APPENDIX

FOMC November Margaret

Notes 17, L. 1992 Greene

Mr.

Chairman: The dollar remains on to the sidelines of market attention. since of DM mark. The U.S.

But early

it has

shown

a tendency to of

strengthen of the

almost

continuously morning German yen. market

October, an

rising

a high

period

this

1.6070, It rose

increase modest not

almost 4 percent

13 percent against foreign

against the

the

a more did

Japanese

authorities during the At of September's

engage

in any

exchange

operations

interval. the time of your last meeting, market lowered the immediate had pretty pressures much and about been

European the

exchange had

crisis both

dissipated interest durability the has ultimate been

and rates. of

Bundesbank then,

official remained

market the and

Since existing

though rate the

questions

exchange of the

relationships Monetary in the

within System,

Europe there

configuration of

European pressures

a lessening

active

exchange

markets. --The they lost French have been able to and the recover then all of the reserves

defending of

the

franc, to

some. has

Their helped that the the

repayment German

indebtedness bank absorb

Bundesbank of the

central

some

liquidity

September --The the Italian

interventions currencies lira--have against were first

had that

created. the some EMS--pound of the sterling rate and

departed

recovered the mark

exchange when

depreciation currencies

that

developed

these

floated.

-2-

--Impressively,

these developments occurred at the same

time that the EMS central banks other than the Bundesbank have been able to drop interest rates by varying degrees. but in every case to levels below those prevailing before the crisis. The countries with the largest changes in interest

rates are those with the newly floating currencies--the United Kingdom and Italy. Most other EMS countries have also

been able to narrow their interest differentials relative to Germany. France is one of the few countries where the decline

in money market rates is not as great as that which occurred in Germany during September.

With interest rates in the united States tending to firm largely in response to evidence of somewhat better-than-expected labor market data and talk of fiscal stimulus early next year, the interest differentials against the dollar tended to narrow. The

mcxe was greatest for longer-term interest rates as they reflected not only the changes in short-term rates currently taking place but also expectations that these trends would continue. On lo-year

government bonds, for example, German rates remain higher than those here, but the adverse differential has been squeezed down to its lowest level since early spring of this year. At the same maturity,

the favorable interest rate differentials we enjoy relative to Japan widened to more than 2 percentage points. Under these circumstances, market participants began to consider the possibility reversed. that the trend of dollar rates may have

They were sensitive to any indication that the move to In response, many who

lower interest rates abroad would continue.

had either invested abroad or had allowed their foreign currency receivables to build up in anticipation of further dollar

-3depreciation moved moved to convert during most back into dollars. Thus, the dollar

up steadily

of the inter-meeting period. conditions rolled back as

One of the reasons much as they there rates did during were

why the crisis

October

and the first

two weeks

of November that German

is that interest released output,

widespread continue attention

expectations

at that time Data

would

to be lowered.

then being outlook officials the the for German appeared

drew market employment the most target

to a deteriorating Also, Bundesbank

and exports. recent

to dismiss Bundesbank's unusual Together,

accelerations

of M3 growth,

variable,

as an aberration interventions

reflecting

circumstances these

of the huge

of September. that the Bundesbank of of the

developments

encouraged

the view

was entering monetary other

on a course

of persistent, open up room to lower

if gradual,

easing

policy

that would

for the central their

banks

EMS countries As these

to continue other European

own interest their

rates.

countries

did move

interest would vis-

rates accept a-vis

lower,

some

started

to probe narrowing

the limits

the market

as far as a further the German mark.

of interest

differentials by the

At the same time, environment of policy

as perceived

Bundesbank, hospitable prospect weakening sensitive rolled

the domestic to an easing

has now turned

somewhat ago. the

less The

than it was two months has deteriorated for next with

for fiscal economy, juncture about

consolidation wage right

negotiations now,

year are at a of exchange rates has in

and the movement

back

half

of the mark's has sensed

appreciation

that occurred has just market

September. recently

The market become

that the Bundesbank in its money

a little

less generous

operations eliminate rates seems

and,

last week,

the price

of Euro-DM

futures

adjusted interest rise

to

an expectation end. Under

of a further these

cut in short-term

by year to have

circumstances, couple

the dollar's

stalled

during

the past

of days and some other pressure. been unloading as banks during in the

European

currencies Meanwhile,

have met with the Bundesbank

some renewed has quietly reserves

exchange repayment

markets

some of the dollar extended These

it received central aimed

of credits crisis. absorb

to other operations

European have

the September the Bundesbank had created. conducted

been

at helping

the liquidity

which

the earlier

interventions been of

For the most part, manner.

their

dollar

sales have

in a quiet

But market

participants

are aware

the Bundesbank's

actions.

OPEN MARKET DOMESTIC DESK OPERATIONS FOMC MEETING November 17, 1992 William J. McDonouqh

Monetary policy was unchanged throughout last meeting and the Desk sought on reserves consistent with
to

the period since the

maintain the degree of pressure in the area

Federal funds trading

around 3 percent.

To reflect decreases in seasonal borrowings

typical of this time of year, we lowered the borrowing allowance five times in installments of $25 million from an initial level of $200 million to the present level of $75 million. The assumed path

for excess reserves held by the banking system was maintained at $1 billion. Actual seasonal borrowings did decline through the period from $143 million the first day to $38 million last Friday. Adjustment

borrowings averaged $26 million-- even that relatively low level was caused by three tightish days when adjustment borrowings were over $100 million. The banks held excess reserves above the assumed $1

billion level in the first of the three maintenance periods,just about right on it in the second period,and somewhat below it in the final one.

7‘

2 Managing the reserve needs was not particularly problematic. We stayed out of the market the day after the last FOMC

meeting even though funds were a bit tight in order to underscore the unchanged we stance added of policy. Once steady when policy funds was were

established,

reserves

several
target

times

trading slightly below the 3 percent add needs. The BIS and the Bundesbank

when there were reserve

complicated

things

somewhat by

asking on very short notice to hold large deposits over a weekend as they sought to manage unusually large dollar positions coming from the September turmoil in European FX markets; we were able to take care of a substantial share of their requests. To help meet the growing~seasonal need for reserves, the Desk bought $3.9 billion in Treasury bills in the market on October 27 and $980 million in securities from foreign accounts. On 19 of

the 26 business days in the period, either system or customer repos were used as well. The average effective Fed funds rate for the period was 3.02%. In the Treasury market, coupon securities increased in yield by 25 to over 85 basis points, with a flattening curve. of the yield

The 30-year maturity yield rose by 26 basis points, whereas

the lo-year rose by 59 basis points and the 3-year by 84 basis points. The increase in rates reflected in part a removal early in A more important factor

the period of an expectation of Fed ease. was a discounting continuing concern

of Governor Clinton's electoral victory and a before and after the election regarding a

3 possible fiscal package early next year. For the most part, economic data played a limited role in rate movements as the reports continued mixed. Market views of the

outlook shifted modestly during the period from an initial concern that the economic recovery could stall to a view that, if

anything, growth Against that

may be picking up at least slightly. background of uncertainty, Treasury auction

results were uneven. in the period, met

Some auctions, particularly the Y-year early relatively weak demand, but others did The

relatively well as investors found maturities they preferred.

midquarter refunding went rather well. With rates having adjusted upward before the auctions, the tenand
time,

thirty-year

issues

attracted a strong response.

For the first

the Treasury made shortage existed

the judgment call that an acute and protracted when it chose to reopen the lo-year issue.

The shortage, in our

technical assessment, was indeed acute and protracted, not because of any inappropriate market practices, but because of investor

demand and particularly heavy use of the issue by the street firms as a hedging device against long positions resulting from heavy

calendars of corporate and municipal issues and customer sales of mortgage-backed securities.

The second monthly *'Dutch" auctions of the 2-year and S-year Treasuries, in the year-long experiment with that method, went

reasonably well as the dealers seem to be getting more familiar with how to bid. They like the removal of the winner's curse, but

are seeking to avoid bidding so strongly that the issue comes at a

4 yield loss. Market maintain futures but we participants, posture. interpreted this over bit at this juncture, expect the Fed to and so low that it makes retail distribution difficult without a

a steady could think be that

The

structure

of short-term anticipation really comes

rates

to suggest of tightness

of firming, from some

pressure

on funding forward

the year-end. period between now needs and the next FOMC

Looking meeting, from

to the to us

it appears

that the reserve in the be $8 of demand such for

arising and

primarily required normal

seasonal are

increases going leeway to of

currency that

reserves

magnitude could well

the

intermeeting transactions the Committee the

billion

require

temporary that

of excessively authorize intermeeting

large size.

Therefore, $3 billion

we request for this

an additional level

period,

bringing

to $11 billion.

Michael J. Prell November 17. 1992

FOMC As you may have discerned struggled wasn't fiscal a bit in developing time we've

BRIEFING in reading the Greenbook. meeting. the staff This change in

a projection been confronted

for this with

the first policy.

a possible

but in this

instance.

the task of producing by the fact that knows what

a coherent already Although People

and useful thinks Mr.

analysis

was complicated

everybody be.

something

is coming

but nobody

it will

Clinton

outlined

a program

in his campaign it still

booklet

Puttine

First.

it is only

an outline

and

has to be fleshed primarily is

out. at

Moreover. achieving

the program short-run talk

he described

was not aimed stimulus,

aggregate of altering

demand

and there

considerable economy classic take

or augmenting

it so as to give the a variation on the but

a quick boost. two-handed

In the end. we performed routine, saying

economist grains

here's

a forecast. of no

it with policy

several shift

of salt because

the assumption

fiscal

is dubious. to make some amends this morning together making by the a policy

so. let me attempt suggesting material decision. First, headed if there I think were how one might presented

go a step

further with

in pulling

in the Greenbook

an eye toward

it ti useful

to ask where

the economy this

would

be an it

no fiscal

action.

You can view as it were:

as simply

analytical

device--setting

a baseline.

or you can view reality,

as a reasonable in which short-run

approximation measures

of at least enacted don't

one potential

one of

the fiscal

net out to much

in terms

macroeconomic

impetus.

.

November 17. 1992

2

Michael J. Prell

I won't repeat all that was said in the Greenbook to describe our forecast. Basically, we indicated that it seemed likely that the

economy~would maintain a moderate growth path in the near term despite the recent jump in interest rates and appreciation of the dollar. Then. later in 1993. there should be a gradual acceleration, encouraged in part by an easing of bond rates. Focusing on the near term, it is worth noting that the 2 percent growth of real GDP that we've projected through the first half of 1993 is about half a point slower than what occurred over the first three quarters of this year, and that the projected Z-1/4 percent growth of domestic demand is a full percentage point below the pace thus far this year. It is conceivable that, in arriving at this

forecast, we have been unduly negative in interpreting the incoming data; there's a danger that, having been burned in the past, we may become excessively skeptical about good news and miss the For example. the recent

strengthening we*ve been expecting all along.

decline in initial claims could mean that employment is doing better than all of the corporate downsizing announcements would suggest: or the early November jump in the University of Michigan sentiment index could mean that consumers already have become more willing to borrow and spend. their spirits lifted by the prospect that a new administration will be more active in engendering job growth.

But, as I suggested. we've seen false starts previously--the short-lived Desert Storm euphoria comes immediately to mind--and we believe that a degree of caution is warranted. To be sure, some

progress has been made in reducing the financial impediments to expansion, but they have not been eliminated, and there are still major segments of the domestic economy experiencing contractionary pressures. strong

MOreOVer, while we have anticipated a

November

17, 1992

3

Michael

J. Prell

significant possibility occurred

drag from that

the external activity

sector. will

we can not rule out the to disappoint--as remote

foreign

continue there

earlier

in the U.S. trade

And then squabble

is the hopefully

risk that the current into a trade war.

will

be allowed

to degenerate

All told. modicum shortfall negligible, considerably conditions. If that the possible good as mine I'll offer of forward

my assessment thrust at this

is that point, path that

the economy and while

has at least

a

the risk of a is not

from the Greenbook there also

output

for the near term we‘ll continue stable

is a chance 2 percent

to do money market

better

than

growth.

under

is so. how should in fiscal

one view Your

the outlook guess will

in light

of as But

changes with

policy?

is undoubtedly be forthcoming. worth.

regard

to what

legislation

a few random there

observations,

for what

they're

First, big fiscal of the

are some

significant There

barriers

to enactment about Mr. the the

of a size

stimulus

package.

is still among

a concern traders.

federal

deficit--and have noted

not just repeatedly

bond

Clinton deficit during

and his advisors over time. the

the need

to reduce

and this

was

echoed

by many

Congressional

candidates

campaign. The nuts and bolts of the legislative moderation: process even seem also to

point budget kinds

in the direction rules

of fiscal

if the

current and the Clinton's public

are scrapped

to accommodate taxes

the deficit

levels

of trade-offs would

between there

and expenditures

that Mr. of the

program debt heard again

require. which

is the additional early

hurdle

ceiling. view

must

be raised

next year. will

A frequently rear that its head

is that

the Balanced and that,

Budget

Amendment

at that

point,

in an effort

to counter

November 17, 1992

- 4

Michael J. Prell

initiative, it will be necessary to pass some multi-year deficitreduction legislation with credible teeth. There undoubtedly is room in all this for a package to emerge investment- and equity-oriented

that has as its base longer-range
COlllpO*C2*tS

involving little net deficit expansion. but that adds in This might be achieved by adjusting the

some temporary stimulus.

timing of various pieces of the basic program or by adding on some extra expenditures or tax cuts. Depending on their nature, such

short-run stimulus measures might, or might not, have an appreciable impact on aggregate demand: for example. a one-time income tax rebate would be expected to have a rather weak effect, but a one-year extra investment tax credit could have a considerable the buck by shifting spending forward in time. Obviously, it is impossible to reach any firm conclusions about what will happen once the give and take of the legislative process is put in motion. But let us consider what the risks may be. transitory bang for

in terms of the possible economic outcomes. The fiscal simulations in the Greenbook were intended only to

provide some rough idea of the potential effects of a range of tax and spending measures. They suggest that, if you accept our baseline

forecast, it probably would take a substantial fiscal stimulus package--well m--to beyond what Mr. Clinton signaled in Puttine People

push output growth up to such a point that we would put Of course, if

major pressures on resources within the next two years. you believe that we have understated expansion--which not a possibility

the underlying thrust of the

prior business cycle experience certainly suggests is one can afford to ignore--then the risk is greater.

If, for example, real GDP growth were to average 4 percent over the

November

17. 1992

- 5

Michael

J. Prell

next two pressures quite below

yeaas--versus toward

the 2-314 inflation

percent might

in the Greenbook well emerge

baseline-though

greater

by 1994,

possibly 3 percent.

still

starting

from a rate of price

increase

somewhat

HOWeVer. not only reactions yields

weighing

against

a big boost

from

fiscal

policy

are

the political

considerations, markets. causes.

but also the potential Though the about recent backup in bond

of the financial had several

likely

concerns

the fiscal factor.

outlook That said.

are generally one still movements. inflation borrowers must

perceived

to have

been

a significant

be careful

in assessing the

the implications reflects perceived

of such rate primarily by potential demand of potential to finance

If, for example, fears. may then

rate increase of capital

the real

cost

not have

risen much

and the damping rise reflects then

of aggregate

may be limited. stronger borrowers investment federal economic

But if the rate activity down

an anticipation at least scme

the road. higher

may be willing goods. growth

to incur

real capital

costs

And if it reflects over time. then

simply

expectations

of greater in real in the near

debt

it may

represent

a hike

rates that term.

will

crowd

out private

borrowing

and investment

In arriving substantially higher channel domestic Greenbook, could bond toward rates

at our baseline this last

forecast.

we've

leaned viewed through the the

interpretation, a drag

and we've

as imposing

on activity--partly partly through

of exchange demand

rate appreciation, Similarly,

the traditional in the measure if

channels.

as we also noted fiscal

the effects

of a deficit-expanding smaller than our model debt were path.

stimulus

be considerably about

simulations to hold

suggest

concerns

an expanded rates above

national

intermediate-

and long-term

our baseline

.

November

17, 1992

6 -

Michael J. Prell

To sum up briefly, then, it appears that the economy is growing moderately at this time and that the chances of sustaining at

least moderate growth over the next few quarters are good, absent a significant further deterioration in the financial environment. But

with such a growth path. unemployment

probably will remain high and and the Congress to take boost to

maintain the pressure on the Administration some action. The odds do not obviously

favor a u

aggregate demand flowing from fiscal policy, and even if there were such a boost, the amount of slack in the economy provides some cushion against an immediate reversal of the disinflationary process--and the room to

provides you some time to monitor developments.

HOWWer,

maneuver is not unlimited. and it doesn't take a stretch of the imagination to envision a combination of fiscal impetus and revived

animal spirits that might make it necessary to tighten money market conditions sooner or more than we've anticipated. eventual reacceleration of wages and prices. to head off an

November

17, 1992

Long-run Ranges Donald L. Kohn In July. in 1993 it chose when the FOMC considered 1992 ranges for money and debt basis.

to carry

over the that the

ranges

on a provisional among ways, these money,

The Committee rates,

recognized were

relationships

interest

and income

evolving

in unanticipated information about

and felt that relationships predict economy and

it did not yet have to establish would a new

sufficient range with

for M2 that

it could

confidently for the that

be compatible At that the

its longer-run

objectives decided

prices. reconsider subject

time.

the Committee before

also

it might

well

ranges

its regularly

scheduled

revisit

to this became

in February.

after

additional

information

and analysis

available. The unusual annual information received since late June does show continued

increases rate

for M2 velocity. the second

V2 increased quarters. for the

at about

a 4 percent a conveloc-

in both

and third

Although

siderably ity should upward culated

smaller grow

increase

is projected percent

fourth

quarter,

around

Z-112

over the year. when

Substantial is cal-

movements with The

in M2 velocity behind

are evident GDP as well. is that market

this measure

M2 lagged surprise. declining

of course. short-term

velocity interest

increases rates--a

have circumThe

occurred stance

with

heretofore done

generally

associated and

with

decreasing

velocity. since by

analysis then, Josh

for the July meeting, light on this Porter.

revised

and refined That

sheds Feinman

some

unusual looks

occurrence. array

study,

and Dick

at a broad

of returns the response way.

on M2 of M2 It

and its competitors to changes in those

for savers' rates

dollars.

and allows

to be estimated

in an innovative

-2-

turns

out that

rates

on important

alternatives market

to M2 also rates, market

declined, had been rates relative on

but not by nearly used to compute and rates

as much

as short-term costs.

which

opportunity

Long-term have

interest high

on con.sumer loans. market fairly

for example. rates.

remained

to short-term M2 itself returns quence, ceived. interest fell

and deposit smartly

At the

same time.

yields

with

short-term interest

market

rates--especially As a conseconmarket increase

on funds

likely

to be highly

sensitive.

the effective actually rates. rose

opportunity in 1992. much

cost

of holding the drop

M2. broadly in short-term in M2.and the

despite

explaining

of the weakness

in its velocity. Some of the unusual years has reflected as the behavior that of opportunity are not likely costs in recent

circumstances extraordinary
law

to be repeated curve debt. and HOW-

soon--such changes ever. flows

steepening the cost

of the yield of consumer structure

in the tax also

that

raised

some

resulted

from

changes both

in the

of financial capital

related

to the efforts to new costs balance

of depositories

rebuilding

and adapting strengthening to taper

and regulations While

and of their these

customers processes

sheets. they

we expect

latter

off next

year.

are likely

to persist rates

for some time. on liquid deposits

contributing

to further

declines

in offering flows

and to a continued institutions. be further of FDICIA revival

channeling

of credit

around

depository year will

Moreover. by new

velocities

of both

M2 and M3 next

boosted

institutional in the

influences--such latter part

as features

implemented

starting

of 1992 and the

of the RTC. Taking account rates, of these factors. of the assumed declines flatness rates of in

short-term the absence

market

and of anticipated stimulus package.

in long

of a fiscal

we are projecting

M2 growth

3

of 2 percent in 1993 associated with the growth of nominal income of the greenbook forecast of about 4-l/2 percent. rise in M2 velocity of around 2-l/2 percent. This implies another The M2 projection for

next year is l/2 point lower than was forecast in July. partly reflecting a substantial downward revision in projected nominal GDP M3 is projected to increase less than one An easier

growth for 1993 since then.

percent in 1993. and its velocity to rise around 4 percent.

fiscal policy would tend to keep long-term interest rates higher than otherwise and raise nominal GDP, with roughly offsetting effects on demand for M2. M2 velocity would tend to be higher as more funds

flowed to capital market investments. The Feinman/Porter we had been speculating study. by quantifying some of the effects

about. and the recent experience with velocity

give us a little more confidence in our projection that increases in M2 velocity will in fact persist for some time. M2 velocity over the short- of intermediate-terms However. predicting always was a hazard-

ous business, because it required a sense of what interest rates would go with what GDP. The study underlines those hazards by bringing into

the process a much wider array of interest rates than previously thought necessary. Thus, the extent of the increase in velocity
re-

mains highly uncertain, rate proves correct.

even if the assumption of a flat federal funds

Against this background.

the Committee would seem to have a

number of choices open to it with respect to decisions on the longterm ranges at this meeting. First, it can chose to do nothing. The

deadline for informing Congress of our final ranges is February, and action could simply be postponed until that time. Postponing the

decision would seem an apt choice if the Committee did not intend to revise the tentative ranges, especially if that decision arose from a

desire

to await

the additional we will

information a better of whether

that

will

be available of fourth strength

in

February. quarter and more

By then, velocity damped

have

approximation the recent

and some velocity

sense behavior

in M2

is persisting

into the

new year.

The current meeting,

discussion

could

be seen

as a prelude some of the

for the February issues and

perhaps

helping

to clarify at that

facilitating

a decision

time. the tentative Committee ranges growth the ranges at this. to put some

A reason the November. weight In the on the

to vote

to reconfirm be that within the

meeting money

might

intended early

on having context sluggish

growth

these

in the year. to continue forecast, appropriate ex-

of a projection side over

that money months

is likely greenbook seem most

coming

under

a reaffirmation if the pansion. Committee
or

of the

ranges

at this

time the

would

was not

satisfied

with

outlook

for economic

felt

that ,velocity was not likely and wanted money the to signal

to continue its intention

to increase to take

as rapidly any needed

as projected. actions case

to boost

growth ranges

and spending. rests on the information and

The analysis so that with that

for reducing that

suggest

velocity

is likely

to continue should

to increase,

relatively

damped outcomes forces

M2 and M3 growth for spending

rates

be compatible If the staff to on the same for a

satisfactory of the

and inflation. velocity

assessment track,

continuing lower

to boost would

is close

money

growth

within

ranges

be consistent stronger. limited

with At the

greenbook time. very the rapid

nominal reduction pickup

GDP outlook in the

or something would

even

ranges

signal demand.

tolerance

in spending

and money gains

and thereby and lean again

suggest any occur

an intention incipient as the

to consolidate for price continued.

on inflation to build

against might

tendency

pressures

that

expansion

5

Of course, the Committee could lower the ranges by less than the one full percentage point suggested in the bluebook, to 2 to 6 percent for M2 and l/2 to 4-l/2 point for M3. abrupt decline. especially be seen as a more temperate given the already-low say l/2 point The less-

target ranges. might

response to the new information and less

likely to raise concerns about whether the Federal Reserve is prepared to allow sufficient monetary growth. As to the timing of reductions in the ranges should the Committee desire this approach, action at this meeting could be justified on the grounds that new information unfinished business from last July. meeting. we have had third-quarter does allow the cleaning up of Just since the last Committee GDP with its confirmation of rapid Any change in expansion to support more robust economic

velocity increase. as well as release of the study. ranges would need to be communicated

to the Congress. presumably by

letter from Chairman Greenspan to the Chairmen of the Banking Committees explaining the action. On the other hand. next February is the The new ranges

natural time to t-e-examine and vote on the ranges.

would be announced and explained at that time in the normal report and testimony. and in the context of the Committee's the economy and inflation. expected compatibility new projections for

This might make it easier to discuss the

of lower ranges with sustained economic expan-

sion and damped inflation: interactions with any fiscal policy proposals could also be explained at that time. Even if no vote is taken

at this meeting, the policy record would note that the ranges were discussed and would summarize the considerations members. raised by Committee

November

17, 1992

Short-run Policy Donald L. Kohn

In thinking would

about with

policy

options

at this meeting. the

the FOMC in-

seem to be faced on the

something

of a dilemma: supply

incoming

formation than

economy however.

and on money as Mike in part

has been

a bit

stronger and

anticipated: rates

noted,

the backup information forecast central

in interest

exchange

resulting

from this

has weakened in real of the fiscal

the outlook--contributing and nominal Committee's stimulus. The accounted years. expected firmer rise GDP for forecast

in the Greenbook below the

to growth tendencies any added

1993 somewhat in July.

though

this

is without

in interest

rates

has been

substantial, rates

and

is

for entirely These increases demands credit

by increases apparently over

in forward represent

out to seven revisions to from

upward

credit private

the next

few years, fiscal

resulting stimulus. than

both

demands

and possible in real rates,

And they

seem to consist expectations. or even rates

of increases

rather

in inflation relatively interest to flat

given

the firmness

of the dollar TO the

and the

declining

commodity optimism

prices.

extent

higher from

reflected

on the

economy they

resulting

and leading for the stock

a greater economy market

willingness

to spend, policy.

wouldn't regard,

be a problem the rise

and monetary over the

In this period

in the

intermeeting also

should

give

some

reassurance. in recent long-term process

But we have years--the rates rose first

experienced

several

episodes

few months

of 1991 and of 1992.-in of a stronger economy.

which

in anticipation helped

and in the they

apparently

to short-circuit

the very

strength

anticipated.

In each case rates subsequently

retreated. falling well below their

previous lows, as economic activity turned out to be far less robust and the path of short-term rates considerably been imbedded in the structure of rates. below that which had

And this is assumed in the fiscal stimulus. relative to earlier To the

greenbook to happen again, absent appreciable The current situation is complicated, such episodes. by the uncertainties

about fiscal policy.

extent markets are reacting to the uncertainty

itself or are antici-

pating fiscal stimulus that does not occur or is effective only with a long lag, the rise in rates could have a more adverse effect on aggregate demand for a time than the previous responses to increases in spending. This circumstance eventually will self-correct--either

through actual stimulus or through rates coming back down when fiscal policy is not changed. The risks at the current time are compounded by strength in the dollar in the context of economic weakness abroad. A portion of

the dollar's increase is a response to actual and anticipated further monetary policy ease overseas. deteriorating That ease seems to be offsetting a

situation abroad, rather than producing a noticeable net From the perspective of our forecast,

stimulus to economic growth.

relative to the last FOMC we have a higher dollar and about the same projection of growth abroad--a net negative in terms of demands for U.S.-produced goods and services. about real side forces might

In the past, added uncertainty

have argued that more attention be paid to money supply developments. However, as we have already discussed today, there is considerable uncertainty about money-income relationships. Still. unusual behavior

of money and credit in months ahead might be one signal of how some uncertainties are being resolved.

-3-

Money growth in October and early November was somewhat stronger than we projected at the last FOMC meeting. In part, this

likely reflects a higher path for spending over the second half than anticipated at that time. mortgage refinancings But special factors also played a role as

turned out to be somewhat greater than expected.

MOreOVer, the public's appetite for bonds seems to have slackened, perhaps reflecting uncertainties rates.
bie are not

or anticipated

increases in interest

projecting the strength in money to continue. over coming months, which would keep

Indeed. we foresee a deceleration

M2 from reaching the lower bound of its range in 1992; and keep it below the Z-l/Z percent lower bound of the current tentative range through March of 1993, under the unchanged interest rates of alternative B. A portion of this slowdown reflects the absence of the

special factors that have been boosting money growth in recent months. and indeed we anticipate with a slackening some drawdown of demand deposits associated In addition, depositories

in mortgage refinancing.

look like they still have some way to go in reducing rates on liquid deposits. and we expect the continuation M2 holdings. of this process to discourage

With nominal spending projected to expand at a modest

pace, and the forces boosting velocity still in place. we see underlying money growth of only 2 percent--the alternative October to March. On the credit side. recent data suggest some strengthening private demands--but very limited. Bank credit seems on a somewhat of B growth rate from

firmer trend than through the summer, but growth in October was below that of September. with business loans leveling out. survey of lending officers, few institutions In our quarterly

reported easing of terms Moreover, in

or conditions or a noticeable pickup in credit demand.

-4-

securities markets quality spreads, while still quite low. have widened a little since this summer, suggesting some caution by private lenders. Looking forward. we see a gradual strengthening However, money and depository of private

debt flows next year.

credit remain

quite subdued and the expansion of private debt is slower than that of income as balance sheets continue to be rebuilt. A sense that this expansion of money and the greenbook outlook for spending behind it were not adequate might argue for consideration of some easing of policy. This option might be particular-

ly attractive if there were perceived to be some chance that the forces of disinflation around the world were sufficiently strong that

price stability might be reached in the next few years with excess capacity remaining, risking actual deflation. are seen as weak. the possibility If underlying demands

of fiscal stimulus need not deter

easing at this time. especially if that stimulus were seen as possibly muted by financial market reactions or significantly delayed. The

easing would tend to offset the effect of the recent backup in longerterm interest rates and the dollar. Alternative B might be chosen if the greenbook outlook were The strength of recent data and

considered probable and acceptable.

possibility that pleasant surprises could continue. along with the likelihood of fiscal stimulus to take effect fairly promptly next year. might also reinforce the case for keeping policy on hold. ever, should the Committee view the risks and costs of unexpected shortfalls in activity to be weighted to the downside, it may still wish to keep its directive biased toward ease under alternative B. HOW-

November

17. 1992

Detailed Minutes Donald L. Kohn

Committee Gonzalez Reserve comments concerning Bank

members detailed

have

received

several

letters

from

Chairman One to their

reporting about

of FOMC

discussions. to have then

presidents

asked

their

willingness would

and votes

recorded

in minutes,

which

be released the Board's

"promptly." views

The other.

to Chairman meetings

Greenspan. for release

requested 60 days

on videotaping As background

FOMC

later. members also on this detailed each

for this

discussion. giving

Committee

received topic.

a memo Before

from Norm April 1976,

Bernard

some

of the history were

proceedings This

at each meeting document it was was while

in a "memorandum participant word-for-word secretariat stance then said

of discussion." essentially

recorded said. edited adhering

what

in the order intervention

It was not a by the FOMC subwas five

transcript: for wording argument

each

and organization. made

to the

of the

by each participant. It was

The document released matters. after

reviewed with

by meeting

participants.

years,

deletions

of sensitive

international

The FOMC 1976. in fact able that One reason were

voted

to discontinue an imbalance

the memorandum between costs

of discussion and benefits:

in

given was very

there

few requests time factor

for it, and it consumed It seems U.S. clear,

consider-

staff

and principal

to prepare. was a recent Act.

however, deci-

the precipitating the Freedom Act, public

District

Court

sion under that. have under

of Information a considerable with a very

The Committee

saw a risk might the on the

that

portion short lag.

of the memorandum As a substitute. a fuller report

to be made

Committee

expanded

its policy

record

to include

discussions at the meeting, to immediately

and moved up release of the policy record

following the next FOMC meeting.

The matter bubbled around in Congress until 1984. though it has been quiet since then--itself widespread interest. perhaps anindicator of a lack of

Through the earlier period. the Board generally provided several

did not object to a law requiring detailed minutes,

safeguards were in place: the whole document had to be protected from FOIA requests for a minimum period--from interval sensitive international for an extended period. The advantages of producing some kind of detailed record of Committee meetings would seem to be two-fold. First. it would be 3 to 5 years: and after this could still be deleted

information

available to economists and historians for study and analysis: informed analysis of how policy is made should enhance public understanding and possibly result in worthwhile monetary policy. suggestions for improving

Second. it gives a sense of greater openness to perhaps reducing suspicions about what The disadvantage is potential adverse

Federal Reserve deliberations, goes on behind closed doors.

feedback on the policy process itself. tions, about revealing confidential firms. or

Concerns about market reacon specific

sources or information

about public reactions to arguments or proposals could needed to reach the best

inhibit the free flow of ideas and discussion possible decisions.

The longer the lag in releasing the detail of

discussions, for example, taking it out of the immediate cyclical context. presumably the less the inhibiting effect. but whether it could be completely eliminated is an open question. If the Committee decided that a more extensive record of discussion and decisions should be released, it would need to determine the lag and the format. With regard to the latter. there are

several possibilities.

First is the videotape

suggested by Chairman

Gonzalez or simply an audio tape--presumably sensitive material, use by scholars. literal. or

edited to delete certain for

and perhaps also accompanied by a transcript alone.

Second would be a transcript

This could be hearing. in

it could be in the style of a Congressional

which each person was allowed to edit his or her own remarks--but only lightly and without changing meaning. Editing, including suggested Third would be a

deletions, could be reviewed by the Secretariat. revival of the memorandum of discussion,

prepared by the FOMC

secretariat and reviewed by participants. Fourth would be an expansion of the policy record. One way

of addressing Chairman Gonzalez' concern about taking responsibility for positions and votes would be to have more attribution policy record. in the

As you know. dissenters now submit statements giving the majority is presumably covered by

the reasons for their.dissents: the record itself.

But those in the majority could also have the file statements about their policy

right--or even the obligation--to position.

As is now true for dissenters. those statements would have A second possibility

to be drawn from their comments at the meeting.

for the policy record would be to attribute the views described in the policy discussion to the specific members giving those yiews. For

example instead of the policy record saying "several members noted they could live with an asymmetrical metrical one because..." directive but preferred a syn..."

it could say "Messrs. X.Y. and Z noted

This practice could be followed both for the majority and the minority, possibly eliminating dissenting statements.

Finally, Mr. Chairman, the Committee needs to determine how it wants to respond to Chairman Gonzalez--through one letter written

by you on behalf of the Committee, or with the individual members responding in addition to the letter you promised.