APPENDIX

FOMC BRIEFING March 28th,

- P.R. 1995

FISHER

Mr.

Chairman,

I will in the last operations, operations.

be focusing two months. the forces

on why the dollar I will at work

has declined review:

so .;harply foreign

then briefly in the bond

market,

and doxestic

To ul:derstand helpful to look

the dollar's

recent

decline, that

I think been

it is driving

back

at the perceptions

have

expectations year 1995 or so.

for the mark, The dollar's

the yen and the dollar decline during the first

for the past quarter of

can then be understood

as reflecting

the simultaneous of expectations movement that

disappointment provided 1994.

of the particular

combination upward

the basis

for the dollar's

at the end of

For market the mark

participants,

the dollar's

position

relative by shifting

to

and yen has been about

significantly to three

determined questions.

expectations

the answers

I

- 2 -

First:

Is Germany other, what rate

on a converging European

or diverging and,

path

with

the

major

economies

ill either

case,

are

the implications between

of that path Germany

for interest

differentials

and the U.S.?

Second:

Is there related that

something surplus

that will

offset logic

Japan's

exportit seems

OR reverse

the

by which

a wrak

Japanese

economy

and fragile yen? And,

financial

sector

translate

into a strong

Third:

Can

interest

rates

in the United

States

ever

get high

enough deficit?

to offset

the drag

of the current

account

With question continue; economy

respect whether there

to European the process

convergence, of European question

there monetary whether process

is a political union will

is a structural from

the German in a is a or

will

emerge

the unification

significantly-enhanced cyclical question with

competitive other

position;

and there

whether

European

economies

are in-step policy.

out-of-step

the German

economy

and German

monetary

In recent have When shifted,

years, European

as the perceived exchange rates

answers

to these have

questions adjusted.

and the mark

the cyclical

and structural divergent

positions

of the European then the economic

countries

look most

from Germany,

- 3 -

conditions there union

for monetary

union

are suspect. will

If, at the same to keep monetary of the

time,

appears

to be a lack of political or a lack of willingness

on track,

on the part rate

Bundesbank then

to provide

an hospitable sharply.

interest

environment,

the mark

appreciates

However, than

if overall

German

economic

performance

is no better the then

the average will

of Europe make sure

and if, at the end of the day, that monetary likely union stays alive,

Bundesbank the Deutsche European

mark

is more

to be blended hand,

into a paneconomic and if the

currency. is much goes

On the other better than

if German

performance Bundesbank union

the rest of Europe rates,

its own way on interest to occur.

then monetary an independent

is unlikely mark

Put differently, claim

Deutsche reserve European

has an obvious but

to be one of the world's to be blended into a pan-

currencies; currency

a mark

about

is less deserving.

Turning participants expectation surplus. constant; potential Japanese capital

to the yen, have that

over

the past positioned

few years, themselves

market on the

repeatedly something

would

be found

to offset exports

Japan's as a

The

surplus

related that

to Japan's the market '~OS,

is viewed for is a that

the variable offset. interest outflows.

has

looked

In the early rates Then would it was

it was thought the offset that

lower

provide thought

by stimulating in trade

changes

- 4 polices would permit an increase in imports. More recently,

market participants have thought that the yen might weaken if economic activity in Japan picked up, leading to both greater imports and to improvements in the condition of Japanese financial institutions which, in turn, might permit greater outward investment. Thus, in the past 18 months, as expectations for increased growth in Japan rise, the yen tends to stabilize or weaken. as these expectations are disappointed, the yen renews its ascent. However, odd or ironic it may seem, the market has But

learned the lesson -- with the same certainty as Pavlov's dogs learned theirs -- that, until something changes, in the land of the rising surplus, a weak economy and a fragile financial sector translate into a strong currency.

The United States has been seen as the land of low interest rates and a rising current account deficit. When the foreign

exchange market expects U.S. interest rates to rise, the dollar is bid on the rumor. However, on the fact of rate increases the

dollar is offered, on the disappointing realization that rates are still not yet high enough, or exchange rates not yet low enough, to induce foreigners to finance the ever-widening current account deficit with unhedged, long-dollar positions.

While the dominant expectations for the mark, the yen and the dollar have been negative for the dollar -- and, thus, the

- 5 -

dollar's and

downward

trend

-- these

expectations October

have

shifted

back

forth.

Beginning

this past

and continuing

through of the

early

December,

expectations

began

to line up in favor

dollar.

In Europe, fiscal prospects. was

there

was a modest

optimism

about

political

and pro-

In France,

for example,

the pro-European, presidency, alliance to

EMU Balladur providing gratify union little

the frontrunner flexibility

for the French

enough

in the France-German insistence

the Bundesbank's would real be necessary pressure still

known

that greater There

political

for monetary

union.

had been and

in European publicly

exchange

markets

for months interest

Teitmeyer were

was

stating

that German up.

rates

as likely

to go down

as they were

At the start the U.S.-Japan the Japanese growth, with

of October, talks. would

modest

progress

was

announced a sense

in that

trade economy forecasts And

By November, turn the corner

there

was

and record seeming

respectable quite up -the

of 2.5 percent

for 1995

reasonable. creating fiscal balance

in December, that Japanese

the Nikkei banks

started

moving

the hope year

might

be able

to close

in March

with

a little

bit of cushion

on their

sheets.

-

6

-

Finally, November meaningful something increases. Congress, might

the 75-basis-point that

increase how

by the Committee rates in

in

suggested

the Fed knew

to raise mentioned,

increments.

As I previously expectation with even new, dared

this created rate in

of an extrapolative At the same market time,

for further Republican hope that

majorities something

participants U.S.

be done

about

fiscal

policy.

Thus, Teitmeyer economy think

with

the Fed getting prepared

serious

about

raising

rates,

seemingly expected

to lower growth,

rates,

and the Japanese reasonable begin to to

to start

real

it appeared might

that

the U.S. or even

current shrink,

account

deficit

stabilize, European dollar's

at the very

same time move

that U.S.sharply in the &&

interest favor.

rate

differentials the first

would

But during that

quarter

of this year, rise have

of the expectations disappointed.

supported

the dollar's

been

In January, currencies, especially German longer raise wage

the mark

began

to rise against conditions

other

European -of

as fiscal in Spain demands

and political Italy.

deteriorated

and

At the same threats, rates

time,

as a result was no have

and strike

the Bundesbank and might even

thought them.

capable In France,

of lowering Chirac

to

replaced frontrunner for the presidency. Based

Balladur

as the of England's

on the Bank

7

trade-weighted January percent these escudo

index,

the mark

reached

an historic

high on 5 and half

10th and then continued to its peak on March and after

to rise an additional Only after was

17th.

the mar-k reached forced begun rates, upon the

lofty and

levels,

a devaluation

the peseta,

have market

participants interest

to consider azd even

the possibility then only with

of an ease the explicit

in German

encouragement

of Teitmeyer.

The market's also changed

perception Since

of the Japanese the Kobe

economic

outlook

has of

sharply. recession

earthquake

the prospect and the

a triple-dip Nikkei's Leeson's financial

is being

discussed more

in Japan in iight

December trades sector

uptick

is viewed

of Nick growth and

than as a precursor stability.

of economic

While

Japanese

financial

leaders

insist

that there

has been

no significant exporters declining

"repatriation"

flow of capital, dollar sellers.

the Japanese Morcovel-, ::le banks and othc:~ of the have

have been aggressive Nikkei serves thereby outflows.

to weaken further

the Japanese

intermediaries, future dollar, just capital

decreasing

the likelihood against markets

As the yen hit new highs continued to sink, Japanese

and the Nikkei begun

recently

to look

for a reduction

in rates

by the Bank

of Japan.

In January offering shrinking

and February,

the U.S. interest

also rates with

reverted -- and, Europe

to type: thus, as a

lower-than-expected interest-rate

different~ials account

-- as well

higher-than-expected

current

deficit.

In my opinion, Europe, which Japan

these

major

shifts

in expectations

for factors and, in

and Lhe United the dollar

States lower

are the principal over the first the dollar down

have pulled

quarter

all likelihood, historic lows

would sooner

have brought or later.

to test the

However, in February particularly U.S.

the timing and early

and abruptness

of the dollar's of events

decli;;? -~

March

was the result -- further

which

for foreigners ability

eroded

confidence affairs.

in the The

government's

to manage

economic

handling

of the Mexican

crisis

negatively

affected

the perception

of the Administration's budget amendment would unwound

competence. expectations

The defeat

of the balanced majorities on promises

that Republican through

in Congress of fiscal members, value

be able promptly And, finally,

to follow comments

restraint. perceived

by Committee to the exchange Reserve's market inflation-

as suggesting undermined

indifference the Federal

of the dollar, credentials exchange-rate

fighting for whom inflation.

in the eyes of overseas depreciations

participants of

are a major

source

-

9

-

With during

all of this

in the background, March 10th call,

and as I described we intervened on Thursday in the and

the Committee's

dollar-mark Friday,

and dollar-yen 2nd and 3rd, the

exchange

markets

March

in an effort of official

to stabilize

the dollar

and counteract

impression

indifference.

On Thursday, the same ESF. amount

we sold of yen, after

300 million divided

dollars between banks

worth

of marks

and

evenly European the Desk

the System had operated dollars evenly

and the in of

On Friday,

central

support marks between central addition,

of the dollar, 370 million System

sold 450 million of yen, again

worth

and

dollars

worth

divided other in

the

and the ESF. a total

Over

the course

of Friday, and, own

banks sold

purchased a total

of 2.8 billion marks

dollars their

of 5 billion

against

currencies.

In my opinion, effect dollar of calming after

Thursday's the market

solo operation and temporarily

had the beneficial stabilizing the

its sharp

fall that morning. giving

Friday's some

concerted support, higher did and, in

operation,

while

initially

the dollar

not plausibly retrospect, looking

appear appears

to be able to have or yen.

to push

the dollar

simply

provided

'liquidity

to those

to buy marks

I

-

10

-

I think Chairman's subsequent dollar cuts

the dollar's

recent

stability March

is the result Eth, the bond statements

of the

statement

on Wednesday, Teitmeyer's

market's that of rate the

improvement,

repeated

is undervalued,

and the increased

plausibility

in Germany

and Japan.

Turning interest rate

to the U.S. lower over

securities the period Throughout

markets,

the short-end

led

rates

as expectations the period,

for further of

increases demand

unwound. seemed

the strength who found prices for

investor themselves rallied example,

to surprise

the dealers,

trying

to catch following

up to the market weak activity

as bond

not only after

data but also,

slightly headline

higher-than-expected employment figures.

CPI and strongerComments by Federal

than-expected Reserve helping the data points

officials

also played reach

a role

in market about notes

psychology, of

participants for monetary while

conclusions Two-year

the implications fell by 70 basis points in yield.

policy. bonds

in yield

fell by 30 basis

From

the Committee's testimony,

last meeting the yield

up to the Chairman's on two-year notes points, starts declined as and

Humphrey-Hawkins by 25 basis January's industrial pace

points

and the long-bond report, were retail

by 10 basis sales,

employment production

housing

seen as implying following

a reduction

in the Humphrey-

of activity.

In the days

the Chairman's

-

11

-

Hawkins and the

testimony, long-bond

the two-year another

note

shed

another

30 basis

points

15 basis

points.

The market during with the first long

went week

through

one relatively after

brief

correction sharp But decline, strong

of March,

the dollar's

the

end taking

the brunt

of the selling. by the March and February this past

demand Times sales.

re-emerged article The

by mid-March,

aided views

13th New York data Friday on retail after

on the Governors' rally

took yet another goods report.

step

the February

durable

Over from large

the period, pools

we heard

a lot about managers

Treasuries short

benefitting indices.

of cash was

and money another

their

Central

bank

buying bill

significant

factor,

particularly

in the Treasury

market.

At present, at this implyinq increase meeting less

there priced

are no expectations into the market; probability and

for Committee forward

action are

prices

than

a SO-50

of a 50-basis-point

at the Committee's

next meeting.

Finally, to maintain Committee's tone, much with

during

the period, of reserve

while

the Domestic indicated traded

Desk

sought

the degree

pressure market

at the a soft During to

last meeting, the Federal this

the money

with

Funds

rate often

at 5 and 15/16th. with

of February,

appeared

to be consistent

our need

-

12

-

drain

reserves.

In March, sizable

however, needs

the soft

tone

continued This week,

even

as we allowed though, funds

reserve

to develop. regained

the market

appears

to have

its appetite

and the

market

has a firm

tone,

reflecting

a remaining

add need.

Mr. ratify

Chairman,

I will foreign

need

separate

votes

of the Committee

to

the Desks'

and domestic

operations.

In addition mentioned, for value dollars 14th,

to the intervention

operations

already March 10th call,

and as I discussed February 2nd,

on the Committee's de Mexico drew

the Banco swap

1 billion March

on our reciprocal 500 million,

line and,
1

then,

for value

repaid

leaving

billion

still

outstanding.

The Desk's operations, February March with

domestic matched

activity

consisted

entirely

of temporary dominating in in

sale-purchase large drain

transactions

when

we faced

needs,

and RPs dominating

as add needs

emerged.

I would

be happy

to answer

any questions

Michael J. Prell March 28. 1995

FOMC

BRIEFING

For same say as that the we

all one now

practical we presented that have both in

purposes. at the

the last with been

latest FOMC

staff meeting.

forecast This is

is

the to

not

hold

forecast generally

absolute in line

confidence. wit!1 our in

But

the

incoming that growth 1995

indicators would see

expectarion jemand

a substantial

slowing

ag~,regare

and

a pickup respect begun

inflation. to the show demand :hrough sectors On the picture. more the effects with way homes some in of some the sales recent recenr dropped dat;~ in monetary

With restrair.t relatively deceleration last falls-a have

to

clearly. the side. before

interest-sensitive of activity. that

Leading

household so evident in

pattern The weak

wasn't decline

revisions rum the spell recent to

subsequent residenrial in

single-fnmiiy into of the motor and in

staL.ts !spring. vehicle:; there

should

construction purchases coming of

Similarly. is ii1

slippage lower retail and On

consumer in

pointing the latesr

production sales report

months,

a~-e hinrs for

a softening

thy

demand

furniture

appliances. business of side, it in hadn't equipment As we seemed likely that we would

the

maintain over the

the past

pace

incr-ease of on of years.

spending, in

That

iniasobserved

couple data end

reporred shipments

the of

Greenbook goods than to be we

supplement. released had ar

the the

manufacturers' last week so.

capital numbers appears

contained

stronger investment

anticipated: for some

but,

even

equipment this quarter.

headed

deceleration

FOMC Briefing--March

28. 1995

Michael

J. Prell

For the irrelevant uncertainty classify forecast

longer

haul--but policy

not so long

as to be utterly is also the not sure whether to our be that as to

for monetary about

considerations--there policy. I'm just risk,

federal

budget

that

as an upside

or a downside deficit

relative

assumption will

of moderate yet

reduction! but

It could

tax cut fever likely that

get the upper about

hand.

it perhaps reduction than

is just will we've

all the talk be reflected

massive

deficit

ultimately

in greater I believe

fiscal made

restraint

built

into our projection. assumption, area that under will so. as aggregate think demand the

we‘ve

a sensible

fiscal a high risk

circumstances. careful

but this monitoring that

is obviously for some

necessitate I said

time. of and we in

earlier,

we feel

our projection risks,

reasonably

balances price

the identifiable side. As you the

the same

is true

on the

probably fact

noted

reading couple evidence Rather, with

the Greenbook. of CPIs that
we are

we are hesitant the

to take

that

the last

have our

shown

acceleration

we predicted for inflation

as definitive is correct.

analysis

of the prospects that those

simply correct.

saying

numbers

are not inconsistent

our being One

reason

for our caution generally cost

is that

the news

on compensation the recent

developments readings

has been

favorable: index

Not only were hourly reported

on the

employment but the provides

and average

earnings in the Beige

surprisingly Book

low.

anecdotal scarcely is that,

information a hint though that

and elsewhere reason 1995,

of wage the core

acceleration. CPI did accelerate to do with goods to such the

Another in early

for caution there was

no indication that

it had much push

rise in materials prices items up more

prices

we thought

might

finished

rapidly. auto

A lot of the pickup finance rates and used

was

attributable

as tuition,

car prices.

FOMC

Briefing--March
NOW.

28, 1995

Michael

J. Prell

I don't

want

to suggest

by that

dissection

that about index

a a macro

bottom-up phenomenon movements work
as we

approach like can.

is necessarily but the provide

the best way to think composition clues of price about

inflation. at rimes. the

useful

the processes observations. in before signs of are

at so. the that

and about scrutinize

flukiness

of particular

monthly

the PPIs we'll

and CPIs certainly

that will be looking with

be coming

next broad

FOMC meeting. inflationary utilization

for clearer measured of the

pressures, and with

associated

levels dollar,

resource

the depreciation point, however.

manifesting the overall

themselves. core

At this the

we think of late,

that.

with

CPI showing our basic

firmness that that

it has

it makes at

sense such

to stick levels over

with

story

the economy inflation

is operating

of resource time.

utilization

is going

to trend

upward

Let me now turn international side.

the

floor

over to Ted.

who will

deal

with

the

4

-

E.M.Truman March 28, 1995 FOMC Presentation -- International change
DeVelODmentS

In the context our overall changed meeting. Mexican services make lower forecast, from

of little

in the broad

contour has

of

our outlook

for the external

sector

somewhat

that presented due

at the Committee's assessment exports Beyond

last

Principally situation, in the

to our revised net

of the of goods and

we now have weaker half

first

of this year.

that net exports

a larger U.S.

positive

contribution and the

to real slightly

GDP due to somewhat lower dollar.

economic

activity

However, for more

as Mike than

has noted,

the external

sector

is responsible in

its normal

share

of the risks if they three are

and uncertainties reasonably Mexico,

the overall I thought dollar,

staff I would

forecast, review

even

balanced. the

briefly trade

of them:

and the January With respect

data. we have modified our projection current economy. than that

to Mexico,

of the size account

and

the timing and

of the change its impact is now

in Mexico's on the U.S.

deficit,

therefore adjustment

The Mexican incorporated projecting half of

external

somewhat Moreover, be achieved quarter. almost half

larger

in our January that almost

forecast.

we are now in the first To put a number 1987

all of it will in the first subtracts in the point

1995,

principally

on it, the Mexican dollars about from U.S.

adjustment net exports

15 billion

first

of this year,

one-third

of a percentage

of real

GDP.

- 2 -

We are now projecting decline 4-l/2 percent

that

real

GDP

in Mexico

will economic a

this year. stabilize year. This

On the assumption in Mexico, implies period

that

and financial moderate activity that

conditions next

we are projecting of economic

recovery

a level about

at the end of the forecast outlook, before

10 percent devaluation.

below We

in our December

the peso's

are projecting and 15 percent about dollar produce

Mexican

inflation

of about

40 percent

this year of

next year with

and a real

depreciation

of the peso

20 percent,

the peso

settling elements deficit

in at around

6.50 per to

at the end of 1996. a Mexican and current

These account

are estimated of about

$9 billion

this year

$6 billion these

in 1996. assumptions and projections may convey to say that economy the this a

However, false sense

of precision. situation

It is an understatement implications uncertainty. of their than

the Mexican are a source Mexican year

and its

for the U.S. For example, account

of considerable projection

official

current

deficit we have

is substantially

smaller

ours.

Moreover,

incorporated developments Brazil

some negative onto other

spillover American

effects

from Mexican -- Argentina with and those

Latin

countries

in particular as well Turning

-- but

there

are risks

associated

estimates

-- in both

directions. as Peter during has described, the intermeeting the period in to

to the dollar, substantially

dollar

has declined 5 percent

-- about terms

on our multilateral-trade-weighted G-10 currencies, The dollar's but not weakness so much

index relative

of the other

our previous

forecast.

can be explained

- 3 -

partly about

by shifts the future

in economic course

fundamentals monetary

such policy

as perceptions and the external appear recent to

of U.S.

implications accounts. be involved weakness,

of developments However, as well,

in Mexico

for

the U.S.

in my opinion, and a sizeable should

non-economic part

factors

of the dollar's as unexplained. in putting near

as of now, This

be regarded

has left us with The dollar it has average, that

a challenge

together end of years in

our forecast. the range terms

is now trading fluctuated having over

the lower eight

in which

the past lows slide may

of our G-10 this

hit new

against may have

the DM and been of a as

the yen; overdone. prolonged

suggests

the dollar's the dollar

On the other swoon that

hand,

be in the midst factors such

can be traced account

to long-term

our budget portfolio

and current

deficits

or trends

in global

diversification. In our forecast, we have adopted a compromise position to

between trade

these

two extremes the lower

and have that

the dollar

continuing reached. As was

around

levels

it has recently large.

However,

our band

of uncertainty

is quite simulations

illustrated Greenbook, dollar

in the alternative a substantial make

presented

in the of the

further

depreciation difference the January

or recovery in the outlook. trade data

would

a considerable puzzle concerns

A final they goods should

and how in

be interpreted. of $12.2

The January billion

deficit

on trade just

and services

was released somewhat

as we were by the data,

completing but we were

our forecast. less surprised

We were than

surprised

was the market.

-4.

The deficit billion, deficit, Perhaps, by trade will an increase which,

on goods of more

transactions than

ballooned from

to $17.2

$4 billion was

the December small. for we

you will dollars

recall,

surprisingly

a billion with

of this

increase

can be accounted that

Mexico,

lending

support

to our assessment adjustment

be feeling billion which

the impact

of the Mexican

quickly.

Another

can be accounted we expect

for by reduced

aircraft we have only one

shipments, treated month

to recover. noise. those

The remainder However, data with

largely

as statistical

of data

available,

and with

falling,

we believe, be

outside setting

the range ourselves While

of reasonable up for a nasty easily

variation, surprise.

we could

well

I could our

go on to describe I will

other

questions let

we have

about

forecast,

Mr. Chairman,

stop now and

the Committee

ask the questions.

March FOMC Briefing Donald L. Kohn

28, 1995

With with

economic having

activity tightened increases

apparently

having

decelerated and with probably leave

of late. some of to

the System

at its last meeting, in interest rates could greater

the effects be felt, of policy

of previous

still

it might unchanged

be argued

that the Committee awaiting

the Stance of

at this meeting, in the economy. needs

clarification does choose for policy

the underlying alternative reactions

trends

If the Committee its preferences symmetry

B, it still going

to consider

forward--as I will

summarized address

in the

or asymmetry

of

the directive--which sion. The bluebook well back as for B. a little But

briefly

at the end of my discus-

gives instead

arguments

for alternatives on these.

A and C, as I'd step

of expanding

I thought

and flag

one possible

consequence

of some of the changes in recent in funds

in the way policy years.

has come to be formulated it seems to impart increase to me that greater

and implemented a number of trends

Specifically, threaten they may

policymaking rate because will require would

inertia

to the

federal

the amount

of evidence stance.

the Committee This, of in

to justify raise the

a change

in its policy

course, a timely

risk that the funds the Committee's were no signs

rate would objectives.

not be moved

fashion

to achieve there 1995: larger

To be sure. early early 1994 to early 1994 has been of previous the longest

of any such inertia funds

from

the rise in the federal than the average episodes. money

rate since initial increase

increase

over the this

13 months followed

tightening stretch

Nonetheless, market rates

of stable

in 30 years.

2

Our knowledge activity sities level

of the relationship but given

of interest

rates

to prices

and propen-

is limited,

normal

variations

in spending

and inflation of the nominal fostering

expectations, interest the

we can be sure that

a constant for

rate is unlikely objectives.

to be consistent

long with

Committee's stance could might

The risk of overstayhigh over coming lagged make the

ing a particular months, effects which,

policy like

be especially the

1993,

be a time when

possible conditions

of previous policy

actions move less

and changing obvious than

economic

appropriate

it has been to a potential

for a while. problem of

What inertia--if explicit

phenomena there

might

contribute First funds

indeed

is one?

is the return

to a "arrow, perhaps As

target

for the federal

rate, with of each

the effects policy

accentuated

by the immediate and rising

announcement broadened

action.

new technology markets

wealth

participation

in financial clarity These

and heightened

responses

to new information, became more

greater important.

in conveying trends discount vincing

the Committee's with

intentions

interacted

increased funds shift

uncertainty rate

about

the underlying to provide a con-

borrowing/federal rationale for the

relationship

in operating funds

procedures

a few years such a fed

ago to focus more

on a federal

rate target.

Nonetheless, versus

shift may not be without funds targeting debates

its drawbacks. in the latter in the

In the borrowing half of the 1980s. some

Committee of the slugpressures votes for. the at

members gishness that each

who had been of the

around

1970s

attributed

response

of policy that

to gathering

inflation

time small

to a procedure change

focussed funds

on. and required rate target.

in the federal some

Since

then.

Committee ing more there

has avoided

of the resulting

inflexibility funds

by authorizthough

between-meeting shying

changes

in the federal

rate,

has been

away

from this

over the past year.

One effect

-3

of a federal cent practice

funds

rate operating

target,

together decision.

with

the more

re-

of announcing

each Committee in terms

has been attention,

to virbe-

tually tween policy that

eliminate open market actions

the distinction, operations

of public

and changes

in the discount and political

rate--all scrutiny of

now

seem to attract

the media

used to be reserved funds

for discount along

rate changes. with the effort that

The visibility to reach

the federal tee consensus feel often

rate target,

Commitwill

on policy

actions. certain

could mean

the Committee Greater

a need to be more can be obtained Moreover.

of its decisions. for more

certainty

only by waiting

information. of indicators way--the that

the Committee to key decisions we sometimes After

has lost one class in a more exaggerate timely

sometimes aggregates. used

helped

monetary

I think

the role the aggregates did not trigger markets--and for a good in a signifiwere may of

to play

in policy.

1982 these

variables

automatic they were while.

changes

in the stance allowed

of the System

in reserve bands

frequently

to run outside were

target

But movements

in the aggregates and when they

considered

cant way in policymaking, tending have this

and other supply

indicators

to run in the same direction, quicker and more

money

developments

prompted

forceful

action. toward fully

A good example ease in the

is the turn shift will

in policy that

from tightening seems

spring on

of 1989--a this days.

in retrospect

justified.

A memo few June

episode

be distributed to ease more policy

to the Committee for the first months after

in the next time iti early

In deciding a little the

1989. just ening

than

three

the last major to incoming

tightdata

action,

Committee that

gave considerable suggested pressures.

weight

on employment pansion

and wages

a flagging

in the pace

of ex-

and no pickup

in cost

But it also paid weak M2 numbers.

considerWithout

able attention

to a string

of unexpectedly

-4

the aggregates

nowadays,

the

Committee

may

feel the need to wait for

mre

definitive evidence of departure of the economy from expectations comfortable in changing policy.

before being sufficiently

The third change in Committee practices that might impart inertia to policy action is the recent predilection toward larger moves in the federal funds rate--that is, 50 or 75 basis point moves rather than 25 basis points. Clearly. there is no problem with moving

the federal funds rate by sizable amounts when such action seems warranted, and smaller moves in such circumstances can be disruptive to markets, which quickly anticipate further action, or come to question Federal Reserve intentions. But, especially when uncertainties about

appropriate policies are larger, there might be something to be said for smaller, possibly more frequent, adjustments. The problem, again,

is that the larger adjustments may be seen as requiring a greater burden of proof before they can be taken. The issues I have raised are highly conjectural, and I may well be wrong in my analysis. Furthermore, I am not suggesting a

return to discount borrowing objectives or monetary targeting, which were abandoned for good reasons. But the potential for greater funds

rate inertia is one the Committee members might keep in mind over coming quarters. As I noted at the beginning of my discussion, if the Committee chooses to leave reserve conditions unchanged, it would still need to specify its predisposition toward policy changes in~the future.

The Committee might want to be biased toward tightening if it saw the risks still tilted toward an unacceptably high inflation outcome. With inflation already showing signs of pickup. and with the economy
operating at unemployment associated and capacity with utilization prices. rates that in the might

past had been

accelerating

the Committee

want

to react

especially

quickly

and forcefully

to indications slower growth

that path

the economy than

was not moving Concerns

into a substantially potential inflation

in 1994.

about

pressures

also might further

be accentuated--with declines panied

implications

for policy

reactions--by that were

in the dollar

or even in bond yields of sagging might

not accom-

by convincing A symmetrical

evidence

aggregate

demand. appropriate if

directive risks point,

be considered

the Committee well balanced

saw the at this

to achieving so that

its objectives even

as reasonably odds that level of above for of its

it saw about

next move would interest long-run rates

be up or down. is impossible which

Although

the appropriate real rates

to pinpoint,

are still

averages.

might

be seen as adding of the economy

to the potential

an appreciable the effects ing.

further

slowing

at a time when many shown through

of the higher

rates have not yet might

to spendof

A symmetrical

directive about

also be preferred the Committee movements--muted before than acting

if, in light

the uncertainties response allowing more

the outlook, or market

preferred

a muted

to incoming firmer

data

in the sen.se of and then being

evidence with

to accumulate rather

comfortable

smaller

larger

steps.