APPENDIX

Notes

for

FOMC

Meeting

May 19,1992 William J. McDonouah

Dollar exchange rates from the time of your last meeting until early last week traded comfortably in ranges of 133 to 135 yen and DM 1.63 to 1.68, but then there was a gradual weakening of the dollar leading to a stronger selling bringing the dollar below 130 yen and 1.60 marks, the lowest levels for the period. Market

participants are gloomy about Japanese financial markets even though there is growing hope that the stock market may have found its bottom. It is also gloomy about inflationary pressures and

political uncertainty in Germany. overtaking or overwhelming this gloom about the other major currencies, there is an underlying feeling of weakness in the dollar for the first time since January. This seems to be based on a view that the Federal Reserve will loosen in the next month or two and growing confusion about the meaning of presidential election opinion Polls* The downward movement of the dollar against the yen came in three installments. A small move occurred after the G-7 meeting and the mention in the statement that the decline in the yen was not contributing to the adjustment process; the dollar dropped from just over 134 to about 133, in part because the Dank of Japan on instructions from the Ministry of Finance intervened on Monday and Tuesday after the G-7 meeting and sold then each day and

later. The second and largest move came

-2-

last week, when Under Secretary Mulford talked about the need for a stronger yen during Congressional testimony and as the market became more convinced that the Fed might ease again; the dollar dropped to just under 130. Yesterday, the dollar broke the 129

level, at least in part because of some heavy speculative selling that I will describe in a moment. morning. The dollar weakened against the DM from a high just above 1.67 to about 1.61 between the end of March and last Friday because of widening interest rate differentials and a widely held view that German interest rates might go up and U.S. rates might come down. Again, the dollar slumped further yesterday and broke the 1.60 level. It is just above 1.59 today. This weakness of the dollar It is just above 129 this

happened at a time when Germany was experiencing severe labor unrest and inflationary wage settlements to end the public workers strike and avoid one by the metal workers. Settlements of 5.4% and 5.8% for the two groupsare well above productivity growth. This

complicates further the severe economic cost of German unification. Directly related to the strains of unification is some political disarray. The German Government managed to look inept in its

handling of the public workers strike and following settlement. The junior partner in the coalition, the Free Democrats, made themselves and Chancellor Xohl look weak in handling the succession to Foreign Minister Genscher. The denting of Germany's political and economic armor made it possible for several other European countries to act more

-3-

independently. Rate Mechanism short-term

As the

UM weakened the United France follow

somewhat Kingdom

within

the

Exchange reduced and as

of the EMS, rates. will

and Ireland

interest believes

reduced by

reserve

requirements rates

the market
well. those German

reducing

short-term interest rates

Nobody

has been successful even though

in bringing

rates

below

of Germany, longer

the short term the lo-year of their any

are converging. as a proxy,

term rates,

using

government neighbors.

are still The exchange

comfortably desk did

below

those into

not enter since the

intervention

in the

foreign

markets last

last meeting. we and the market position held and by have the become Bank aware Negara and trading to of of very and the

In the a very

few days, dollar

large the

long

Malaysia, active

country's

central

bank

a well-known whose of

participant

in foreign

exchange been

markets, a matter guess Negara

position-taking Federal major Reserve trading long marks, size. large British With loss the

activities in the past. counterparts as of late and

have

concern one at

An educated is that Bank

from was

of their least German

last Swiss

week

against

Japanese order

yen,

pounds recent

francs

in that dollar,

of position is a very known by

weakening

of the

there

in that

position.

This

became began only

increasingly to cut back sold to

Negara's with

trading

partners

and they one case, moves

or to trade dollars for to new

Negara, its

in at least position.

if Negara Negara

reduce

These

forced

look

counterparties We believe

and made its losing Negara had to

hand more visible dump at least

to the market. of its

that

a portion

-4-

dollars yesterday and that this selling of dollars was an important cause of the dollar weakness, as was the shorting of the dollar by those familiar with Negara's position. Bank Negara's situation is an overhang on the dollar which may take some time to work off. We will continue to monitor this situation closely. At the March 31 meeting, the Committee gave its clearance to the Federal Reserve's participation in the sale of DMlO billion from our reserves, DM6 billion for account of the Federal Reserve and DM4 billion from the Exchange Stabilization Fund. We have

reached agreement on that sale and are working out the mechanics with the Treasury on their participation. The DM sale is being

done as last year in an off-market transaction with the Bundesbank, but at market rates. The DM4 billion spot transaction should be

done in the fairly near future and the forward sales set for a series of maturities ending in December. This action will reduce the total reserves in DM by the entire amount of DMlO billion to approximately $20.9 billion equivalent at current exchange rates. We also have total reserves of $17.3 billion equivalent in Japanese yen, $580 million in Swiss francs and about $100 million in other currencies. After the DM sale, therefore, we will have total

reserves in foreign currencies equal to just under $39 billion. The Committee will also recall,its clearing our plan to sell interest on our reserves as it is earned. We will begin

discussions with the Treasury regarding their participation in interest sales.

-5-

The we would billion,

Bundesbank's entertain the

Vice

President,

Hans

Tietmeyer, another

asked sale part

me

if

idea of entering concurrent with

into

of DMlO of the

to take place

the remaining running bring

transaction part of

I have just described If we to about would $14.7 do

or perhaps so, it would

into the early U.S. official and $32.7

1993. down

reserves billion which Truman, I

billion Before

equivalent pursuing

in DM this

equivalent have with

overall. to the

matter, Mr.

brought the with the the

Chairman's or entering I would wish

attention into

through any

Treasury

detailed general German

negotiations guidance idea, I from will

Bundesbank,

like

to request this

Committee. a

If you

to pursue for time, the we

develop

specific meeting.

proposal At that

Committee's should also

consideration consider

at a future

the currency

composition

of our reserves.

Notes

for

Peter D. Sternlight FOMC Meeting Washington, DC May 18. 1992

For the domestic

about Trading those

the

first

week

of

the

past

intermeeting conditions March around and

period,

Desk

sought

to hold just prior

reserve to the

unchanged consistent Then, on

from with April in the

prevailing funds

31 meeting, 4 percent. significant of

federal 9, against broad

continuing of

to

trade

a background

persistent along abating easing to with

weakness relatively tendencies, conditions,

monetary

aggregates, and

indications

meager the

economic Desk

expansion

inflationary of reserve percent. began to

implemented federal for

a slight funds to and was

expecting The allowance $100

soften

3-314

seasonal and move then

adjustment reduced 9. The to

borrowing $75

the

period the to

at

million, easing

million was

go with returned associated

modest $100 with

on April 30 in in

allowance

million a modest coped

on

April

a technical

adjustment

pick-up with some the in

seasonal

borrowing. uncertainties in required

The in managing

Desk

greater-than-usual as the

reserves was

during folded

period.

reduction its

reserve impact

ratios on excess to

on April and

2. with as

hard-to-foresee balances proved date. in At the

reserve in

levels, the for days

Treasury the in

difficult first, we

predict

following bulge

April excess

tax

made wake

allowance of the were to the some be other

a large

reserves as this had added of the

immediate when

reserve cut at

requirement the end in of the

reduction. 1990.-but initial

occurred

requirements proved On to

allowance this be time.

unnecessary hand. the

phase

cut may

reserve for

requirement reserves are

reduction in the a

leading

elevated period,

demands as

excess balances

current

maintenance

required

reaching

-2-

seasonal needed

low for

point

and

perhaps

impinging Exacerbating in the latter

on

the the half excess

reserve problem of April,

levels of many banks

clearing Treasury to that

purposes. balances permit excesses and of

predicting seemed out of

reluctant concern

any

build-up not

of be

reserves, off without

perhaps risking

could this days

worked to

end-of-day funds rates of

overdrafts. on a number

contributed in April. in the an to

lower-than-desired to avoid the when avoid of May 13

A desire first half

build-up hopes of

excesses Fed

also easing

occurred provided eventually

of May. to

another

additional a sharp at the

reason tightening end of

building reserve reserve

excesses--leading conditions period. On average. first to funds week of and bulge

in

borrowing

the

were the

close

to

the

expected period,

4 percent but when sagged the May 13, on the to

level around

in

the

intermeeting for the In next the

3-l/2 rate rose

3-518 3-314

percent

few

weeks

expected average the final

was to

percent. with

two

weeks of

ended

3.80 In

percent. opening of

the of

help the

a sharp

firming

day. the been

the

days daily

current balances percent. of

maintenance a question, the

period, average

with has

adequacy

clearing 3.95 in

a higher-than-desired levels full have varied

Borrowing $150 when firm period million the funds for

a range running

about to the

$50 low

to side to 13 the

maintenance and

periods, bulging when at of

rate

sagged

conditions the end of to

veered the May

side. when

There we

was

a particular our at

bulge

restrained aggressive easing move.

injections a time

reserves the market

avoid on the

appearing lookout

overly for The an

when

was

Desk

undertook reserve

no needs

outright were met

transactions with System

during or

the

period.

Moderate

customer

-3-

repurchase flexibly bank in

agreements. a period in of

This

permitted

needs

to

be

addressed and uncertain balances. than our

uncertain to to the avoid

reserve lower

forecasts of more

behavior

response was the taken time,

levels

reserve reserves

Particular banks moves wanted as

care at

injecting

lest a more

market

participants posture of being

misconstrue than was

leaning Even

toward so, we

accommodative on the edge

intended. the need rate: occasion was we

skirted

misunderstood reserve desired

on

noted

earlier--May and our some funds

13.-when were trading

a large

technical over was the

projected, thought but of been the

a shade of reserves

overnight market

injection observers

unaggressive skimpiness they had

thought to stop at

otherwise a lower funds no

because rate than to move scale

the

propositions estimating. doubters On were

caused Later largely of

us that

day.

when

climbed easing small the

20 had

percent, been

persuaded

that

intended,

a couple

other

occasions, executed the

very in

matched-sale essentially policy was

purchase to being disabuse

transactions participants

were of

market an easier

notion

that

fostered. ahead, in we face some sizable and and we and would lasting expect needs to along for

Looking additional this lines through of the

reserves

coming of at on the

weeks, bill last

address the

a combination discussion yields

coupon

purchases

meeting. issues generally 15 to declined over

Market the but intermeeting this did of future not

Treasury a net a smooth that

period--by occur at in work

of

about

65 basis there

points-was a

progression lead to

and

mixture about

factors

could

differing were to 65 in basis as

judgments the two-to

prospects. coupon issues, from

The on

steepest the order

declines of out 55 for

three-year This area

points. and

benefitted

a reaching

yield

bills

-4-

other early strong toward

shorter April

issues

sank

in yield.

partly

a result

of the Fed's suggested shift was no

easing,

and as information In March, policy

on the economy there had been

recovery a view more

momentum. that the next

some

move.

while

not imminent, than

perhaps side. emerge

likely

to be toward

the firming

rather

easing to of a and

By early though

April.

anticipation

of an easing move was

step began somewhat

the timing

of the System's

surprise. mostly further weak

Following data

the move.

a mix of uneven kept much

economic alive

data

on money

supply with

expectations ebb and flow

for a

easing

step--though report

of expectations or money

in response growth.

to each

on the economy,

inflation,

In the bill somewhat more

area. the

rates

came

down

about

45-50

basis

points,

or

than

System's fed funds

perceived rate.

reduction As noted,

of 25 basis sentiment

-points in the expected moved from a neutral

market

or even

slightly

bearish

stance

regarding move is

monetary distinctly laggard change shortly increases short

policy

prospects

to a view

that

another

easing

possible

against

the backdrop Bill

of slow economic supplies showed

growth. little net

M2 and subdued over the period. the April

inflation. Heavy tax

maturities

of cash management offset

bills

after

date were issues

nearly

by sizable sale of new

in regular management

cycle bills bill

and a $10 billion June 18.

cash

to mature auctions,

In yesterday's were at 3.61 percent

regular and 3.71

3- and 6-month percent the

the new issues with 4.08

respectively. last meeting.

compared

and 4.19

just before

Intermediate to the flow addition

and longer

term coupon

issues

also

responded but in

of information

on the economy about

and money

growth, and

gave weight

to concerns

new issue

supply

-5-

recurrent

worries

that

System

easing The

might

be overdone. April 9 easing

with

adverse

consequences review markets quarter in the

for inflation. long-term quite

System's

got a mixed and long mid-

market

and then

the intermediate

became

heavy

later

in April

as the Treasury's

financing

approached. the auctions arrived, found in early decent May, sentiment

By the time was better especially securities levels. around high been again the were For 7.80

and all three notes.

issues

support-the new auction

lo-year trading

By the end of the period, premiums over

at respectable

their was

example, percent.

the twice down from

re-opened

long bond

trading levels and a had over

the 8.0 percent of 8.11 of your $28

auction

yield about

point

during

the period at the time raised

percent.

The yield Net

7.95 percent the Treasury sector. there

last meeting.

the period, Treasury

about

l/2 billion

in the

coupon Clearly,

was

an improvement part

of sentiment

regarding period. To be came

the long sure, the

term market long market less

in the latter tended

of the recent when

to improve

new information weakness also

out suggesting growth, shorter policy

strength

in the economy, of events

in money stimulating policy reacting the

etc.--the market easing.

same type

that was about

and generating Less clear

speculation the

further

is whether

long market or just

was

positively prospect

to the possibility of slower growth with

of policy perhaps market

easing

to the Based

an unchanged

policy. I come

on conversations at least right now a doubt

with

various

participants. easing would

away with

as to whether market.

further My guess

be well-received much

in the bond in it being

is that would

to have have

confidence greater

so regarded

there

to be some at hand.

evidence

of faltering

recovery

than

is currently

-6-

Mr.
in required

Chairman, reserves.

over

the

next and

intermeeting reserve

period,

movements

currency of foreign reserve

other

factors--possibly projected just for squeak changes I

including to call

the for on

impact

currency additions.

operations--are We might leeway

substantial the standard

through in

$8 billion but to provide provide the

intermeeting a more

outright

holdings, that the to

comfortable

cushion.

recommend to the

Committee run through

a temporary regular

$2 billion meeting date.

addition

leeway,

next

Michael J. Prell May 19. 1992

FOMC BRIEFING

-- DOMESTIC ECONOMIC OUTLOOK

I think there's an old joke to the effect that "Forecasting wouldn't be so tough if you didn't have to predict the future." Unfdrtunately, insofar as the behavior of the U.S. economy is seems to be shrouded in as much mystery as

concerned, the past currently the future.

You may recall that. last fall. we predicted a slight decline in real GDP over the fourth and first quarters. basically that there would be a contraction in manufacturing on the premise

to clean up the

inventory imbalances that had emerged.

In the event. industrial output

did fall as we predicted. but GDP. after little change in the fourth quarter. evidently increased--perhaps quarter. quite substantially--in the first

As a result, we're left with a puzzling picture in which

domestic goods production and imports seemingly fail to account for all of the goods sold, and in which the increase in profits statistical expenditure discrepancy) (or in the

that is needed to balance the income and

sides of the ledger seems awfully large.

Be that as it may. there appears to be ample evidence to support the conclusion that the economy & January. grown appreciably since

The issue before us is just how strong the upward thrust in Obviously, the judgment we've

aggregate demand is at this juncture.

offered is that the thrust probably is enough to sustain moderate growth in activity over the coming months. without a further easing of the funds rate.

May POMC Briefing

- 2 -

Michael J. Prell

The Greenbook provided a summary of our forecast. so I'd like to highlight just a few of the key questions we confronted, and how we

answered them: (1) Is it possible that the first quarter was the real thing and that the recent large increases in employment. as measured in the household survey. are an indication that we're belatedly experiencing

the kind of surge in business activity that has typified cyclical recoveries?
Our answer:

Possible, but not probable.

There still is a set

of unusual economic and financial adversities that argue against a powerful acceleration in activity in the near term. And while the

payroll survey may be missing something, it seems unlikely that labor demand has been increasing as much as is indicated by the household numbers. Other indicators--including of job availability unemployment insurance claims and are

the perceptions

reported in surveys--generally

more consistent with modest gains in employment. (2) Isn't the first-quarter unsustainable, drop in the saving rate to think that consumer

and thus isn't it unreasonable

spending will keep pace with income in coming quarters? This is. to say the least, an area of uncertainty. pointed out in the chart show in February, one of the wside But. as I risks to

our GDP forecast at that time was that we might see the sort of decline in the saving rate that had occurred in the early phases of some other expansions and thus get more of a push from consumer spending than we were anticipating. As Monday morning quarterbacks, we can lay out a

case for a lower level of the saving rate than we had in our prior forecasts. noting the rise in the stock market. the progress that has been made by many households and other favorable factors. in reducing their debt-servicing burdens,

On the other hand. a nihilistic view would

May FOMC Briefing be that measurement

- 3 -

Michael J. Prell that it is With

of the saving rate is so problematic

always inadvisable to make a lot of its currently estimated level. a blend of these thoughts--and with an allowance for some pent-up

demand. especially for autos--we've

concluded that it's reasonable to

expect that consumption will grow essentially apace with income through next year. (3) Has the housing recovery fizzled?

Well, the March figures on new home sales and other indications of a drop-off in real estate transactions forecast of housing starts substantially. did cause us to lower our This morning's report showed component at

total starts in April down sharply. with the single-family

just a 963,000 annual rate--off more than 10 percent from a downwardrevised March figure. This is even weaker than we had expected, and it

points ,to the direct loss of a couple of tenths on GDP growth in the current quarter. In seeking to divine the underlying trends. however,

it is worth noting that, despite what might have been in part a payback for the extra activity pulled into the first quarter by transitory factors. single-family fourth-quarter levels. starts and permits remained in April above their
Moreover,

indicators of builder and buyer

sentiment, as well as affordability measures, suggest that it would not be unduly optimistic to look for modest gains in activity in coming months--and more if the recent easing in mortgage rates is extended. (4) The orders data and anecdotal reports suggest that equipment demand may indeed be firming. but isn't the Greenbook forecast of an abatement in the decline of nonresidential optimistic, especially A few thoughts construction overly

in light of the Olympia & York bankruptcy? are relevant here. First. nonresidential

construction is a small enough sector that, even were it to continue declining at the recent pace. the difference relative to our projection

.:

May FOMC Briefing

- 4 -

Michael J. Prell

would not be critical in GDP terms.

Second, we dn anticipate that the it is other

plunge in office and hotel construction will continue:

categories that we see firming in the near future. and this forecast appears to have a reasonable foundation in the available data on contracts and permits. Finally. we have recognized that the financial

damage from the commercial real estate debacle is still not behind us. and that it is one reason why we expect that there will be only a gradual easing of the credit supply constraints that have been afflicting the economy. (5) If the amount of inventory liquidation in the first quarter

evidently was far less than the BEA estimated, doesn't that bode ill for near-term production? Two answers are in order. one statistical, the statistical one economic. is. in On

side. the Greenbook forecast of GDP ~QX@&

effect, based on our estimate of the m first quarter, not the BEA's number.

inventory change in the As for economics, all other

things equal. a lower level of stocks at the end of the first quarter would have been a plus for the outlook. Be that as it may. however. our are in pretty of stocks in the

assessment is that. with a few exceptions, inventories good shape. Thus, we foresee only a small liquidation

current quarter--and contribution to GDP.

the reduced run-off implies a moderate positive

(6) Isn't there a significant risk that export demand will be weaker than we've projected, given the softness of economies abroad? There is a risk, but it appears limited. held up quite well to date in the face of flagging industrial economies--thanks countries. Export demand has growth in the major

to strong sales to Asian and Latin American

Much of the relatively moderate growth in exports we've

forecast should be accounted for by these same countries, which seem to

May POMC Briefing

-5-

Michael J. Prell only a gradual recovery

be expanding at a good clip: we're anticipating in Europe. Japan, and Canada.

(7) OK, let us stipulate that the Greenbook forecast for real GDP growth is exactly right; can we be sure that the inflation forecast is. to07 We found this to be one of the toughest questions of all. because, looking at the recent data from the Employment Cost and Consumer Price Indexes, the progress of the disinflation process seemed uncertain. Just to cite one example. the CPI. excluding food and

energy. rose 3.9 percent over the past 12 months, at a 4.1 percent annual rate over the past six months, and at a 4.8 percent rate over the past three months--scarcely circumstances. a picture of slowing inflation. Under the

it is not difficult to see why. as I've noted before.

most private forecasters are anticipating no further progress toward price stability over the next year or so. as the economy expands. However. recognizing the way sales tax increases. energy cost pass-throughs. import price swings. seasonal adjustment problems, etc..

have buffeted the numbers over the past year. we have chosen at this juncture to alter our assessment of the underlying trends only a little.

And, in light of the projected slack in the economy, we still are expecting to see "core CPI" inflation drift down to the low 3s by late 1993--just a few tenths above our prior forecast. said. stay tuned. We're approaching But. as someone once

inflation territory that we've not time. and we can't be sure how

been in. except briefly, for a long things will work.
l

t..****t***tt.*tt..

,

May FOMC Briefing Donald L. Kohn

19.

1992

A prominent been money the weakness evident

feature

of the

intermeeting of money. which

period The drop

has in to

in broad

measures

in the preliminary was

data,

were

relayed

the FOMC

at the last meeting. and extended on top into

confirmed

by more

complete de-

information cline. money

subsequent growth

weeks.

That

coming

of slower

than

desired

in both of

and income that

in 1991.

and occurring expansion

in the remained

context

indications
_

the current easing

moderate, some avail-

prompted time able

a slight the

in reserve

market

pressures becoming

after over

last

Committee of the

meeting. intermeeting money,

Data

the balance of a rebound aggregates

period only

suggest by enough annual of to

something leave growth both

in broad near

but ends

the lower

of their

cones.

Moreover, will just

we project keep them

continued at the

expansion ends of

M2 and M3 that their ranges

lower

over May factors

and June.

While account behavior

broad

money

is only deci-

one of many sions. does the

to be taken

of in policy of the

recent

and projected questions

aggregates

at least rates

raise

about

whether

short-term to promote

interest adequate

are appropriately expansion.

positioned

economic Some

of the surprising meeting owes

weakness

in money factors,

since whose

the

last

Committee

to temporary

-2-

effects Foremost

were

not

fully list

anticipated was

in the staff's

forecast. tax

on that

the shortfall

in nonwithheld last

collections depressed expected. balances in March smaller April

for April level. Lower

15. which than

Came in below above need

year's

rather

appreciably imply less

it as was to build money imply growth a in late seasonals, in note that of

tax payments which much

in advance, and,through volume

would

have

reduced They also

of April. against

of clearings May than

money

balances in the increases I should

and early

might some

be embodied substantial May.

and indeed seasonally the May partial 11 and

we are adjusted data

seeing money

in early

available

this morning the May for M3

for the weeks growth given rate

18 generally and l-1/4

confirm percent

of l-l/Z

percent book. cient

for M2 Other

in the bluegiven suffi-

temporary to might

factors include

we may not have the disruption

weight

to depositor quarter-end for M2 market of these

relationships when its

of a surge expired,

in RTC activity and the~effects

around

funding

on demand

assets rates latter should money been

of the backup from mid-January

in intermediate through those March.

and long-term The effect

two factors. be fading thus far

like

of depressed

tax payments, rebound growth in has

or reversing. suggests that

But the tepid underlying money

quite

sluggish

as well. damping money now growth may be the for the

Another more,moderate

influence

expansion

of spending

anticipated

-3-

second

quarter--relative and relative

to projections to the first

at the quarter

time

of the taking and

last meeting. account current weakness

after

of expected spending in broad

revisions. is not money.

But the behavior to explain two

of past all of the of

sufficient

We anticipate

quarters money

appreciable first been half fairly

increases of 1992--a steady

in the velocity period in which

of broad

in the have

opportunity basis. income

costs

on a quarterly for the effects it still in M2

average of both seems

Allowing porary -portion further levels special

and tema major

factors.

likely year

that

of the weakness downward of income such the shifts

growth

this

reflects at given been calibrated

in demand

for M2 costs.

assets We have

and opportunity since

observing against

shifts

the middle standard away from

of 1990, model M2 and

projections to channel

of our savings

of M2 demand. into other

Incentives assets usually

or debt steep

repayment yield

continue

to be given

by an unrates the downon

curve,

especially retail

unattractive time and deposits,

intermediatedisruptive ward

and longer-term of RTC

effects

activity, costs on banks shifts

the sluggish

adjustment who

of borrowing rely

for households for credit. in money years

and busi-

nesses

ordinarily some

Unlike factors entirely flows causing benign. from

downward

demand, have

the

the shortfalls They evidence

of recent

not been

a redirection

of credit from

away

depository

institutions

resulting

-4-

factors

that

may

feed

back

on spending. at depository than

Widening

margins have

and tightening implied higher

lending borrowing

terms

institutions would be

costs

ordinarily

associated borrowers, embodies

by the level themselves, some costs the they

of market have come

interest

rates. that

Moreover. debt credit

to recognize rates

beyond extra had

interest risk

or other

terms--including positions--that impetus to the

of more

highly

leveraged adding and rates

not anticipated to use cash

ex ante.

incentives than

flows

to save

deleverage

rather

spend.

And,

elevated

long-term as

.may be discouraging diverting savings The weak spending, seemed

spending to bond

to a degree,

as well

markets. between of downward second weak money and

possible even most

association in the face evident

shifts half

in money year.

demand.

in the

of last

Slow money matic

growth

in that policy the

period was

turned

out

to be symptothe kind

that monetary expansion a similar in money very will

too tight

to foster

of economic anticipate slow which money rapid the growth

Committee this

desired. year.

We do not that the

outcome underway similar instead

We believe half

in the first to the rate

of 1992. of

has been in 1991. increase

of expansion with year

be consistent than last

the more in

in nominal

GDP

now forecast

greenbook. my2 For one, unlike last year. we are in fact that the ongoing

observing

increases

in velocity,

suggesting

-5-

shifts downward money cial

in money shifts

demand

are not being for goods

accompanied and ser+ices.

by further Sluggish finan-

in demands less

growth distress.

seems

an indication

of underlying are time

Both

borrowers than

and lenders at this capital we can credit.

in better last year. have

financial For many been

condition financial
and,

they were

intermediaries, as a consequence. to extend imply

and earnings see stirrings

improved

of a renewed tighter

willingness spreads

In open markets and terms burbalof

quality

better

availability debt

of credit. dens. ance and

Borrowers the urge should

are facing

reduced

servicing

to cut back be waning. last

on spending Moreover,

to bolster the easing

sheets

monetary offsets including a reduced declines They

policy to the lower

since

summer effects

has provided of financial

important stress-rates. Recent signs.

restraining nominal rate,

and real

short-term stock also

interest prices.

exchange

and higher rates

in long-term more

interest

are hopeful for the

suggest

reasonable the

expectations danger that

economy market of

and inflation, participants demand rates and

reducing

financial

overestimating price pressures even

the underlying had unduly

strength

pushed

up interest

and undercut Still.

a moderate reasons

expansion. for caution about the slow

there

are

expansion forces

in money

and credit. rule

We don't

understand

all the that to support

at work

and can not may

out the possibility be too restrictive

financial

conditions

still

-6-

further ing some extreme greenbook

moderate pickup weakness economic only ends

economic in money of the

expansion. growth last in May

The

staff

is forecastfrom the the

and June

few months Still,

consistent

with

forecast.

this

acceleration growth target path ranges along for

represents the lower M2. M3.

a return

to an underlying annual

of the Committee's

and debt. A desire to gain some better that assurance of a pickup around cur-

in money the lower rent

growth, ends

or a judgment ranges--or

growth

of money

of the

other

factors

in the

circumstances--suggested path for

a significant spending would

risk

to achievof

ing a reasonable alternative Even money

argue

in favor

A or perhaps growth well

a somewhat

lesser

easing

of policy. ranges robust

down

in the lower expansion

half

of the very

in a setting may raise

in which

economic

is not

questions if there further seen

about were

the adequacy doubts about

of monetary the strength interest

stimulus. of the rates downlong

Especially economy, might ward be tilt

reductions

in short-term little threat

as embodying for time

to the basic period--one tightening,

to inflation ample

a considerable for a subsequent

enough should

to allow that

prove

necessary. extent nominal long-term reduction The rates would de-

To what cline rates in response is difficult

to a further to determine.

in money

market yield

steeply

sloped

i

-7-

curve

suggests

that

markets

do not have growth rates

built

in the pos-

sibility Moreover, commentary Reserve's tion. trying

of simultaneous the may level

moderata

and disinflation. as market the Federal

of long-term some

as well about

indicate

uncertainty with

priorities this

and intentions is not

respect

to inflabeen

Perhaps to walk

surprising, line

since

we have

something the

of a fine since

in putting while

emphasis continuing

on stimulating to insist Depending to raise reduce tive.

economy

last

fall.

on our on the inflation

commitment

to long-run

price has

stability. the potential to

circumstances. expectations credibility or even would

an easing for

a time.

or at least stability

near-term Unchanged, probably

for our price nominal

objecrates as

higher.

long-term

a result effect lower. market

not undercut real rates

the basic likely

stimulative would be

of an easing, and

since

still

if the policy would Still, setbacks

judgment catch even

were

correct.

eventually reality in longwould sheet

expectations

up to the underlying increase

of disinflation. term rates and

a temporary

to inflation

expectations

constitute

a less

conducive

environment

for balance

restructuring. If there weak money and was This were concern were about market reaction, provided B might be and

credit clearly

seen

as acceptable

the economy preferred. data after

moving

ahead.

alternative allow time

alternative season

would

also

for more trend

the tax

to determine

the underlying

-a-

of money. late ease Given course easing. gaining odds that even

The

risk

is being signals

caught

in the lags--finding and having been to

too

monetary further

were

meaningful action had

than about

if timely velocities,

taken. such a

questions may

however, to avoid if there

risking absent

be viewed it may

as difficult be desirable

aggressive in With some

And,

is value

credibility built

for our inflation into the market. over pressure

objectives. the unchanged the

on easing

stance

of alternative period. est lack might

B, if maintained put some upward rates.

intermeeting interabout a

on short-term concerns

rates

and exchange

If desired. could

of a pickup

in money

and credit

be embodied that

in an

asymmetrical persistent. cially

directive. shortfalls data

with would

the understanding prompt easing

further. espe-

actions,

if incoming

on the

economy

and prices would

suggested less

moderation. danger response likely

In this

circumstance, reaction

there

be much

of an adverse of bond

in price

expectations. easing move

and the is more

markets

to an eventual

to be positive. Finally, Mr. Chairman, I should language note that the

bluebook tion

gave

some

alternative

for the This

specificawould in May of the

of money the

growth

in the directive. of monetary slow

language expected

emphasize and June

resumption than

growth

rather

the very

or no expansion

March-to-June

period.