Chart t

ECONOMIC

PROJECTIONS

FOR 1992 FOMC Range Central Tendency Percent change, Q4 to 04 Staff

Nominal GDP previous estimate Real GDP previous estimate CPI previous estimate

5t061’ 4
4 to 6

5’ to 6 /*
4’ to 5314 /2

5.3
5.1

2 to 3’ 14
I’ to 23/4 /2

2’ to 3 12
194 to 2’ /*

2.5
2.1

3 t0 3’ 12
2v2. to 3’ /*

3 to 31/z
3 to 3’ 12

3.5
3.5

Average level, Q4, percent Unemployment rate previous estimate 67is to 7’ 2 1 @I~ to 7’ l.j 7 to 7’ 14
63/4 to 7

7.2
7.2

ECONOMIC

PROJECTIONS

FOR 1993 FOMC Central Range Tendency Staff

Percent change, Q4 to Q4

Nominal GDP Real GDP CPI

4’ to 7 12 2’ t0 3’ /2 /2 2’ to 4 12

5’ to 6 12 23J4 to 3 23l4 to 3’ 14

5.8 3.0 3.1

Average level, Q4, percent Unemployment rate 6’ to 7 12 6’ to 7 12 6.7

NOTE:

Central tendencies constructed by dropping top and bottom three from distribution, and rounding to nearest quarter percent.

Chad 2

KEY FACTORS IN THE STAFF FORECAST

l

Federal funds rate remains near 33/b percent.

l

Long-term

rates decline some by early 1993.

l

Credit supply constraints

diminish---but

only gradually.

l

No major changes in fiscal policy.

.

No supply shocks.

l

Dollar remains near recent level.

June Long-run targets Donald L. Kohn The measures targets weight and for unusual their these behavior of demands complicates and raises

30.

1992

for broad the

money of the

velocities aggregates on them treated

choice

questions

about

to be placed The FOMC

in policy. the monetary aggregates for on the of broadly someits in tend of and as policy

has

information or as direct economy. policy

variables--not channels

as ultimate bank

objectives influence the

of central

The actions

aggregates in reserve

encapsulate markets Their state

interaction driven convey or even

and demands can

by spending thing future, response about

and income. the current adjustments

movements

of the economy asset

since

of financial

portfolios conditions

to changing more

economic than the

and financial adjustments relationship in the even

to be made goods income and

rapidly But

of purchases between shortand

services. been

money inter-

has never

very

tight

mediate-term, a growing

and may

be getting

looser

as savers costs. the

face

array

of choices

at lower

transactions has

In these federal funds rate

circumstances to achieve

the FOMC

varied for the

its objectives that rate

economy measure in

or inflation, in response activity nized policy the

and it has to incoming
are

adjusted information evolving. by lags

in large

about But

how

the trends also recog-

and prices problems and

it has effects

posed

in the

of its in finding the

moves

of the difficulties

inherent

appropriate process. tendencies to deviate somewhat was the

level

of the

short-term have been very

nominal used

rate.

In this signs: slowly. occasioned funds rate or

aggregates

as warning or very have the

for money

to grow from

rapidly

substantially intense

expectations, of whether the

more

examination

positioned

correctly. adjusted Both narrow ranges 1980s. its

In the past. sufficiently and broad

rate has the

not

necessarily target outside 1970s

been

to hit money

annual ended late

ranges. annual and early below the with

growth

on a number

of occasions as 1987.

in the

and as recently

M2 finished Act requires and

the year only plans that
. . .

range.

The Humphrey-Hawkins "set forth ranges

Federal respect

Reserve to the

objectives

of growth

or diminution explicitly

of the monetary notes that

and credit

aggregates". is not credit

The Act required

the Federal

Reserve and

to achieve that

its objectives they cannot

for money

if it determines because of the

or should provided

not be achieved an explanation given.

of "changing reasons for the

conditions." deviation are The Committee system. and the tion

subsequently "changing

conditions"

currently

facing

the

involve Bad loans

a major and the

restructuring reactions have

of the

depository markets.

of regulators,

Congress

to them,

led to widening

intermediaof a shrinkIn

spreads.

a marked to supply flowing

reduction deposits through

in the willingness to the public, and

institutions age of credit

depository

institutions.

-3-

these ship

circumstances of the vast and

it is not

surprising

that

the

relationaccount to

liabilities bulk

of these

institutions.

which

for the borrowing cycle narily, interest ignoring weight seems rates period.

of the broad would

monetary

aggregates.

spending over

change, time

within spans

the business as well. Ordiamong for the it

and possibly disruption rates, unusual of the evident

longer

and uncertainty and money movements. in policy relationship has been that distress

in the demand

relationship be reason reducing However, interest the same was

income money

would

and generally decisions. of nominal over

aggregates that the also

to spending

disrupted

It is possible of deeper "credit rates of the

the weakness

in money

symptomatic so-called The good

in the financial spilled over

system.

the

crunch".

which

to spending. were of to weak in not

interest indexes

we normally effective Weak

use cost

to gauge and

policy

availability fed through

credit income 1992. some

to borrowers. percentage but

money

has

not

point

for percentage of money

point. has signal

especially still from

the behavior

seemingly

conveyed noise

information. very The

though

distinguishing

has been

difficult. staff has had to pay particularly close attenpatterns growth for

tion

to the

implications in money

of shifting

intermediation money

and changes rates nominal evident. likely

demand

in forecasting with Greenbook

to be associated at assumed surprised

outcomes

income

market

interest

rates.

As is money

we were

by the weakness

of broad

-4-

and

strength

in velocity carried we have

in the first forward revised

half

of the year. results of the

While second growth

we haven't quarter. in M2

the extreme down our

estimate and

of the

and M3 for below the

1992 to 2 percent lower ends

l/4 percent. ranges: of for is

respectively. for 1993. we

of their

current

are projecting 2-I/2

only

a small and

strengthening l/2 percent this

money M3.

growth--to The downward

percent

for M2

revision

relative The

to earlier forces while

year

reflected some time

in stronger seem to have

velocity.

affecting some

M2 for

intensified:

of these will be

forces less

also

affect

spending. and

in our judgment than behind

this

the

case The

in 1992 principal

1993

in previous the

years. of offer-

factor

projection deposit

continuing ing rates. under that But cant rates

increases Some

in velocity

is declining arise from

of these with same

decreases limitations

restrictions deposits flows. signifithese

FDICIA. will have

along the

on brokered on deposit continuing

sort

of effect expect

even

absent

FDICIA in rates

we would

decreases have

on liquid

deposits: they have

although

fallen

substantially, up to the or so. offset time,

considerable in short-term falling deposit rates little

distance rates rates

to go to catch last year about same when

declines year,

of the

Last

apparently at the at least

the decreases

in market costs

occurring changed. identified would

leaving

opportunity

taking sent

account

of all the factors This year, it

in the memo that

to the Committee. along all dimensions,

appear

measured

including

-5-

relative even rates have

to longer-term increased. extend and that

market the

rates. continued Thus.

opportunity adjustment M2 holders cash

costs

may

of deposit will to loan

should

trend.

continue

to confront capital

incentives market

to shift

flows

repayments, tives.

investments.

and other

alterna-

resulting why

in an increase these shifts that

in velocity. be symptomatic could credit over feed this year, as

won't

they were ing? sify. Banks For

last. one.

of problems we do not abate

back

on spendto intenhorizon. loan terms

expect

restraint

and it may already types

a little stopped and kinds

the forecast most

have

about

tightening

on most

of credit. some agency

seem

to be a bit more Given

vigorous hold-

in seeking ings they

to make

of loans.

their

of Treasury. could make

and mortgage-backed loans without

securities, expanding balance such to are in a

substantial Risk-based considerably and

sheets shift

greatly. has become

capital more

to accommodate abundant, owing

greater better Finally. they

profitability shape. opening

equity

issuance.

Borrowers

up more real

options

to finance are

spending. lower than of

interest in the

rates. last few

and nominal. with

were

years.

narrowing improved

spreads credit On

private

over

Treasury for those

rates with

suggesting access

availability balance both

to open markets. about over

we project and

M2 velocity 1993; such

to increase even

3 percent eight and

in 1992

increases,

quarters,

are not unprecedented.

but they

are unusual

-6-

have

occurred

previously

in environments

of rising

market

interest

rates. With borrowers credit continuing demands to restructure toward capital growth balance markets and

sheets with we

by tilting

pressures

on banks only

to restrain increases

asset

persisting. over the

anticipate 18 months. activity M3

modest

in bank

credit the

next

Moreover. in 1993. follow the

we are projecting damping its thrift

resumption As a conseif of the of is

of RTC quence. any.

assets.

should over

recent

course

of little. some

growth

forecast arise

horizon. from the

Because

depressing credit not

effects away

on M3 from

rechannelling debt growth

flows

depositories.

total weak.

anticipated in 1992

to be correspondingly and 4 percent below in 1993.

Still,

at 2-3/4 is

percent expected

nonfederal

debt

to expand

the pace

of spending in taking demands growth

as households on debt federal to 5 pernext

and business obligations. sector cent. year. The credit, which are

continue The

to be cautious heavy debt

continuing to boost

of the in 1992

projected the

within

current

range.

and to 5-314

percent

outlook with

for very the high

sluggish degree

growth

of money

and

together

of uncertainty

with to

the

projected and income.

behavior pose

of the aggregates to the

is related in

spending specifying gave two

challenges year

Committee The

its

ranges

for this for each

and next.

bluebook

alternatives or ranges

year--the point

current lower.

1992 Clearly

ranges.

a full

percentage

there

are other larger

possibilities or smaller the lower

that

might

be considered. the To

including ranges keep by

decreases end

atid widening or more

reducing

of one

ranges.

my discussion my comments cover the

within to the year

(barely)

tolerable

bounds.

I will I

confine will might

two bluebook separately.

alternatives. though some

also link

each

strategies

two decisions. reducing with the current monetary ranges would seem to

For align year. them

1992,

better

expected

expansion to note into that

for the the

In this

regard. GDP

it is important forecast that coming of the

Committee's averages such

nominal

this

meeting

a half

point

above

staff. to show

Although through that point the

a difference

wouldn't a half the

be expected year.

for point Committee, that

in M2 over more than M2 even

it does

suggest

staff,

could the

legitimately lower

claim

it expected range,

growth with

around the

end of the about veloc-

existing ity. than

staff

assumption out much

Nonetheless, expected range

velocity

has

turned

stronger Reducand not expanComgrowth range if

and is likely would

to continue

to increase. grounds.

ing the

be explained

on those

by any desire sion than

or expectation earlier

of lower this more

nominal

income the GDP

anticipated

year: rapid

in fact. nominal The

mittee for

members

are forecasting than they room

1992 now allow

did in February. for M2 growth below than

reduced

would

some

even

2 percent without

velocity triggering

turned

out to be stronger

projected.

expectations

and pressures

for a policy

reaction.

.

The show

stronger through

GDP expected much to M3.

by the Committee since pressures

is unlikely on depositories spending markets. even need with

to and

borrowers financed

are likely

to result

in additional credit range.

being Thus, nominal the

disproportionately would fall short

in open of its There

M3 probably GDP projected debt range,

by the FOMC. especially the lower with end

is less

to adjust

the Committee's of its range

outlook.

Debt be exhalf. owes but

is now pected and the partly not from for

around to end

and would in the

the year

within

it. though

lower

shortfall to the

relative

to projections funding. that not

in February money

absence might

of RTC

Adjusting the rationale

debt

ranges

emphasize

arises

intermediation lower borrowing Adjusting but

patterns, or spending ranges

expectations was

or desires in at mid-year adjusted. and 1986.

than

expected year were

February. is rare. rebased.

for the current Ml times ranges

not unprecedented. dropped was the three

or even range

between

1983

and the M3

lowered ranges

in mid-1990. for 1992 unchanged M2 within would the be was Such

Leaving justified consistent if the with

Committee

thought

range

its objectives might reflect

for nominal anticipations staff would was

spending. that

an expectation would not rise

velocity so

as rapidly below

as the range

projecting

that money in spending, in the

growth

the

suggest

shortfalls than

as well forecast.

as desires Retaining

for stronger the current

spending range

staff

would

imply

that

the

Committee

was

prepared

to give

serious

con-

sideration relative

to taking to the range

action

to spur money Policy clearly

growth actions indicated

if weakness would that but to the not

persisted. information along

be required spending there was

if other

proceeding

a satisfactory of continuing Another

course. attention

would

be a presumption of the current shortfall. ranges

implications taining about the

rationale

for main-

is that growth

in light to the

of uncertainties economy. the range the with

relationships felt that

of money it was

Committee

unable since

to reset a new

any confidence, with this it some latter

especially

range

might

carry it. If

presumption reasoning its was

of an attempt used. the

to achieve

Committee less weight

could

explain

to Congress aggregates

reasons

for

placing

on the

and their With regard has

ranges. to 1993. twice in the the last current three years

the Committee ranges into

simply

carried year

over

year's Such

the following

on a provisional

basis. about the

decisions economic year-end, of money carrying might the

rested situation and

importantly likely

on uncertainties the

to be facing

Committee

around

on the uncertainties Committee's to 6-l/2 even

about

the

relationships regard, into 1993

to the the

objectives. percent range

In this for M2 decided

2-l/2

be justified ranges. 1992

if the

Committee grounds.

to reduce the

1992

On substantive for

retaining

current the

ranges

1993 might to ensure

be seen

as emphasizing room in its

Committee's

desire

sufficient

ranges economy, began

to move even

against if the

any incipient recent unusual

weakening weakness

of the in money demand

to unwind. Lower ranges for 1993 would growth that be more year. GDP likely to we now is

encompass think about demand to grow

expected The

money

given for

what 1993

we know. the same

Committee's staff's.

nominal Absent credit. current well the

as the

a rebound money 1992

in money likely

or a surge comfortably

in depository up in the could

is not

ranges

in 1993,

and for M3. of the to lean the

especially, also would

fall

short.

A reduction intentions as

ranges

signal

Committee's

against

any incipient hold and

re-emergence

of inflation of

recovery

took

resumption emphasize Indeed.

of the pattern the longer-run percentage

downward tive

adjustments

would

objecpoint

of price

stability. range

a full

reduction range over

in the

would

bring

the midpoint with price

of the M2 stability

close time,

to the level assuming

consistent secular

normal

velocity

behavior.

July Short-run Policy Options Donald L. Kohn

1. 1992

Various written or the won't though. decides down other repeat
to

members the for

yesterday Committee the coming

gave might

the

reasons

I had one so I

for why course them.

want

to choose period.

intermeeting

I do have

a few other of the

background Committee

points, as it

bring

to the

attention

on short-run First,

policy. some new new information this morning on

we have The

the money weakening revisions over

supply. in money in the Ml day,

information in June--with Subject expect

suggests

a further

growth

all the downward to further refinement

category. we now would

the next

to be projecting rate in all the

declines three

of about

3-l/2

percent

at an annual points for for

aggregates

in June,

2 percentage a percent

below

bluebook

for Ml and half We have

lower

the broader the extraordi weakness in NOW and NOW

aggregates. nary behavior relative accounts. account downward. and

no new

explanations

of money

in June. most

or for the latest of which sluggish have has been in June.

to expectations, Bank credit

remains rates not

other

deposit has

continued

to adjust heightengrowth through have in May,

but

there

been

a sudden. while has that

major. sizable

ing of such total stock

adjustments. and bond

Moreover. funds

mutual

persisted these

we have

no information

to suggest

gains

picked

up.

Looking

forward,

we continue

to anticipate can be growth

that

the projected with Even until might comparable

expansion increases

in nominal

spending

supported

in Ml and lower

of M2.

so. continued we can be read for

declines

in the aggregates, portfolio about or about the kind

at least involved. strength financial going

identify

and assess questions services with

shifts concurrent whether

as raising goods and

of demand conditions forward

were

compatible in the
as

of expansion

embodied Second.

staff

forecast. discussed. of near-term rates. the market easing does

Joan

Lovett

have into seems

a significant the structure

probability of short-term partly

built

This

expectation data as

to be built a lack

on interpretation momentum

of recent

suggesting sion. has

of strong

in the economic the Federal

expanReserve suffiIn this

and partly

on an assessment priority to reduce

that

put important vigorous the

on assuring

an expansion rate.

ciently context, would

the unemployment to any

reaction very much

in markets

easing

we undertake it with

depend

on how the market and was the our objectives. seen

interpreted

respect

to the

economy that that and

An easing a significant ning out risk

as a measured expansion of weak

response could money. be

to run-

economic context

of steam,

in the

would or time.

be unlikely interfere

to adversely with building

affect central

inflation bank

expectations over

credibility

-3-

In such as well would

a situation, as real

bond

yields

would for

be

lower time.

in nominal than they but. on a

terms,

at least ease.

some

be if we didn't a heightening from dollar

The dollar

would

decline, the odds

without "run"

of inflation with would

concerns.

assets U.S.

adverse

consequences though

for bonds not elimi-

and equities nated.

in the

be reduced.

In these to help

circumstances. at least saw

an easing a little. this

would

be likely the source rates lower flow

the economy.

whatever year.

of its malaise. would prime bolster

As we housing, rates

earlier other

lower

among would

sectors,

and the with cash

and market

aid borrowers

constraints would shift

and encourage demands here

spending. and abroad view

The drop toward the

in the dollar products. situation in the at

U.S.

If the Committee was one in which economy were

were

of the

that

current

the chances fairly

of a significant high. it could opt

slowing to ease

in fact

the meeting. An adverse were seen as buying the reaction expansion power to an easing insurance of that is possible good if it reason

without expansion.

to question circumstance,

staying

In this about yield expanof the

easing

would

reinforce now

market

suspicion steep

our longer-run curve. The

objectives, forecast. federal

embodied

in the

staff

of course.,has funds rates.

a moderate

sion at unchanged

The declines

-4-

last

few months such

in the

dollar The

and interest current

rates

help

to expan-

support sion. tion more

an outlook. indeed

slowing

in the

if that

is occurring. in rates by market in interest expansion out

might

be in part quarter. of the rates year.

a reacand the

to the back-up realistic view

in the first participants

outlook should However, an or

currently reinforce

reflected the

and exchange later this

economic turns

if the expansion easing. lower tion than tions even

actually

to be accelerating. at this time by

if it was rates. and

accompanied would tend

steady inflathe

long-term expectations unchanged that

to produce

higher

long-term

rates any

not far down revisions down time.

road

policy.

Certainly, inflation

to expectafrom the 4-5

long-term could

might

come

percent Committee highly

area

be postponed view that

for some reasonable

If the was

were

of the

expansion

likely, the

and it wished downward might tilt

to emphasize to inflation.

its determination then alternative of action but even

to keeping

B. symmetrical could cause

be appropriate. up--both lower along

The lack long-

rates

to back be

and short-term. from and now

long-term as the remained

rates

could expanded

several a moderate

months path

economy damped.

inflation

If, however. moderate concerned expansion that

the

Committee.

while

convinced were down

that also side

were now

the most were

likely

outcome. to the

risks

skewed

more

-5-

than

at the

last meeting. in money

owing

to the

tone then

of incoming it could

data an

or the weakening asymmetrical

and credit. ease.

adopt

directive Mr.

toward Chairman.

Finally, to the operating if,

we added

a possible

sentence

paragraph given the

of the directive current degree

for Committee of uncertainty the weight in

consideration about monetary

relationships. in guiding

it wished intermeeting

to reduce adjustments

on money reserve

growth

conditions.