Actual

trimmed

$25 million

in technical component. area in in

further

shrinkage receded

of the seasonal

funds rates of the

from the 4 l/2 percent around 4.20

the

opening

days

period

to average

percent

the weeks pressures The with

surrounding

Christmas

and year-end, sizable

as moderate

seasonal

were encountered in funds

despite rates

Desk reserve was

injections. compared when a

volatility the

around

year-end

mild

extraordinary as high

gyrations

encountered

a year

earlier,

we saw

rates

as 100 percent

and as low as zero within

matter average

of days.

Once past the first week of the new year, the quite close to the expected 4 percent

funds rate held

level, and somewhat below at times when reserves were released in abundance by declines in required reserves and shrinkages in

currency in circulation. though, as the Treasury

This past Friday saw some elevated rates, balance at the Fed spiked higher and

clearing funds were needed in connection with the settlement of new Treasury issues. Borrowing levels were fairly close to path allowances, except for a sharp surge at the end of the January 8 reserve

maintenance period.

A reserve shortage had been projected on that
that morning discouraged us

settlement day, but a soft funds market

from injecting reserves lest we risk providing a misleading policy signal to the market. Through year-end, and a few days beyond, the Desk faced large needs to add reserves, reflecting the usual seasonal factors such as currency outflows and higher required reserves, but also some unusually high Treasury balances. Since we were looking

forward to a substantial over-abundance of reserves shortly after year-end, all of the heavy needs early in the interval were met

through repurchase agreements, including both System and customerrelated operations. a little earlier On a few occasions the Desk entered the market time, partly in view of early

than the usual

market closing schedules and partly to head off potential strains around the year-end date.

-3.

Fairly soon after year-end, the Desk turned to the task of seasonal reserve absorption. This was accomplished through

sales of about $1.6 billion of bills to foreign accounts, and runoffs of another $1.6 billion of bills at weekly auctions. There

were also several small run-offs of agency issues scattered through the period, totaling $130 million. temporarily, In addition, to drain reserves rounds of matched sale-

the Desk arranged several

purchase transactions in the market, including yesterday and today. Last Friday, though, reserves were injected through weekend RPs to cope with that day's temporary shortage. There were two distinct phases to market interest rate changes over the intermeeting period--first a broad downward

sweep propelled by weak reports on the economy and especially by the December 20
policy-easing

moves, but then an upswing beginning

about January 9 or 10 as sentiment shifted on the likelihood of further easing and concern mounted with prospective supplies of debt offerings. respect to current and

The net result for the

period was mixed.

Bills were still down by a net of 20 to 30 basis

points--anchored by the lower funds rate and day-to-day financing costs. The commercial bank prime rate, which was cut by a full point to 6 l/2 percent just after the discount down at that level. Short to rate

percentage move,

stayed

intermediate-term

Treasury coupon issues rose by a net of some 10 to 20 basis points as increases of 40 to 60 basis points after early January swept aside earlier sharp declines. Treasury's 30-year bond was At the long end, the yield on the just about unchanged on balance,

-4-

beginning and ending a shade over 7 3/4 percent but touching a low just under 7.40 percent earlier in the new year. In the bill area,

which saw a moderate net paydown by Treasury of about $4 l/2 billion, the latest 3- and 6-month issues were auctioned at 3.86 and 3.93 percent, respectively, down from 4.14 and 4.19 percent just before the last meeting. At the same time, the

Treasury raised about $24 billion in the coupon market. The change in sentiment in early January seemed to have as much to do with psychology as with hard evidence on the economy, although the December employment report on January 10, with its of a

small rise in nonfarm payrolls, appeared to mark something critical point in market participants' minds.

Some later downbeat new orders, and

reports on retail sales, industrial production,

consumer sentiment seemed to pack less punch in terms of stirring anticipations of further easing steps. Meantime, concerns

increased over the prospects of Federal fiscal stimulus, while the market also coped with heavy corporate borrowing--some in the intermeeting period. $30 billion

Statements by Fed officials were seen

to be playing down the likelihood for additional near-term easing steps and this, too, weighed on sentiment. It should not be read from these comments that market participants economy. are highly confident of a near-term pick-up is widely in the

The current quarter

expected to be flat--a

small plus or minus.

Some see the flat trend extending to midyear

but probably more look for a modest pick-up in the second quarter. A large majority anticipate moderate growth in the second half of

-5-

the year but this view is not held with rock-solid Many analysts remind themselves that they had

conviction. a

anticipated

recovery a year ago that seemed to get off to a decent start but then evaporated. Against that background, a certain amount of

skepticism remains regarding the current outlook.

Nor has all the some

anticipation of further monetary policy easing been removed: observers months, do anticipate further modest easing steps great

in coming conviction,

although

this view

is not held with

either, and apparently is not priced in to current market levels. A particular focus of market conjecture right now is the Treasury's quarterly financing package to be announced tomorrow

afternoon, given all the speculation on whether the Treasury might reduce the size of its long term issues. that a moderate reduction--perhaps Market comments suggest in

a cut of $2 to $4 billion

what has recently been a $12 billion offering--is anticipated and about priced soon. I'd like to add a few words about market reaction to the interagency report on the Government securities market. By and in. This uncertainty, at least, will be resolved

large, reaction has been rather low key. focused on the possibility for the

Particular interest has to reopen scarce

Treasury

issues, with a major question in the minds of market participants as to just what set of conditions might cause the Treasury to act, and in what form they might act. My sense is that there would be

appreciable interest in a lendinq program as distinct from outright reopenings, in order to deal with temporary scarcities in the

financing point type much

market.

There

is also considerable

interest,

but at this for a new any degree they work. Fed's with is

skepticism,

in regard

to the Report's I have

proposal

of open

or iterative

auction.

yet to hear sources

of enthusiasm just want

for the proposal a better

from market

but mainly it might of the read

to gain As

understanding in the the

as to how

to the

revisions

administration are

primary interest. being

dealer

arrangements,

documents market

being

The dropping by most whether

of our over-all dealers, this times. tend to though might One become heard about

share requirement also on the heard the

welcomed about in

I have

concern market's that a few

expressed liquidity trading large the Fed

not also

impinge hears

difficult may

comment at

activity dealers.

more some

concentrated

Further,

I've

concerns

expressed

about the me a

need

to be~more from

careful dealer So far

one's

counterparties seems of

given to

withdrawal reaction.

surveillance--which there's no big

healthy

line-up

potential

applicants

to be our counterparties.

M.

J. Prell February 4. 1992 Statistics of

FOMC

Chart

Show

Presentation: this

Research afternoon you. provides

and

We shall charts that The the staff has

be referring placed

to the packet

been

before charts

first

of those The

a brief

summary

of

forecast. several decline

plot

of real GDP in the of the current in late

top panel Notably. 1991

illustrates although was not the

features

cycle.

in activity

1990

and early terribly is not

large.

neither

is the upswing peak level

thereafter of output

dynamic. reattained prolonged 1989-1992

Indeed. until recovery period The box

the prior the third phase. as a whole at the year

quarter And,

of 1992.

an exceptionally net growth over the

of course,

is remarkably shows that

meager. it is not until growth to move the a

right

second

half

of this

that we expect It is at that

above

2 percent that

annual

rate.

point

that

we anticipate will start rate to is

the unemployment Even still With

rate,

in the middle however, 6s.

panel, the

decline. predicted

at the end

of 1993.

jobless

to be in the upper slack the

this

in the economy, overall

we project

inflation, and

as measured energy. year. will

by either slow

CPI or the CPI than

ex food

appreciably.

to less

3 percent

next

-2Chart this forecast. 2 highlights The first that some of the key factors underlying

is our basic the federal Based

monetary rate

policy remains at the and our we project on 30-

assumption--namely, current analysis that year over level

funds on that

of 4 percent.

assumption markets,

of prospective interest for

pressures rates will

in credit fall--with down expect the

long-term Treasuries, the next

the yield

example.

moving

to around that credit

7 percent

year

or so.

We also

the restraints crunch will a a

on economic ease somewhat

activity by

associated although credit

with

1993.

we certainly conditions

don't that

anticipate prevailed

return

to the liberal ago. As you know.

supply

few years

our baseline that

Greenbook will

forecast

is

founded fiscal

on the assumption stimulus. ordered to have is that probably As we

there

be no significant in withholding we have incorporated, our tentative

see it, the change which

schedules is likely assessment budget than

by the President, only a minor

effect.

In fact,

enactment would

of the entire provide

Administration less stimulus

plan

substantially

the

package

simulated proposals exchange

in the Greenbook. makes analysis

though

the nature

of a number

of the

difficult. that the

In foreign dollar will

markets.

we anticipate

not change finally.

appreciably we have

in value. that things with will remain

And. fairly calm

assumed

in the

international

oil market,

a modest

-3firming stability in crude in the With over to Tom prices area over the next few months for followed by

of $18 per barrel introduction, flesh out

imports. turn the floor

that

brief

I shall some

Simpson,

who will

of the financial

backdrop

of our economic

projection.

FOMC CHART SHOW Thomas D. Simpson February 4. 1992
Over

the past year. financial markets generally have Despite the

responded favorably as the System has eased policy.

recent backup in long-term rates. the rate on the ten-year Treasury note. shown in the top panel of chart 3. is down about a full

percentage point since the middle of last year. while the funds rate has fallen l-3/4 points. And since most rates peaked in March of

1989. the ten-year rate is down about 2-l/4 percentage points. Declines at the shorter end of the coupon sector have been characteristically larger. This can be seen in the panel at the lower

left. which shows the ratio of declines in Treasury coupon rates of three. ten. and thirty-year maturities to the change in the threeThe dark

month bill rate during cyclical declines in the bill rate.

bar on the left shows the average response over seven previous periods of easing. the green bar the response over the period starting when rates began to decline in March of 1989 to July of last year. and the red bar the response over the period since last July. Over all the

maturities shown. the response of long rates over the period since the spring of 1989 has been on a par with or bigger than what is typical, even at the long end. uniformly greater. And. since last summer. the response has been

-4-

Equity sharply
good bit

values.

as seen

in the

lower

right

panel.

have

risen
a

of late after
of

several

months

of modest

gains.

As a result,

the gap relative Current to both in bond

to previous prices and

periods stand

of economic

recovery high

has been levels

closed.

share

at historically

in relation The rally

earnings and stock left

dividends. has prompted of your next a surge chart. in

markets panel

offerings.
public

As shown

in the top

gross a

issuance

of corporate as firms down

bonds

jumped

to $115 billion ripe

last year. high The

near-record coupon bulk bonds

volume,

saw conditions bank loans

for calling paper. rungs

and paying has

and commercial in the lower

of volume

remained

concentrated

of

investment-grade receptive.

issuers.

although basis.

the market to junk the bond

has

again

become

on a selective Gross equity

issuers. soared to a new positive in the

offerings,

right

panel.

record for the inset. credit

last

year. time

and issuance. since 1983.

net of retirements. Of particular by firms with note. below sheets

turned shown

first have

been

the offerings

investment-grade and improve reverse access

ratings

seeking

to strengthen interest

balance rates

to credit other

markets

or lower

by pursuing

LB0 and

deleveraging Households,

strategies. too. have gotten into the act. As shown in the have

lower

left

panel.

applications months. jumped

for refinancing Those

existing

mortgages

skyrocketed panel, year.

in recent have with

for purchasing

homes,

the right early last

recently consistent

higher

to a pace

in line with

anecdotal

reports

of a revival

of buying

interest. Declines markets have been in interest showing rates and brisk activity in capital of next in has

through

to the financial

condition of your

households chart.

and businesses.

As shown have

in the top panel begun to show

nonfinancial their

corporations sheets. since

progress

repairing been want

balance

The book 1989.

value

of debt to equity that firms

on a gradual to make

downtrend progress

We envision forecast

will

further

over the

period

as the renewed

-5

appeal growth

of equity in debt.

finance

encourages

more

share

offerings

and limits

Meanwhile. claim of interest

mainly payments

owing

to the decline cash

in interest been

rates.

the

on corporate

flow has

in retreat the sharp the decline bottom rates are

for several rise of the

quarters late rates

and is projected over this year

to completely and next.

retrace

1980s

Moreover.

in interest line.

has been

feeding

through panel,

to the corporate lower interest

Indeed.

as shown

in the side net

estimated an amount year and

to have that

reduced

interest

payments

$12 billion

last year. this lines to

is expected next

to accumulate No doubt,

by another thinking

$25 billion along these

$9 billion built

year.

has been the stock

into the outlook rally. markets. also,

of investors

and has

contributed

market Credit

have

taken

a more

favorable chart,

view yield

of

firms' spreads have

financial

condition.

As shown debt,

in the bottom

on investment-grade drifting down

represented a year heavy

by A-rated that

industrials. are quite spreads half thin on

been

for about despite

to levels

by historical junk bonds The bond rating

standards. retraced too.

supply.

Moreover,

have

all of the bulge

of the second a more higher

of 1990. view of

agencies,

seem to be taking of upgrades fell edged

sanguine near

issuers

as the number downgrades A shift LBOs

the end of in the from LBOs cited by

last year while box on the and toward the rating

over the second

half,

as seen away

right. reverse agencies

in financial

restructurings.

and other

recapitalizations. contributor access firms.

has been

as an important firms lacking

to this

development. markets. more

In contrast. principally stringent dependent

to public have been tend

credit facing

medium-sized credit supply.

and smaller Firms

in this

category

to be quite left panel of

on banks

for credit

and,

as shown

in the upper

your next chart. banks reported that they had progressively underwriting

tightened

standards for loans to businesses of all sizes over all Although it would

of 1990 and into the first part of last year.

appear that tightening has largely come to an end, banks' standards at this point would appear to be pretty restrictive. Also over this

period. loan terms. shown in the right panel by spreads of business loan rates over the federal funds rate. have tightened appreciably. Moreover. the degree of that tightening probably is understated by the chart. given that many less creditworthy customers have been weeded

out and thus the larger spreads that,they typically would be paying is not factored into more recent averages. Additionally, banks have

reported considerable firming of other terms over this period, such a6 the cost and size of credit lines. Recent surveys. though. suggest

that these terms. too. by and large have stabilized. It is hard to say how much restraints on credit have affected borrowing. and ultimately spending. by smaller and mid-sized firms.

However. the unusual and protracted decline in business loans at smaller banks. shown in the center panel on the left, suggests the possibility information of a nontrivial impact. This is consistent with firms, in the right panel,

available for manufacturing

which indicates that for small and mid-sized firms. loans from banks rose a little in 1990 before turning down last year. fell at larger manufacturing Bank loans also

firms in 1991. but at a time when many

were funding short-term debt with the proceeds of bond offerings. Other evidence, shown in the bottom panels, is somewhat mixed. Small businesses surveyed by the NFIB in January reported in getting credit. Through much of last year.

lessened difficulties

this survey had been showing that credit was harder to get. especially by firms in New England, although the overall level of the index never

-7-

reached the highs in the early 1980s.

As shown in the right panel, in

the third quarter of last year life insurance companies, an important source of longer-term financing for many below investment-grade firms.

reduced further the share of their private placements investment-grade firms.

going to below

Turning to households. this sector. too. has been making some progress in relieving debt burdens. 1x1 the 1980s. as shown in the top surged. By the

panel of your next chart, household sector borrowing

end of the decade, debt had climbed to more than 90 percent of disposable income. up from two-thirds several years earlier. Over

this same period. households built up large amounts of financial assets. 1n the past two years. growth in both mortgage and consumer

debt has weakened

considerably. and we envision continued subdued Accompanying the

growth this year. before a small pickup next year.

rapid rise in household debt in the 1980s was a large increase in the claim of debt service on income. the center panel. As interest rates

have been coming down. the debt servicing burden has begun to ease. In part. this owes to scheduled reductions rate mortgages
C0lKS.B.

in payments on adjustablerefinancing. Of

and the acceleration

in mortgage

interest earnings from financial assets also have been

declining, and because the household sector is a net creditor. interest received minus interest paid has been falling. Adverse

effects of interest rate declines likely are being felt mainly by those with larger net worth positions, those thought to have lower propensities to spend out of income and to have offsetting gains from asset appreciation. Indeed. using household survey data for 1989.

shown in the side panel. a decline in rates actually boosts net interest receipts of the lower wealth group and leaves essentially

-a-

unchanged the interest income of those with net worth of from $10,000 to $100,000. With mortgage payments coming down further owing to strong refinancing activity and with additional declines in ARM payments in

train. we foresee further sizable reductions in debt servicing burdens this year. leaving many households position. assets, to In these circumstances, in a more comfortable willingness financial

to borrow. or to tap

finance spending should move up from recent lows, shown in

the bottom panel. Some factors bearing on credit supply of banks and life insurance companies are presented illustrates that the market's in chart 8. The upper panel

assessment

of the outlook for banks has

improved markedly since late last year. as shares of both money center and regional banks generally have outperformed broader market indexes. Meanwhile, spreads on bank debt, the center-left panel. have narrowed.

Banks have begun to respond by issuing more equity and refinancing debt. Better access to capital and funding markets is providing banks At the same time, investor

with more scope to expand balance sheets. demand for asset-backed securities

and mortgages remains fairly

strong. as suggested by the spreads shown in the right panel. continuing to provide banks with the flexibility to retain or sell off such loan originations. In these circumstances. it seems hard to

believe that credit supplies will tighten further at banks. and it seems plausible that some loosening businesses of restraints on supplies to lending

could emerge as banks pursue more profitable

opportunities. Life insurance companies, heightened caution. though. are more likely to display

Shares of life insurance companies. the lower

panel. have not registered gains of late comparable to those of banks.

-9-

as there from have

appears

to be more real estate

uncertainty exposure.

about

potential their

further bond

losses

commercial come under of years.

MOreOVer,

portfolios

greater

regulatory

and public

scrutiny

in the past and to

couple even

In these

circumstances. firms

below

investment-grade. to continue from

some marginal

investment-grade, in obtaining

are likely

encounter
SOLKCS.

difficulties

longer-term

financing

this

In sum. on the market spending sources

restraints plans

on credit

supply

are not seen as access ample.

as impinging to open

of investment-grade and should remain

firms. quite

has

been

Elsewhere. these feeling a

restraints should little ease more

on credit gradually

supply

are expected

to persist.

although

as deleveraging become more

proceeds willing

and as banks, lenders.

comfortable.

-lO-

Mr. Prell:

One of the very situation. the top last which attempt meet final

of the important near-term outlook

considerations for the economy

in

our assessment

is the inventory glass and look at

If you pull of chart

out your 9. you'll

magnifying see that

panel

the

economy

appeared pattern in

summer output

to be following moves

the traditional to final adequate

recovery

up relative that they

sales,

as businesses on hand to of to

to ensure

have

stocks

rising sales

customer proved

demand. anemic. and

Unfortunately, inventory

the thrust imbalances

began panels,

reemerge

by the fall.

As may be seen succeeded ratios

in the bottom in keeping up a bit

manufacturers, lean, and but

as a group.

their

stocks

inventory-sales trade. expectation, is that the

backed

in wholesale

retail

Our the top nonfarm pace:

indicated current will

by the bar-chart quarter will

inset

in

panel. business

be one

in which

inventories swing point in the

be liquidated investment growth. and

at a moderate is sufficient

the

resultant

in inventory off of GDP second

to chop

a percentage abates

As that accumulation

liquidation

quarter.

-ll-

begins positive

in the

third

quarter,

inventory growth.

investment

makes

a small

contribution But what

to output final

about momentum

demand? was

The

failure

of final in the

demand

to gather

last year

a major

element

shortfall tempted you

of activity to preface stop

relative

to our remarks

forecast. with

I'm almost that our

my ensuing

the admonition because even

should

me if you've same mean

heard

this last

one before, year. this But

story

is much

the

as we told that

if it we

is. that think

doesn't

it is wrong

time--indeed, because of the

it has more

going

for it now, just

partly

financial

adjustments Chart

that Tom

documented. in the impetus residential to expansion doing so, given

10 summarizes which

the picture has provided

construction over our the past

sector, year

and

is projected interest that

to continue rates. virtually will

expectations panel, we

regarding anticipate

As you all come

can see in

the top

of the in the single in of

improvement family

in homebuilding The

activity

sector.

key force

initially left rate

is the improvement panel mortgage by the ratio

affordability, the monthly disposable affected

gauged

in the middle

payment income.

on a new fixed Obviously, home

relative

to are

purchase

decisions

also

by the perceived and the demand signs

attractiveness recently

of a house prices same

as an should time, couple work

investment. to bolster though, of years

of firmer At

from that

that

viewpoint.

the over

we expect will

the rise enough

in prices not

the next

be moderate

to damage

affordability.

-12-

In any event, picking quarter may be sales up nicely evidenced seen pace at the recorded from

the the

indications already

are that pace

home

sales

are

improved at the at the

in the fourth And--as modest the If sales reports

in the lower

data

charted

right.

left--even

relatively quarter,

on average new homes as much

in the fourth looks

overhang

of unsold

less burdensome. as some

are up anywhere suggest, whether family credit this we may there

near

recently

anecdotal

be able

to tell

by the middle complaint

of the year that single of that

is much

to the

industry

homebuilding for land

is being

constrained

by a shortage We believe is likely to

acquisition

and development. one that gives

is only

a minor

problem--and and

diminish

as demand

strengthens

lenders

greater

confidence. We don't soon with righthand remains regard panel see that confidence materializing sector. where--as any time the units

to the multifamily indicates--the high. take brief

overhang

of vacant

rental

exceptionally I should

perhaps

note

of the

proposed is that year, that

tax it with

credit would some

for first-time boost housing effect

homebuyers. production on 1993 only

Our assessment moderately

this

negative

activity. of 1992

We believe starts vastly supply

the

quarter-million Homebuilders' if their

augmentation association about

predicted overblown:

by the indeed, are

is probably and other

claims

credit

constraints

-13-

justified. prices

much

of the

incremental

demand

could

show

up in

rather With

than

in added

building. credit, the continuing turnover through will the help

or without

the tax

recovery to bolster direct demand

in homebuilding consumer

and greater

housing months

spending and income

in coming effects

employment

and

through But.

the associated year's

for furnishings showed, that

and other alone may

goods.

as last

experience rolling chart

not be enough

to get the ball panels in real are of

with 11. we

any force.

As you

can

see in the top acceleration year. element

are projecting over but

a gradual

consumer part

outlays

the course the more

of this dynamic

Services

of the

story,

is expenditures and then is year,

on goods, post not but

which

we expect gain

to level

out this quarter. the

quarter This

a moderate dissimilar it certainly in consumer I would

in the second observed been

pattern last

to that hasn't

over

same period

signaled

as it was

a year

ago by a

surge

confidence. have to say that the current stunningly low

level because

of consumer sentiment

sentiment appears

is a worry.

It is precisely major extra no

to be so out of line with it may be providing short-run with

macroeconomic information. better than

variables But

that

some

it is very

information--perhaps In that context,

contemporaneous signs

spending. the

the tentative off

last month

that but

indexes

may be feel

leveling

are a little

encouraging,

I'd certainly

a lot

-14-

better

about

the outlook before too

if there long.

were

to be some

improvement

in sentiment

Setting considerations months reduced enhanced not just ahead.

aside

the

sentiment for

indicators, a step-up

several in the

appear

to argue

in spending are bearing market some

As Tom noted. burdens

many now.

households and the been

debt-service wealth. for motor

stock low for

rise has time now

Expenditures vehicles and

have

other

durable

goods,

but

also of

for clothing desired

and semi-durable probably

home

furnishings:

some backlog

purchases

is developing. shows, our forecast roughly for the next in line with

As the middle two years disposable expected interest surpassed business panel, current saving has consumer

panel

spending

rising these over

income.

Obviously. correlated increases

two variables time. But

can be it is of have of

to be highly to note those that

in consumption first couple seen

often

in income This

in the

of years

expansions. plots

is most

easily

in the bottom Notably, movement prior our in the

which

the personal not

saving

rate.

forecast rate

does

anticipate occurred risk

a downward in these

of the sort that suggest must an upside

cycles. but about that the

This might possibility degree

to our projection, the uncertainty and the many rate

be weighed still high

against debt

to which

burdens might the

greater

sense to is

of insecurity spend very

about

employment

prompt saving

consumers already

cautiously.

Moreover,

low by historical

standards.

-15-

Our consumer inventory provide increase

expectation and housing

is that will.

spending along

by households

for

goods

with

the anticipated discuss-to

swing--and sufficient their

export momentum

growth,

which

Ted will

to demand

to cause

businessmen

spending

on new

equipment. a modest quarter

As indicated increase in

in the

top panels equipment offset

of chart spending

12. we project in the current

to be more

than

by a further Over and the Overall. modest

substantial coming drag the

drop

in nonresidential equipment spending side should begin

construction. gather steam

quarters. from the

structures

should this

to subside. looks very

increase to the

in expenditure plans reported spending from

year

relative plant

in the survey--and recent

Commerce certainly canvas

Department's not

and equipment what we learned

at odds with

the

by the Reserve One would

Banks. to be able to nail down the near-term data, but

like

outlook

statistically those

by looking data--plotted

at the

orders

unfortunately provide orders quarter delivery likely

in the middle the drop that

panels--don't in computer the fourthto the is in

a clear

signal.

We interpret

in December surge

as confirming was

our view

in spending

in large

part

related

of IBM's

new mainframe,

and the one

first for

quarter

to be a relatively and office

lackluster The

real

investment in

computing orders shown

equipment.

recent goods

improvement (excluding

for other in the

nondefense panel,

capital however,

aircraft) upturn

right

points

to a moderate

-16-

in spending current effect capital

on industrial our story

equipment. is one

As we look beyond

the

quarter, taking outlays

of the classical growth

accelerator with to

hold

as overall

output

is sustained. as opposed

being

concentrated

in equipment

new buildings. As the bottom nonresidential we believe
SO. we

panel

suggests, is still will

the trend decidedly

for while or puts

construction the decline

negative:

that

moderate

in the next This

year

don't the are

foresee

an upturn

before

1994. spectrum

probably

us toward and there recent sector impact.

pessimistic some hints

end of the

of forecasters-in this

of a bottoming

out in contracts risk from

months. probably

But the magnitude is not large.

of the upside

especially

in terms

of GDP

On the baseline The top

other

hand.

the upside

risk

associated is quite

with

our

projection panels

for the federal 13 lay out

sector

obvious.

of chart

our forecast I think this

for federal is a fairly spending

purchases solid

of goods with

and services. an ongoing

picture, the Any

decline

in defense rise

outweighing purchases. alter years. The probably bars

effects

of an ongoing initiatives

in nondefense are unlikely the next two to

legislative path

enacted over

greatly

the

of federal

purchases

larger

risks

with

respect

to the federal programs.

budget

reside

in the tax and transfer panel indicate.

As the black year

in the middle

the norm

in the first

-17-

and some

a half

of recent

cyclical

upturns

has

been

for there in the place measure

to be

discretionary cycle the

fiscal

stimulus.

In contrast. put into

current amount fiscal policy.

1990 budget

agreement by the

a small of

of restraint, impetus. that

as measured assumption

staff's

On our

of no change continue in the

in fiscal 1993. that. not out The as

slight proposals

restraint are

would

through aggregate would

President's best

so modest point,

we can judge

at this

their

passage

reverse something

the situation. more

But one can not which is why

completely we included is certain: huge.

rule the

substantial.

simulation what NIPA from

in the Greenbook. the budget at the

One thing will

no matter even on the

happens. basis

deficit right,

remain removes

shown

which

the distortion

the deposit Budget

insurance deficits

program. appear likely
also to

continue right

afflicting shows that.

states despite

and localities. further expect

The box

at the bottom and expenditure

tax increases the aggregate retirement at the this

restraint. and local

we don't sector,

position funds. left,

of the

state

excluding

to reach we project

balance that up in

until real

late next purchases but even

year. will that

As shown further will

fall

year

and then by past

turn

1993--

growth

be modest

standards. markets. and

Chart There has been

14 addresses a lot of talk

the outlook recently

for labor

about

restructuring especially

fundamental service

changes

in productivity There

trends, clearly

in the

producing

industries.

is something

happening, what the

but

I would

sound

a note

of caution. a little

I think in common

that with

we have sort

been

seeing

has more

than

of capitulation the ends pressures prompted

on the part

of firms

that

reputedly when the yet to

has marked continuing pick

of business on profits firms they've that

slumps

in the past.

and the failure

of sales

up have

to throw hoped

in the towel Once

and make

the

painful gets

adjustments the fact

to avoid. are doing

the process

going,

others

it undoubtedly in write-offs on the given parts that

provides

psychological of last year

reinforcement. surely reflected

The burst a desire

at the end of many

firms

to get all the bad news was a disaster. it has been collar

behind

them,

1991 already

Moreover, accounts from that white

overlooked have past,

in many not been

recent totally immune

workers in the

cost-cutting

efforts

and. besides, months firms. have

a lot of involved

the employment assembly

cuts

announced

in recent

line workers The bottom

in manufacturing line is that we

think

it is reasonable

to

assume

that

a better will The thus

underlying

trend

in productivity just a little better, at

performance this point.

be forthcoming--but 1992-93 largely same year. pickup reflects the

in productivity the normal relatively

shown

in the pattern. in a

top panels

cyclical subdued

By the employment product change this

token, shown

upturn is more

in the middle growth

panels,

of weak

aggregate

demand

than

it is of a radical

in operations.

-19-

The further term. weakness a mixture decline perhaps probably in labor multiply, moderate the rise

lackluster projected past labor

pace

of hiring

this

year rate rise

explains

the

for the unemployment couple force been of years. that

in the near is damped We think by that

As in the in the

participation at work rate

rate.

of forces

has

in the

atypically

large

in the participation of a secular reflects demand. the and nature. normal once

since

1989--some of what

of them seen

But much responses

we've

to cyclical opportunities

variations begin a at to

employment turn

participation increase in the

should labor

upward.

producing

force--indicated

in the table

right. With the balance of changes in labor demand and labor

supply expect

holding that

the unemployment will pace

rate high

through

1993. we

firms in the

be able to achieve of their wage

substantial increases--as

reductions indicated insurance employers their some

and benefit

at the top costs will

of chart

15.

Controlling

medical but in up

is likely undoubtedly and they

to continue become

to be difficult,

increasingly to make smaller pressure

aggressive pick

efforts, of the tab

will

strive

employees wage hikes.

indirectly

through some

Clearly. have

our forecast

implies

on the norms

that in

conditioned years: under

decisions increments

on nominal in wages

compensation than

increases and

recent of well

of less

3 percent

4 percent

in total quarter

compensation This

sound may

low by the so many

standards

of the past

century.

be why

-2o-

other lower

forecasters inflation However,

are less next year.

optimistic

about

the prospects

for

we view

the forecasted disinflation

wage

pattern that

as a

natural

part

of the overall ought

process through

experience projected that core

suggests levels

to be sustained slack. into

1993 at the shows in

of economic fits nicely

The middle the pattern

panel

our forecast inflation

of movements when as the

that rate

have

occurred the

during

periods

unemployment estimated

has

exceeded

so-called

NAIRU.

in econometric Finally,

relations. inflation arising the forecast anticipates food and

our overall be no shocks Food prices.

that

there

will

from

the volatile panel, are

energy expected

sectors.

lower

left

to rise moderately, in the probably economy. are

essentially I should to the note

in line with that the

prices in this the

elsewhere forecast

risks

skewed

upside,

however,

given

extraordinarily present. A swing overall Our

low stocks

of grains--especially

wheat--at

in energy

prices

is the main faster this

reason year

that

the

CPI is projected forecast on net

to rise implies

than

last.

oil price

that, retail

after energy

declining prices will be risks politics is

substantially rising

in 1991. year

moderately

this

and next.

There

are always East

of surprises a continuing based

in this wildcard.

sphere--with Our

volatile

Middle crude

assumption is.

about Saudi

prices

on the belief

that

OPEC--that

Arabia--will

-21adjust production fairly smoothly in response to rising Kuwaiti output and a resumption of Iraqi exports. and possibly to appreciable shortfalls output in the former Soviet Union. With those international allusions. I should turn the proceedings over to Ted for a look at the external aspects of our projection.

E. M. Truman February 4, 1992 FOMC Chart Show Presentation: International
DeVelODIWntS

My presentation on the external sector focuses primarily on three aspects of our forecast: the foreign exchange value of the dollar, growth prospects abroad, and cyclical influences on U.S. external accounts. Chart 16 addresses the first of these issues: the dollar. As is shown by the red line in the top panel, the

foreign exchange value of the dollar in terms of other G-10 currencies on a real, or price-adjusted, basis is trading near its lows of recent years, after its ups and downs over the past year. As can be seen by comparing the black line, the dollar's

rise and fall over the past year appears to have been loosely associated with changes in the differential between U.S. and foreign real long-term interest rates. The dollar's movements in nominal terms against the other G-10 currencies on the weighted-average basis tend to be

dominated by movements against the DM, since all except two of the ten currencies in our index are now tied directly or indirectly to the DM through actual or shadow participation in the exchange rate mechanism of the European Monetary System. As

is shown in the box on the left of the middle panel, the dollar has depreciated against the DM by 10 percent since last June, and its depreciation against the pound sterling has been almost as large.

I
-22-

The box three-month the United somewhat here and, and

at the long-term while

right

presents

reCc?nt

information Japan

on and a

interest the charts

rates

in Germany, lower

States, longer

in the

panel

provide rates rates long ease in

perspective abroad. rates drift

on the downtrend Our outlook to a much

in interest for interest extent,

on average, short

abroad rates

is that will

and, lower

lesser

gradually

as inflation in Canada,

pressures the United

Germany,

and slow

growth

persists

Kingdom

and Japan. As Mike forecast balance overall point risks period, has indicated, will we are projecting remain essentially level, that, over the on same

the dollar terms should

unchanged and the This the

in nominal stability forecast

at around prevail certainly balanced.

its recent terms but

in real wrong,

as well. we feel

is almost well

that

are reasonably Turning

to economic the

conditions

in the major

foreign display In or that GNP

industrial trends general, negative. the recent

economies,

top panels

of the next

chart

in industrial growth

production

on a year-over-year production the right has been panel,

basis. declining

in industrial Germany,

For western data

we believe

are broadly

consistent

with

no growth

in real is a

in the relative

fourth

quarter

of last year. a recent

By contrast, modest pick

France

bright

spot with

up in industrial

production. Inflation of the major economic has been on a downward with trend recently in most of

industrial

countries,

the general

slowing

activity,

declining

oil prices,

the appreciation

of most

-23-

currencies temporary been the

against factors. case

the dollar, As is shown Japan

and the passing in the middle and France. pattern:

of certain panels, this has is in the

for Canada, exception

However, by

Germany

an important excise French taxes rate. The that actual The

to this

boosted

increases above

at mid-year,

German

inflation

has moved

recent

G-7

meeting

articulated

a shared

consensus has to lead to On the some presents, gaps, of of as

and prospective issue changes is whether

growth

in the G-7

countries is likely to come.

slowed.

this diagnosis in the months not.

significant whole,

in policies is~ that issue,

our judg'ment on this G-7

it will the box

To provide lower panel

perspective for the of the

in the

foreign fourth GDP

countries,

staff

estimates along with

of output estimates

quarter growth

of last year, rates going

potential growth

forward,

and our projections

this As

year. is shown in the first two lines in the box, we output at the end of that and below

estimate last year

that was GDP

in Japan

and western potential. year

Germany

at or above growth Japanese this

We are projecting potential

Japanese the

will be below this will in that

official

forecast: policy

probably country

lead to as the year

further

stimulative

actions

progresses. The West potential, projected remains German economy is producing growth at about this year its is deficit money

and under to keep

current

policies, Moreover,

it there. wage

Germany's

budget

enlarged,

pressures

are a major

concern,

growth has increased, and inflation is relatively high. Consequently, we see little scope for stimulative policy actions in Germany aside from some easing of short-term interest rates when and if inflation pressures subside. This situation for Germany limits the scope for monetary or fiscal stimulus by its major EMS partners, France, Italy and the United Kingdom. With the possible exception of the United

Kingdom, where the March pre-election budget is expected to be mildly expansionary, we do not anticipate any significant stimulative policy actions in these countries despite the negative output gaps shown in the chart, and our projection that GDP growth rates this year will be less than potential. In Canada, the estimated output gap is very large, but we do not expect a significant boost from macro-economic policies. Short-term interest rates are likely to continue to

decline as long as the Bank of Canada is confident that it can hit its 3-percent inflation target for the year, which we think is likely. The scope for easier fiscal policy in Canada is

constrained by continuing large deficits at the federal and provincial level. Indeed, last week the federal government froze

hiring and discretionary spending for the balance of the fiscal year ending in March. Chart 18 summarizes our outlook for growth and inflation abroad. As shown by the red bars in the top left panel, we are

projecting a moderate acceleration of economic activity for all foreign countries on average over the two halves of 1992 and into 1993. The right panel shows that growth slowed in the G-6

-25-

countries pick up

in the second

half

of last year Aside from

and

is projected industrial oil

to

as 1992 progresses. growth some held

the major

countries, prices Latin group,

up quite

well

last year

as lower

helped America, growth

countries

and conditions For these this year

improved other and

somewhat countries in 1993,

in as a

especially should

Mexico.

be sustained

rise

stimulated

in part The middle

by exports panel

to the our

industrial outlook pattern

countries. for GDP growth similar last half of half in

depicts The

selected across year, this and

G-6 countries. countries:

general slowing

is quite

following

or negative in the

growth first

we

are projecting followed by

a moderate somewhat

pick-up faster

year,

growth

in the

second

in 1993. The bottom panel presents our forecast for consumer with

prices

in the major

industrial output

countries. gaps in most

Consistent
G-J

persistent inflation drift

or emerging is projected over the

countries, near term and

to remain forecast

subdued

in the

lower

period.

U.S.

inflation other

is expected
G-J

to be roughly countries. One that that has

in line with

the average

in the

risk

to the

outlook

for economic

activity months,

abroad and one is the problems

received tried that

increased to take

attention account

in recent

we have

of in our projection, or balance-sheet foreign

possibility more

an overhang in some

of debt,

generally, will

or all of the major

industrial recovery to provide or

economies expansion

lead

to a retrenchment, activity.

and retard chart

the

of economic

The next

tries

-26-

some

perspective debt

on this

possibility.

It presents firms

data

on ratios in

of gross

to GDP and

for non-financial five other for each the level

and households The ratios are

the United indexed the

States

countries. country from

to the average highlights norm

1970 to 1980. to that 1990 --

Thus,

chart

of debt

relative

particular the slowdown

in 1985 as well activity off. these

as changes began

through

when

in economic data leave that

and available,

comprehensive

Recognizing institutional overall them changes

ratios

can be affected in the

by of of

as well

as by our

changes cautious

stance

macro-economic problems

policies, associated in Japan

interpretation of debt are

is that

with

an overhang

likely panels. Kingdom country, been

to be present This is not

and the United The have

Kingdom,

the top in the United in that have

surprising: probably

debt problems retarded

are well but have

known, begun

recovery

to recede.

In Japan, shoe that

such problems

long

recognized

as the other decline

is yet to drop, market. What may

following be and

the substantial and also

in the stock is that

surprising, France

encouraging, suggest

in Canada, absence countries for the

Germany

these

measures

a relative three

of problems, -- middle United

at least right States

judging

by the data panels

for these

and bottom

-- compared panel. detailed

with

those

-- the middle As Tom

left

Simpson's

dissection

of U.S.

balance on debt and

sheets

has

amply problems

demonstrated, is likely at this

no single

set of data

financial however,

to be definitive. point is that

On balance, associated

our judgment

problems

-27-

with

an overhang risk

of debt

and inflated

asset

values

represent activity

only

a limited abroad

to our overall

projection exports.

of economic

and to the demand The top left

for U.S.

panel exports.

of chart With

20 presents a relatively

our outlook low dollar, of

for only

real small

nonagricultural increases activity

in prices abroad, exports over the

of U.S.

exports,

and a pick-up that U.S. annual

economic

we are projecting expand

nonagricultural 8 to 9 percent points of that

will

at an average One

rate

of

next two years.

to two percentage to computer exports. goods as

growth

is expected is expected

to be due to come

A larger sector economic

contribution

from the capital in investment

as a whole, activity

reflecting picks rate

a recovery

demand

up abroad. of real non-oil imports slower -- the right in

The growth panel the U.S. -- is projected

to be considerably -- largely price

-- averaging low

5 to 6 percent growth and our

range

because

of relatively

improved panel The

competitiveness. our outlook shows that, for the U.S.

The bottom external basis, accounts. our underlying from the last this

summarizes line

first

on an annual (that is, was

current influence

account

balance Shield

abstracting cut in half

of Desert

and Storm)

year, year,

is projected

to record

a further next year.

improvement Trade current balance (line

and less of an improvement 2 -- contributed last year, On the a growing importantly but helps hand,

in goods account this

-- line

to the on

improvement and next. to make

little trade

year

other

in services to the

3) continues

positive

contribution

-2s

current recovery United improve

account

balance.

With

lower

dollar

interest

rates

and a

of profits States, this The

on investments income

abroad -- line

as well

as in the to

investment year last

4 -- is expected

and next. line shows that real GDP net much exports over the of goods forecast to the

and services period, expansion increase oil

are projected

not to change little 1993.

and therefore of real GDP

to provide in 1992 and

net contribution Although than

the projected that in nonthe

in nonagricultural the Oil expected imports

exports rise

is larger imports

imports,

in oil

largely

offsets

difference. picks

increase

as the growth declines.

of consumption exports and is

up and domestic an important

production boost

Nevertheless,

provide

to domestic

income

and production, rapid headed growth in a

it is encouraging sufficient positive to keep direction. The perspective influence final on the

that

the continuation external

of their accounts

our overall

international evolution factors

chart

provides

a longer-term and the shows moved how, with four at on the

of our on it.

external

balance

of cyclical

The top panel balance Over has

a full-employment federal years, about budget

basis,

the U.S.

external

deficit

from

1981 to 1987. line)

the past stabilized the

the budget three percent

deficit

(the black Over the

of GDP. has

same period, and with

external

balance

(the red

line)

narrowed, submit

it our

net access these

to foreign

savings.

I would

that,

on the margin,

-29-

developments term interest

have

contributed Moreover,

to upward as shown

pressure

on U.S.

longtrend

rates.

in the chart,

this

is projected

to continue. panel presents actual period staff estimates of the output States foreign the larger is since (the G-7

The middle evolution 1981 red and line) of the gap over and

between

and potential for the United average

the projection

a U.S. -export-weighted line).

of the

countries shortfall than

(the black

At the end

of last year, was

of U. s. output foreign G-7

relative countries, more

to potential but the U.S. over

a bit

for the

output

gap

projected period.

to narrow

somewhat

rapidly

the

forecast

The external cyclically assumes States. basis,

bottom

panel

compares line)

the with

actual

and projected of the latter measure

balance

(the black balance

an estimate The

adjusted

(the red abroad

line). as well

output

is at potential on this

as in the United adjusted eliminated. Chairman, I'll

By 1993, the external On that,

hypothetical, would

cyclically

deficit perhaps,

be essentially note, Mr.

surprising

pass

the baton

back

to Mike.

-3o-

As a reward presentation. summary Hawkins revision: I shall

for your conclude you

patient briefly. submitted

attention Chart for use

to our lengthy 22 provides a

of the forecasts report. The I must range for not

in the Humphreyto incorporate should central read 6a

apologize

for failing rate The

the unemployment 6-l/2 to 7-l/4.

3/4 to 7-I/4 ranges least budget called that I've

percent. defined

tendency

encompass that

the Administration's incorporates document also built the

numbers--at

for their proposals. "business

forecast

President's a soassumption real GDP of

The Budget as usual"

presents on the

projection adopted,

those

proposals

are not

and it shows the

growth your

of only range

1.6 percent of forecasts

this

year--around the

low end

full

and below include may arise report

staff's

forecast,

which,

as I've noted, one question

doesn't that

a fiscal about

stimulus.

Obviously, that what

the projections Congress will be

are included fiscal

in the Board's are

to the

assumptions

embedded

in your

numbers.