APPENDIX

EoMC Notes -- Peter Fisher NOVEMBER 15. 1994 The dollar moved sharply lower in mid-October following the German elections and the passing of what were perceived as opportunities for the Federal Reserve to raise rates on U.S. economic data releases. As the dollar appeared to begin moving

lower again in early November, the Desk intervened on Wednesday, November 2nd and Thursday, November 3rd.

Following the Committee's last meeting, the dollar rose against the yen in anticipation of, and following, the September 30th announcement of interim agreements and disagreements in the U.S.-Japan trade talks. However, by the time the dollar moved

above 100 yen on October 7, long-dollar positions -- both speculative and of Japanese exporters -- began to be sold againat the yen and the mark. Around the same time, German capital

markets appeared to rally in anticipation of a Kohl victory in the October 16th German federai election and this rally provided a basis for traders to anticipate a repetition of the mark's strength which followed the June European elections.

As the dollar has moved lower, it appears that market participants have been seeing the dollar's glass half empty but the mark's glass as half full. that: They frequently cite the views

the German economy is strong, and U.S. interest rates are too low. Few focus on the other

-2side of these equations: that the U.S. economy is strong; that

the German economy's strength is export led; and that U.S. rates are likely to go higher while German rates are likely to remain at current levels.

The strong, negative sentiment toward the dollar in October reflects two things: firet, the single, dominant fact and factor

in exchange markets in 1994 has been the dollar's weakness and, second, whatever the proximate cause or trigger of the dollar's decline in any given month, market participants increasingly
associate

the dollar's weakness with the stance of monetary

policy.

In the relationships among the dollar, the mark and the yen, it is unmistakable that the dollar's weakness has been the dominant factor in 1994 -- not the strength of the mark or the yen. Those who have ignored the combined weight of the U.S.

trade and current account deficits, the global portfolio diversification of U.S. savings, and the negative foreign perception of the Clinton Administration, cost. have done 80 at some

Based on their experience this year, most market participants believe that, in the absence of an equal and opposite force, the trend of dollar weakness is likely to continue and to be self-sustaining. While there are a number

-3of fundamental and transient factors contributing to the dollar's movements lowgr_, taking these factors as given, market participants increasingly focus on the stance of U.S. monetary policy as the reason why the dollar is not hiaher.

Putting aside the question of whether current rates are sufficient to stave off increased inflation one or two years from
IlOW,

there are at least three related, but dietinct, t'curves"

that foreign exchange market participants perceive the Fed as being behind:

First, rates are not yet high enough to provide true symmetry to the perceived rieks of future increases and decreases and, thus, are not yet high enough to provide adequate stability to the bond market to induce foreign demand;

Second, rates are not yet high enough for the level of real bond yieids, relative to the w of real foreign bond

yields, to induce foreign demand; and

Third, rates are not yet high enough in the short-end co give the dollar an adequate cost-of-carry advantage against the mark to induce speculative accounts and corporate accounts to hold w&edged dollar positions and deposits.

- 4 -

In short, while best measure exchange

the exchange or guide of view,

market

may or may not be the policy, from the only made

of reality point

for monetary Federal

market's

reserve

policy

it to neutral actions German

in August,

when the Board's

and the Committee's effective parity for the to keep of

brought overnight

U.S. overnight rates.

rates within

With the gear box in neutral alone would

last three months, the dollar moving

momentum

have been enough trend.

lower along

its pre-existing

However,

during

the middle provided

two weeks of October, an opportunity might

the series in the When these the for the adding of the strength

of U.S. data releases market thought

when many

the Federal

Reserve

raise rates. action,

data releases perception dollar's momentum

came and went without rate policy appeared

any policy

that interest continued

is "responsible" to be vindicated,

weakness

to the dollars's positions the German

movement closed

lower on the weight out and the mark's

long-dollar following

being

election.

From October percent two-year percent historic against low

llth, the dollar

dropped

more than days,

3 and ax half to a

the mark in just 10 trading

returning

[1.48601 on October

25th, and dropped days, 2nd.

by over four a new

against

the yen in 16 trading

reaching

low of 96.11 yen on November

-

5

-

In thin markets, with the dollar grinding lower, there appeared to be a risk that the dollar would slide into new, lower ranges. This risk appeared particularly acute on Wednesday,

November 2nd as the dollar reached its new, historic low against the yen. Our joint operation with the Treasury sought, first, to stop the momentum of the steady move lower, through a reminder of twoway risk, in the hope of minimizing the extent to which the dollar's decline would be self-sustaining and, second, to underscore the policy objective of a strong dollar. The second

operation on Thursday, November 3rd, was intended to put an exclamation point behind the policy objective of a stronger dollar by disaascciating our actions from particular levels and from the recent practice of intervening for one-day only.

The operation was modestly successful, both in reawakening a sense of two-way risk and in underscoring the policy goal. this regard, I think the market was as interested in the operation as an indication of the Federal Reserve's commitment to a stronger dollar as it was in a reaffirmation of the Treasury's commitment. As I hoped, acting without European central banks the issue is not In

was perceived by many as a positive factor:

whether a dozen or so European central banks care enough to give a nod to a stronger doilar; rather, the issue is whether the U.S. monetary authorities care enough to stand up by themselves,

-6-

When we did not intervene on Friday, November 4th, the dollar came off somewhat, returning to the levels of Wednesday's close. The U.S. election results triggered a burst of dollar

buying out of Zuropa and then a rush by the dealer community to close short positions. The dollar also moved a bit higher on

last Thursday's PPX number and, again, rose one and a' half pfennings and almost one yen on Monday, to close yesterday at approximately the levels last seen in mid-October.

7 think the "pep" the dollar has shown in the last few days can be attributed to aeveral factors. First, the dealer

community has been surprised several times now in recent weeks: by our intervention; by the strength of the European market reaction to the U.S. election as well as by the strength of the election results themselves; and by last week's PPI release. Each of these surprises has proved costly to those with short positions. Second, as this meeting has approached, there appears

to have been dollar buying "on the rumor" of a rate increase. Finally, reflecting on the three different measures of the interest rate "curven" which the foreign exchange market perceives the Fed as being behind, some in the market seem prepared to anticipate the possibility that the Fed is within striking distance of moving onto, or even ahead of, one or more of these curves. On a separate matter,
I

should note that the Mexican peso Last

has come under considerable presaure in the last few days.

-

7

-

week, following rather good government auctions, the markets turned negative. AT&T announced a billion dollar

telecommunications joint venture with a firm that would be competing with Telmex. Instead of focusing on the vote of

confidence implied for the Mexican economy by such an investment, the Mexican stock market responded sharply when a U.S. dealer dropped Telmex from its recommended list; Telmex then lost 8 and a half percent of its value, dragging the stock market almost five percent lower. Also, over the last three days of last week, a

firm with one of the major speculative positions in the peso and Mexican government paper began to cut back its positions, apparently trying to get out well ahead of the year-end. Yesterday, the peso was trading

Mr. Chairman, I would be happy to answer questions.

I will need the Committee's ratification of our operations: on Wednesday, November 2nd, we sold 400 million dollars worth of Japanese yen and 400 million dollars worth of German marks for the System's account. On Thursday, November 2rd, we sold 250 marks for the

million worth of yen and 250 million worth of System's Account. Thus,
ol’ er

the period, for the System Account,

we sold 650 million worth of yen and 650 million worth of marks.

-

a -

or. Chairman, the System'e reciprocal currency arrangements come up for renewal at this time of year, with the exception of cur Mexican and Canadian governments. I have no changes in the

terms and conditions of the existing swap arrangements to suggest and I request that the Committee approve their renewal without change.

Notes

for FOMC Meeting November 15, 1994 Joan E. Lovett

Our operations designed since to maintain

during

the intermeeting of reserve funds was steady

period

were

the degree with

pressure trading reduced declines

in place around by a total in the The of

August,

consistent

Federal allowance

4 314 percent. $250 million seasonal allowance ran very

The borrowing in six steps, which

to reflect occur

portion

typically

at this

time of year.

currently light

stands most

at $225 million. of the interval, when banks

Adjustment but jumped

borrowing to over short

through

$1 l/2 billion on a settlement averaged formal

last Wednesday day. Absent Total

found

themselves

that occasion, borrowing came

adjustment

borrowing the

$22 million. allowance

in a bit under

over much

of the period

as the technical in the seasonal

adjustments component.

tended

to lag the actual

decline

The Desk start

faced

a small Shortages

need were

to add reserves projected then were

at the

of the interval. over the next

to expand expected begin to to

modestly jump surge

two periods, when

and

in the period

now underway

currency

would

as we approached Currency

the holiday

season. at a pace exceeding our

has been

expanding

earlier faced

expectations,

deepening

the actual

reserve

shortages foreign in the

over

the interval.

The effects reduced

of our recent supplies

exchange

activities

further

reserve

2

current required deposits

period, reserves have

although

successive

downward

revisions

to

stemming partially

from persistent offsetting.

weakness

in M,

been

The Desk made provide multi-day spanning reserves System just over

frequent

use of temporary Altogether term, and

operations we arranged

to eight

the interval. for fixed

RPs, most

ten operations RPs. to acquire reserve

one business the middle foreign

day, mostly

customer

Around securities shortages from

of the interval, to help meet

we began

accounts

the deeper

that were

beginning

to emerge. were

Altogether

about

$1.9 billion accounts. bills period

of bills

and coupons

purchased nearly

from'these $4 billion of in the entry

And

last Wednesday, to pare

we bought

in the market in progress. our With

the substantial fifth

deficiencies market

This was our for bills. expected purchase

outright

this year,

second currency

to continue will

climbing

through

the

year-end, weeks.

another Right

market

be needed $8 billion

in upcoming of the next in the be

now, we expect leeway

our normal

intermeeting period. outlook, entirely

to be sufficient

to see us through uncertainties leeway

However,

there

are considerable need for additional

so a possible ruled out.

cannot

The effective 4.79 percent, intended and rates

funds

rate over

the interval close

averaged

generally firmed date.

remained to about More

to their over touched

level.

Conditions

5 l/2 percent funds

the September

30 quarter-end

recently,

3 20 percent themselves remained reflecting on last Wednesday's a little to the firm short side settlement date when close, and banks they period found

at the period's in the current view that a rate

maintenance hike

the consensus

is imminent. rates rose driven was to rose of the a net higher

In the securities substantially by accumulating ahead, cutting further over

markets,

interest

the intermeeting the economic capacity Treasury

period, expansion

evidence into

that

forging

remaining pressures.

and threatening coupon yields

intensify

inflation

25 to 50 basis coupon yield

points,

accompanied rates

by some rose

flattening

curve,

and bill

about

50 basis' points. by the market's now seem

Participants downward intent

are feeling over

somewhat

shell-shocked

course

the past out

ten months,

and many

to just wait Throughout

the balance

of the year. were impressed sector by the

the period,

analysts

continued

signs

of strength

in the manufacturing market By most

and by of the the the At

the apparent interest labor rate

resilience hikes also

of the housing in place.

in the face measures, even

already

market

showed gains

signs

of tightening

up,

though

reported this

payroll

were

on the low side of expectations. analysts see real GDP growing slipping worrying continued, it is only

juncture,

most

market

at about in

a 4 percent the first more

pace quarter

in the fourth of 1995. price

quarter,

only modestly trends in the

Meanwhile, indicators that

forward

looking become

and many a matter of time goods.

investors before

have

convinced will

these

pressures

begin

to show

through

to final

4 The dollar which weakened partly as a result climb of these same concerns,

reinforced recent since

the upward long bond

in yields. above

By late October, in yield has for the

the most first

closed

8 percent

time

the spring above that

of 1992, level

and its yield trading. were not

risen

somewhat

further

in later

Rate movements however. releases third With market

over

the interval

all one way,

participants short

defensive,

some of the data the

pressed

against

positions.

In particular, monthly price

quarter

aggregate

deflators

and recent

statistics which

showed

that current

inflation

appeared

restrained,

caused

yields

to fall back. faced a fairly heavy schedule pressure of new on yields. sector, at the

The market Treasury
supply,

which

added

to the upward was raised

Altogether, which

a net

$23 billion somewhat auctions went

in the coupon

was held

down

by the absence which

of a long bond today.

midquarter legs

refunding

are settling well

Both up

of the refunding

reasonably

as rates

backed

sufficiently $45 billion

in the days was raised bills

leading

up to the auctions. including $27 billion intra-quarter light, market funds

Another from two

in bills, designed

cash management gaps. Issuance

to bridge was

financing

in other

sectors offerings.

generally However.

particularly nonetheless redemptions fiscal

nontaxable heavy and

supplies to meet ahead

were

as selling

by municipal

bond

to square

accounts

for tax purposes this sector

of the

and calendar

year-ends weeks.

caused

to erode

substantially

in recent

5 The outlook intense Markets pace speculation actively for monetary policy has been a matter of

in the market the need at times,

throughout

the past

interval. the the of the

debated and,

for the Fed to accelerate participants entertained Some

of tightening
of

possibility less price move robust data was

an intermeeting statistics persuaded today's

adjustment and most

in rates.

economic eventually

the well-behaved participants

aggregate

that no policy the body a hike in

likely

before

meeting.

At this point, analysts meeting that

of recent rates

economic

evidence 50 basis that, taking

has convinced points

of at least Beyond action,

at today's looking

is all but

certain. forceful rates

some are now

for even more immediate The are points into are in in rise in

the form of a larger statement

and/or

an aggressive is that

of vigilance. rate

prevailing store.

view

further

upward

adjustments

A cumulative

increase

of about

75 to 100 basis appears

the funds

rate by the end of the year yield structure,

to be built increases

the current projected

and additional

rate

for 1995.

Michael J. Prell November 15. 1994 FOMC BRIEFING The economic news since the last meeting has been almost uniformly good. Employment. output and sales have been growing and broad measures little

rapidly: the unemployment of inflation have remained happiness

rate has fallen further: subdued.

Yet. there is seemingly

in the securities markets:

Despite the stability of the

federal funds rate. bond yields have broken out into new high ground, and stock prices have languished reports. Clearly, as in the face of strong earnings

Peter has noted. traders have been afflicted expressed in the

with the same concern that the staff implicitly Greenbook,

which is that the System has fallen behind the curve in to head off a step-up in inflation. in

imposing enough restraint

I won't take the time to review all of the data reported the Greenbook. I want just to highlight

and update a few points in

our analysis of the current situation. First. the figures that have come in since the BEA published its advance estimate of third-quarter appreciably and lowered inventories GDP have raised final sales about equally. So. on net, the

real GDP gain appears still to be somewhat had projected at the last meeting.

above the 3 percent pace we

Second. the labor market data for the current quarter are strong. Looking at them alone. our guess that GDP might be increasing Indeed, one cannot rule

4 percent could be said to be conservative.

out another burst of growth. such as we had in the final quarters of the past two years.

.

FOMC Briefing--November

15. 1994

Michael

J. Prell

Third, the advance report on retail sales for October that was released this morning provides the first major slug of expenditure-side nonauto information for the quarter. It indicates that

sales rose six-tenths

of a percent in October.

When coupled this news is

with the earlier data on unit sales of motor vehicles. consistent with our expectation that consumer

spending will be up

strongly this quarter. Fourth, our forecast for GDP growth this quarter is higher For example, the latest Blue I think a major

than those of many private analysts. Chip "consensus" is 2.7 percent.

In most instances,

source of the difference

is simply that our forecast was not completed But also

until after the October labor market data were released. important situation. in some cases is a different assessment

of the.inventory a much sharper droprecent

Many other analysts are anticipating investment this quarter.

off in inventory

As I noted, however.

data suggest that the pace of accumulation

in the third quarter may something forecasts given the

have been less rapid than BEA estimated--again, issued prior to the Greenbook might have missed. prevailing favorable sales expectations

Moreover,

and tighter supply conditions,

we don't think businesses

will be anxious to trim their inventory-

sales ratios in the near term. Fifth, on the price side. the only news since the Greenbook is the October report on producer prices. The half-percent declines

in the overall and core PPIs for finished surprise. while the further seven-tenths intermediate forecast.

goods were a pleasant rise in the index for

goods excluding food and energy was in line with our reported, the plunge in the finished arithmetically, to a large decline in at least in part

As has been widely

goods measures

was attributable.

car and truck prices--which

seems to have reflected

- 2

FOMC Briefing--November

15, 1994 at model change-over

Michael J. Prell time. Viewed in

quirks of seasonal adjustment

that context, the PPI report basically

was consistent

with the notion despite

that finished goods prices have been rising only gradually, mounting pressures from materials costs.

As you know. the central message in the staff forecast is that this inflation predicting picture is about to change. The shift we are

is not dramatic,

because we believe that the overshooting

in resource utilization absent some external

that has occurred thus far is not huge, and-and prices normally accelerate

shock--wages

gradually in such a circumstance. pressures on resources, The Greenbook

But, unless there is an easing of

inflation will tend to gather speed. projection was designed to give you our sense policy action to nip the

of what it would take in the way of monetary pickup in inflation tilt in 1996.

in the bud and restore a slight disinflationary

To be sure, enough time probably has not passed for the effects of earlier tightening But, that said, the strength actions to of expenditure

all--or even most--of I)

have manifest themselves.

trends to this point is impressive: underlying growth tendencies

it could well be that the

against which policy is leaning are MOreOVer, it is clear that some of

stronger than we had anticipated.

the normal channels through which monetary transmitted to demand are not operating bolstering

restraint might be The dollar

in that direction:

has depreciated,

demand for our exports.

And, banks have

been easing, not tightening, the face of rising rates.

various lending terms and standards in

As we noted in the Greenbook. building

a moderation

of inventory aggregate demand in

does appear likely to be a factor damping

the coming quarters.

But we don't think this in itself will be enough for long. And with some impetus coming

to hold growth below potential

- 3

FOMC Briefing--November from the external deceleration formulating

15. 1994

Michael J. Prell to bring about a marked

sector. it will be necessary final demand.

of domestic

Thus it is that, in

our projection,

we've assumed that the funds rate will points over the next few months. in our estimation of the needed We

increase about l-112 percentage don't pretend to any precision tightening: we are mainly

signaling our assessment that substantial

further action likely will beg needed to achieve the kind of slowing in demand growth that we've outlined.

4

November

15, 1994

FOMC Briefing Donald L. Kohn

The would seem

decision

facing

the Committee to raise

at this

meeting but by the

to be not whether The persistent of output signs

interest

rates

how much. high level

strength

of aggregate

demand.

relative of price

to estimates increases risks

of its potential, stages of

and continuing production even rates

at early of higher increases

suggest

considerable

inflation, in interest

if much have

of the effects

of earlier

yet to be felt. level, the real inflation federal funds for However. the rate,

At its current measured using

backward-looking is around interest

to proxy average.

expectations. above-average expansionary working drop banks

its post-Accord

rates may be needed forces

to counteract markets the at

impact

of other

in financial these

on the economy.

As Mike

noted,

include

in the dollar and continuing and fairly

this year, ample high

easing

credit

conditions

availability

of funds prices

in open holding real over second period demand

markets, down

levels

of equity

the cost

of capital while

and buoying

wealth.

Even

long-term

rates,

likely

increasing

appreciably of the

the past year, half of the

are only back and well

up to the levels the fiscal

1980s

below

stimulus and with

of the early

1980s.

In these

circumstances,

not showing necessary

much

sign

of moderating, back

some

action

seems

to be

to bring The

the economy forecast

to its potential. a policy strategy

greenbook

embodies

that moves restrictive below

interest range,

rates

into what

is thought reducing

to be a output to

one consistent for a period. from the

with

its potential arises already

The need that

for this

degree

of restraint probably process merely involve tion. has

judgment

the economy in train a

overshot

potential,

setting

leading returning accepting

to higher

inflation.

In this

circumstance, could well

the economy a sustained

to its potential uptick in the

rate

of .infla-

Containing in terms interest of output rates,

inflation

is likely will

to be more

costly-nominal Indeed. stan-

foregone--and

require

higher

if inflation as now.

expectations inflation

increase.

it may be that when, dards prone of recent

is low by the

decades,

expectations

may be especially markets seem to in

to such upward evidence over much

revisions. of such

Financial an adjustment.

be providing the dollar

Weakness

of the intermeeting in nominal

period

in the face rates the While do not that

of appreciable and smaller outlook surveys -indicate

increases

dollar

interest that

increases

in rates

abroad

suggests

for U.S.

inflation

may have

deteriorated. economists they

of households a rise

and of business expectations,

in such

do indicate

inflation ness with

is expected

to be higher.

MOreOVer* to spend

the willingconsistent

of households a view that

and businesses real rates have

is not

been

driven

to unusually

elevated

levels

by financial

markets. two options for tightening 75 basis these two

The bluebook policy--federal points. will funds

discussed rate that

increases

of 50 and between

On the view

the difference effect on the

not have

a perceptible that

economy,

and given ultimately them would A 50

the possibility by more than

rates will points,

need

to be raised between

75 basis down

the

choice

seem to come basis point

to a question would about

of short-run keep pace

tactics. with market

increase

expectations. are unlikely would

As a consequence, to react very

interest

and exchange action. It step

rates

strongly

to this

be perceived sequence

as another, of policy

reasonably tightenings. goods

routine,

in

an ongoing

In the absence and services, action data the as

of a flare-up Committee not yet

in inflation view

of final

might firmly

the need

for more Awaiting

forceful further

established. might seem

before in light and

tightening

by more

especially

attractive

of uncertainties the response est rates. of inflation -persists.

about

the

level

of economic

potential

of the economy The may recent

to previous readings

increases on broad

in intermeasures

favorable that has

suggest

even

if economic

strength in the timing

the Committee

some flexibility

of its actions embedded absent likely nitude

before

a major and price moderation

pickup

in inflation process. markets

becomes However, are

in the wage an unexpected to believe

setting

in demand, tightening

that

additional

of like magadverse the data--

will

be forthcoming emerging process price

in December. pressures gains policy

And,

suggesting production renew enough series

further

along

or outsized whether

in spending--could was acting over forcefully time, damp in a

questions

about

to contain

inflation.

Nonetheless. ultimately and

of 50 ,basis points and inflation

steps

should lead

inflation bond

expectations

to a rally

markets,

as in the staff point

forecast. in the federal funds rate

A 75 basis might be chosen sooner. direction was using

increase

in part

to counter

inflation

expectations first change when in the

somewhat either System Choice absence

It would of this

be unusual--the since the

size

early

1980s

a nonborrowed might

reserve

operating

procedure. for the That lack

of this

option

be seen over

as compensating months. strength

of policy

adjustment indicated

recent

of action--when economy and

data

surprising

in the

rising

levels

of resource increase

utilization--probably in inflation expecta-

contributed tions

to the apparent markets.

in financial Such

a policy

move would discussed

not be a complete by market

surprise

_to

markets.

It has been

participants,

who have

built

into

rates

some

odds

that

it will

occur.

Nonetheless, the market's There build is some in more

it is not reaction risk

generally

expected. difficult

As a consequence to predict. Markets actions could into less

is especially

of an adverse Federal they

reaction. Reserve

aggressive

well as now

the future, subject term tions preted Reserve bluebook, which point market take

perhaps

because

saw tightening opposition, And

to intense rates

Congressional

raising

longerexpectainter-

real

quite

substantially. much

inflation also

might

not be damped action a more

if participants that

the unusual anticipated we

as suggesting severe likely

the Federal problem.. In the

inflation outcome

saw the more reaction damp that steps

as being The

one in

market move

was more inflation

favorable. expectations Reserve

75 basis

would

by quelling not prepared to

concerns

the Federal to meet

was

adequate

its inflation this

objectives. the

Real

rates would Committee aggregate contained, need

rise--presumably find desirable the

is an outcome

would

since

it is trying rates would

to damp be the the a

demand. both

But

rise

in real action

might reduce

because

prompter

for rates might

to go as high that

ultimately

and because would

market

presume

the Committee of economic rates could

require

stronger

burden

of proof

overshooting in December. rally,

in the In this if the

intermeeting -interpretation.

period bond

to raise markets

espe,cially

dollar strengthened significantly--an outcome all the more likely if, in the wake of the recent intervention, the unusual tightening were seen as evidence of concern about the implications of a weak currency and a willingness to act on that concern. Does the recent behavior of money and credit argue for the less aggressive tightening action? Several of you

mentioned slow money growth at the last Committee meeting as providing a degree of comfort that policy was not positioned to support a sizable. permanent increase in inflation. Since then. Ml and M2 seem to be weakening further,.and are coming in under the staff projections at the last meeting. We now see Ml as going from a Z-3/4 percent rate of growth in the third quarter to minus 3 percent in the fourth. M2,

which increased at a 3/4 percent pace in the third quarter, looks as if it will be declining at a 1 percent rate in the fourth. The sluggish behavior of the aggregates this year

is primarily a result of the rise in market interest rates and the reluctance of depositories to increase retail deposit offering rates. However. the extent of the very

recent weakness is something of a mystery, especially after taking account of flagging inflows to longer-term mutual funds. As to the indicator value of these measures, Ml is _ especially interest sensitive. and hence its velocity has

been ized.

highly

variable

ever

since

NOW

accounts value

were

authoragsmall.

As a consequence, and the associated interest

the indicator reserve

of this has been

gregate

measures it does

M2 is less changes demand

sensitive--but rates. and as you has been adapt

respond aware.

to the asset

in market for this

are well subject

aggregate

to shifting

preferences of a wider postwar tained

as households array

to the easier Looking

availability back over a susslow rethe

of financial it would

assets.

period. pickup

be quite with

unusual

to have

in inflation But market indicators

the monetary are

aggregates and

and slowing. liance

structures when

changing, curve

on these

Phillips seem

relationships consider-

are flashing able risk.

warning

signals

would

to entail

Moreover. not showing the fourth third--both first flects growth half

broader

measures tendency. the

of money

and

credit

are in

this weakening quarter at about well

We see M3 growing percent rate

l-3/4

of the of the re-

quarters

above The

the pace

of expansion in M3

of the year.

relative growth

strength

in part more is being

robust

loan

at banks.

This large of

funded

by wholesale sales growth

funds--including sources

CDs as well funds. from Some

as securities of bank loan

and nondeposit represents mortgages

demand

shifted as credit

longer-term finance.

markets. But

for home

as well

-business

is also

a response

to easier

-a-

conditions. xontinues

Overall. the debt of nonfinancial sectors To be sure. there

to expand at a moderate pace.

is no sign of a "borrow and spend psychology" associated with low real rates and incipient inflation. But there is

also no sign of a slowing in credit growth, as might be expected and desired if the FOMC is looking for some moderation in the pace of nominal income growth.