APPENDIX

FOMC BRIEFING SEPTEMBER

- P.R.

FISHER

26, 1995

Before permitting myself to take advantage of the toys in the ceiling, _. and because of tne number of topics I need to cover, I thought I should exhaust the potential of older technologies, Thus, you should find an outline of my remarks on the table in front of you, together with a single page of color charts.

1.

TO understand the dollar's sharp sell-off last week, I think it's helpful to distinguish the causes of its initial rally in July and August from the factors that led to its push above 100 yen earlier this month. As I discussed at your last meeting, the dollar's appreciation in July and August, reflected relative changes in expectations for each of the G-3 economies, nudged along by regulatory and monetary policy changes in Tokyo & Frankfurt and concerted intervention.

While

the dollar moved up a bit after the Bank of Japan's September 8th rate cut, the dollar's subsequent rally above 100 yen was -- to a very great extent -the result of unusual and aggressive oral intervention by the Ministry of Finance, aimed at Japanese portfolio managers, talking up the benefits of outward investment, promising a secular change in the dollar's trend, and raising expectations of supportive fiscal and regulatory policies. the dollar's overall summer rally against the yen was vulnerable to a consolidation, it's extension above 100 yen was particularly vulnerable to selling on the announcement of the Japanese fiscal package on September 20th. fiscal package, itself, was somewhat larger and more stimulative than originally expected. it was leaked before the fact and, thus, already in the market. while

Thus,

The But

- 2 Moreover, come market participants had -- somewhat naively -to expect a grand announcement of regulatory changes and banking sector support at the same time as the fiscal package.

The absence of the grand announcement became a good excuse to sell the dollar and we traded down in Tokyo from around 104.60 to 103.60 by the time trading began in New York on the 20th. What when might have stopped as a modest retracement of dollar-yen turned much uglier, for markets and the dollar, the German mark began to appreciate.

The announcement of the French government‘s fiscal plans, that same day, triggered a slight firming of the mark -not because the plans themselves are bad but because they are viewed as politically implausible, as evidenced by the public sector unions subsequent strike call. The dollar after then weakened a bit the release of the slightly-worse-than-expected U.S. trade deficit for July.

Finally, the mark spiked higher, against a number currencies, following the release of remarks by German Finance Minister Waigel and Bundesbank Council member Jochimsen to the effect, respectively, that Italy and France might well not make it into the first round of European monetary union. everyone in the markets understood the limited probability of a number actually meeting the Masstricht criteria Waigel's comment transported that future into current markets. While

of countries by the end of 1997, improbability

It is noteworthy that the dollar has lost a greater share of its recent rally against the mark than it has against the yen. Thus, the good news may be that the dollar's recovery against the yen is a little less vulnerable than we feared. However, the bad news is that the dollar may continue to be vulnerable to the tensions surrounding European monetary union for the next few years.

- 3 2. most of the period, the bond market rallied to its highest price levels of the year but no further, and then sold off a bit. Over back

For most of September, the market was seeing all of the components of the soft landing that were so eagerly hoped for last spring: continued growth, somewhat below potential; __ slightly-better-than-expected inflation numbers; a firming dollar and foreign demand for bonds; and, a Fed seen as likely to ease before year-end. At the end of last week, __ the four-fold increase in the Philadelphia Fed's regional survey of manufacturing activity; __ the dollar's abrupt sell-off, and __ outright threats of default out of Washington, were certainly enough to jolt the market back a bit. However, given such good initial conditions, I think it's worth asking why, prior to the end of last week, the market couldn't break through the (price) highs established earlier this year. Most importantly, it has been hard for market participants to get adequate assurance that the economy will not come back more strongly later this year and early in 1996, given the recent production numbers. Indeed, one of the factors that prompted the market to rally as much as it did last spring, was the risk of recession -which is not now on anyone's radar screen. the net consequences of the fiscal uolicv for the bond market, follies are hard to assess.

Also,

I think that the prospects for some, unspecified improvement in fiscal policy have been reflected in the market for some While the threats of default contributed to yields backing up last week, the uncertainty associated with the wide range of plausible outcomes of the various "train wreck" scenarios may also be making it more difficult for prices to settle in at any one point.

time.

- 4 3. In domestic operations:

during the period, we used temporary operations, supplemented with purchases from foreign to manage reserve conditions. Last

accounts,

week, we faced several days of large deficiencies, and low operating balances, as a consequence of high Treasury balances resulting from quarterly tax receipts.

On Tuesday, I decided to operate earlier than normal, in order to improve our prospects of receiving a sufficient volume of propositions, to meet our need. I mention this for two reasons:

First, our flexibility in doing this was certainly enhanced by the Committee's policy of announcing changes in policy. __ Second, our need to operate early, in order to have adequate assurance that we will have sufficient collateral, reflects the fact that the financing market has been shifting to earlier in the day, leaving our current operating time as something of an afterthought to the rp market. In the context of the thoughtful annex to the Bluebook, on the possible impact of sweep accounts on reserve balances, Don and I will be considering a number of ideas to ensure that the Desk can continue effectively carrying out the Committee's directives. In the uocominq period, the fiscal some challenges for the desk. "train wreck" may create

A partial shutdown of the government, would be likely to make it more the Treasury balance.

after October lst, difficult to forecast

- 5 Any likely adjustments to the Treasury's auction calendar through early November, would have minimal impact Even

on the portfolio. auctions

the cancellation of the 2-and 5-year at the end of October, would have little impact on SOMA, because of our & holdings of these Given

issues.

the"37 billion of maturing securities and and627 billion of interest payments, all on November 15th, no one expects the Treasury to be able to make it beyond mid-November. In contingency planning, for a possible default by the Treasury, we -- like other market participants face a number of uncertainties. We are still unsure whether it will to transfer matured and unpaid over the book-entry wire; Assuming and

--

be possible Treasury securities

that some means could be found to transfer settle these securities we will have to consider whether we will accept them in our RP operations, and, if so, what the appropriate haircut should

be.

Given

the likely breakdown of payment flows that would result from a Treasury default, we would expect demand for excess reserves to rise sharply.

4.

Portfolio Mr.

review:

Chairman, I had hoped to provide the Committee with an initial report on our review of the portfolio's maturity structure in time for the Committee to have a preliminary discussion at the November 15th meeting. I am afraid that I will need some more time, I hope to be able to come to the Committee in either December or January.

However, and

-

6

5.

Mexican While

Swap

Renewal

we had no foreign operations during the period, I would like to inform the Committee that we have an expectation that the Mexican authorities will repay half of each of the outstanding one billion dollars on the System's and the ESF's short-term swaps (500 million each) by the time of the swaps next maturity date on October each

30th.

We would then roll-over the remaining 500 million on the System's and the ESF's swaps until their final maturity in January, when we expect them to be repaid in full. There remains 10.5 billion dollars outstanding on the ESF's medium-term facility.

6.

Ratification

of Operations: ratification for our

Mr. Chairman, I will need the Committee's operations during the period. I would be happy to answer any questions.

Yields Implied by 3-Month Futures Contracts Percent
8.0

June 20, 1995
6.0 .

September 20, 1995

Euro$
4.0.. _

4.0-

q,

J” ,

AUQ

SeP

(2.0)

PerCent

Percent Change of Spot Exchange Rates from June

1 st,

1995

(5.oq’
Percent

“ ”

“1 “

“ ’

J” l

“’ “

“““““’ “““““

AU9

“ ”

“” “

SeP

“ ’

“I “

60)

U.S. Government Bond Yields from Jan lst, 1995

5~ol,,; ,,,, ,,,,,,,,,,,,,.,, ,,, ,,
A” Feb

,,,.,,,,,.,, ,,,,, ,,, ,,,,,.,,, ,,,,,,,,,,.,, ,,,,,,,., ,, ,,,,,,,,,, ,,,,,,,,, ,,,,, :,, ,,, ,,.,, ,,,.,,,, ,,,,,,, ,_,,
Mar m May J"" .I", AUQ

,,,,,, ~,,, ,,,,, ,,,,, 1
Sep

FRBNY

Markets Group

Updated September 25, 1995

I

Michael J. Prell September 26, 1995 FOMC The be forecast as time and at though. out in we've BRIEFING for this meeting only could are the reasonably changes for the animation. will It's be that. the

prepared

characterized the last

singularly almost

unexciting. but as

Not our to

from output

imperceptible. look so flat in some the

projections that

growth

inflation the

suggest of

economy--or In fact.

least we the we

staff--is that over

a state important year to

suspended dynamics

believe economy

playing at this

next enough

or try

two. to

just

point, that In

don't

know will of

nearly occur. time, in the

anticipate

wiggles

inevitably the interest

I won't the

recapirulate Suffice

the it we is

currentto say rhat

quarter that, a GDP

accounting sifting growth

discussed all the of

Greenbook.

through rate in My

available of 2 to

information, 2-112 percent analysts

think a it

vicinity is that

reasonable the same

call. way. The bigger

sense

most

outside

see

about

question

is where

the

economy one At

is headed 1'11 of the

from offer

here. three

Doing quite is

the

proverbial yet in which enough rising

two-handed plausible, the to at

economist answers. quickly resource or mope. tend

better, one end to

different.

spectrum of

a scenario brisk GDP

economy elevate

returns

a pace

expansion say. real

utilization

significantly--

3 percent this driving

Analysts the following First,

holding as

view the

to

point away

to

one

or

more

of

facrrs it To is be

economy

from are.

a more

moderate

path:

argued. sure. but

financial real they

conditions interest by the have to

on balance, are above of the

stimulative. longer-term past decade.

short-term aren't high

rates

averages, And. this other

standards come the down

mOLeO” -er,

long-term obvious business is awash

rates lift

appreciably and making If

year.

providing and

housing less as

market costly indicated as

household the lending in stock

capital with

outlays liquidity. other

well. by and the the

anything.

economy

aggressive run-up

behavior prices. of in be

of banks

and

intermediaries

S8ZCOIld. the less than what is we've passed use

degree assumed will smoke

fiscal the

restraint Greenbook.

in Any

the

offing

is

much

deficit-reduction and fiscal there drag

package will be

that

considerably mirrors. so

back-loaded, that the

liberal

of

and

actually might

imposed

on

the

economy

will

be

less

than

the

budget

numbers

suggest. Third, U.S. and moved producers especially to get their soon are now in a strong some on competitive of our major position trading growth

internationally, partners tracks. have our net

that

economies turn

more

solid

exports as an in to

will extra

upward. if the factors picture. inventory I've

Finally, just listed do will may The have coming to

added

attraction. final and

result need provide

a fairly stock up

buoyant accordingly to

demand thus

businesses investment

some of or

lift this

activity. is will that gather the Fed is going the to

implication soon.

analysis

tighten year. At the of

else

inflation

speed

over

other quite of

end

of

the

spectrum in

is

a view

that

we

are

headed but

for

a period

subdued the 2-l/4 for

growth percent the

activity--not kind few of

a recession, we've

perceptibly described in The expansion and debts. that is

short the

expansion

Greenbook goes

next

quarters. The current in such in economic durables a high terms not changes economy to to which recover suffer. will And, in an of only

argument enervated: business

something

like are up

this. to is their

households capital

ears at

and

spending

already be

level

further capacity

sizable growth. but there

increases

cannot

justified federal

reasonable is being that will ;oon. The have of

Furthermore, are

the

budget

slashed, be

unprecedented to activity. and Mexico

programmatic The isn't

could remain

seriously down

disruptive for a while. our

Japanese going

bogged

either:

consequently, is

trade and and

deficir for of

:iill continue a serback. equiry high, up as

stock

market

overvalued on wealth interest real rates down.

overdue the cost

adverse

effects short-term in which

capital. especially the

course.

rates will

are be

unduly moving

environment economy

softening

pushes The

inflation policy

implication to

is

that. that

unless next

you

wish

to

seize

upon in

this the

as

the

opportunity rate.

achieve be

significant to ease money

notch market

down

inflation

it would in the

appropriate future. between didn't

conditions

appreciably The Greenbook

near

forecast that at our

sits we

these just

scenarios. the we difference see of something the

HOWeVer. between along

I the

should two to of

emphasize arrive our

split

projection. as

Rather, the

the

lines

projection

constituting

mode

probability conditional not the we saying

distribution--the on you our monetary take

most and

likely

of the

alternatives, Of course. we're in But

fiscal

assumptions. each and every warn

should tables. that to

seriously we'd

decimal against for your

place it. policy in

projection do believe today

Indeed. be

vigorously

it would anticipate would and logic final of the

a reasonable without just

premise

decision funds next

that,

a significant below be trend

change over

the

rate. several The

growth

average that of

a little would forecast year's

the

quarters simple to

inflation output from from 1996, wanes

essentially is that, in

stable. the near rally is

our

term, is

the

boost

demand drag

this the the in

capital

market

offsetting As

most we and

inventory financial force only and and

adjustment impetus the

that from

underway. year's

move bond hold:

through rallies these

this

stock

assumed offset in

fiscal by the the

restraint completion negative

takes of

forces

are

partially a diminution

the

inventory from of can so and fact some

adjustment net exports. for

contribution This kind

outlook be if if

activity to ease

suggests a bit in

that the

resource ahead. as

utilization At least,

rates this is

expected the all labor this

months uptrend. we're clip.

force

resumes

a mild

we've

predicted, is in open

manufacturing capacity the at

investment a brisk

witnessing still Dave leaves

raising

plant

This however. more the

questions time

about

inflation be

picture, for

Stockton about rate

noted where, of

last in

that

there

might

a case

optimism natural certainly reversed occurred rate has

conventional is. that in the The case:

Phillips latest

curve price

terms.

unemployment not weakened

index they

readings largely that

have the

Notably, of core

hzve

deterioration this in know, at

trend the 5-3/4

CPI

inflation

earlier remained As you rise we

year--despite the we 5-l/2 have to

fact-that percent that the

the range. core over rate

unemployment

projected under that year.

CPI coming will

will quarters. remain might percent

continue even below suggest than to

to

a pat-e just anticipating late next

3 percent the jobless

though

are

6 percent that, 6. we in

until

While rate is too

such closer close

a pattern to to in 5-l/2 call. the but in the

effect. view we

the this

natural as

still

a matter as

Basically, neighborhood special of full

see

the

economy of

operating and capital,

employment to

labor price

with short we

some run. it

factors speed

working effects

moderat-e no

pressures to the

Certainly.

are

problem:

contrary.

think

I

likely abate. that, import And. creep will

that The despite prices while

the

widening of

of markups this

that

has is

been

occurring by the

will prospect

likelihood the will

happening

enhanced on

dollar's rise be

recent

backsliding than for they

exchange earlier

markets. this year. to

less some

rapidly tendency cuts

did

there

may

compensation benefit the

increases costs

upward--partly be harder to of

because come by--we

in medical that

probably

suspect

continuing sufficiently pressure. improve in our have the short-

restructuring insecure that None run they the the

corporate won't

America exert very would

will much be

keep

workers

they of

inflationary expected to

these

factors

inflation~unemployment don't point benefit have that of to: By

trade-off 1997. resource

permanently, utilization trend sum. the

but

forecast eased without to

rates can

a gradual special maintenance

disinflationary influences. of to be the In current

continue

Greenbook funds

projection for a

suggests while

that

federal with

rate

longer to

is the

likely goal of

consistent stability.

a gentle.

patient

approach

price

E.M. Truman September 26, 1995

FOMC Prmtion

__International

As a complement to Mike Prell’ presentation, I thought it might be useful to add a few s comments about the external sector. We raised our projection for the dollar in the Greenbook, after leaving it unchanged since March. In light of the dollar’ strength over the previous month or so, we raised the dollar’ path by s s about 2-l/2 percent, as indexed by the G-10 weighted average. The ink was not dry on the forecast

before the dollar came under substantial downward pressure from a number of factors, as Peter has discussed, including the U.S. trade data that were released on Greenbook day, the Japanese fiscal package that was announced the same day, and the financial turmoil in Europe. I will torn to each of

these developments in a minute, but first I thought I would comment about our projection for the dollar and its implications for our forecast. We had expected all along that the dollar would recover somewhat. Partly for that reason, the

staff forecast never has envisaged a very large contribution to U.S. real GDP from the external sector. This is in contrast with some of the private forecasts that were predicting that the dollar’ weakness s would produce a large external stimulus. In fact, our forecast has not differed much from those of

private forecasters who pay particular attention to the external sector. The reason is that even as the dollar was declining, growth abroad was weakening, with roughly offsetting effects on net exports. Nevertheless, if the dollar now should remain around its current lower level, closer to its projected

level in the last few Greenbooks, we estimate that the impact on real net exports would be about $10 billion by the fourth quarter of 1996, moving from a slight negative contribution to real GDP to a slight plus over the four quarters of next year. With respect to the July data on trade in goods and services that were released last Wednesday, they were very much in line with our thinking. We anticipated some deterioration

-2based on our assessment that the seasonal adjustment of the trade data appears to be incomplete. This

phenomenon produces relatively strong exports in the fourth quarter and relatively weak exports in the first and third quarters, especially in July. Nevertheless, the release of the data apparently resonated in the market, combined with other factors, including Fred Bergsten’ comments about the dollar’ s s strength undermining improvement in our trade balance. The release of the long-awaited Japanese fiscal package on Wednesday also appeared to disappoint the market, though as Peter has suggested this may have been a case of buying on the rumor and selling on the news. The fundamental question is how we now should evaluate Japanese economic and financial developments. Our answer is that we are somewhat encouraged. The

monetary and fiscal steps by the Japanese authorities over the past several months suggest that they are more determined to do what they can to bring about a sustained recovery in the Japanese economy. At the same time, they appear to be making progress with respect to strengthening the

financial system, notwithstanding or, perhaps, as evidenced by, today’ announcement of losses by s Daiwa. These policy actions, along with the unexpectedly strong second-quarter GDP data and the substantially weaker yen, have led us to move up our forecast of Japanese growth somewhat. However, I would stress that even with this improved outlook, growth only barely reaches our current estimate of potential -- about 2-112 percent -- over the next two years. We anticipate that the financial headwinds in Japan will continue to blow with considerable fury. Thus, we still have a rather conservative forecast. Finally on the European situation, we have seen over the past week the influence of developments that we may not have fully appreciated: changing prospects for EMU. We have

factored into our outlooks for the individual European countries judgments about the influence of the Maastricht criteria on fiscal policies, we have only partial convergence of long-term interest rates within Europe over our forecast period, but we have implicitly assumed that EMU will blast off on

-3. schedule on January 1, 1999. However, we have not been explicit about which countries will be part of the crew, or what kind of mess the rocket will leave behind even if it succeeds in reaching orbit. What I am suggesting by my use of yet another transportation metaphor in discussing EMU is that it is a source of uncertainty. Based on events over the past week, considerable uncertainty about EMU

is likely to prevail over the next several years and to add to volatility in European interest rates and in intra-European and dollar exchange rates in the process. negative, and this may be a downside risk to our forecast. Thank you, Mr. Chairman, that concludes our comments. The net influence on growth is likely to be

September

26,

1995

FOMC Briefing Donald L. Kohn

As noted based

in the

greenbook. there

the will

staff

forecast

is

on an assumption disruptions debate. Given however.

that stemming

be no significant from the current the the issue

economic budget

directly

the uncertainties it may be worth

surrounding discussing

negotiations. briefly.

The first days, on October suggest

key date

of interest

is in just

five NeWS

1. when a strong

annual

appropriations

expire.

stories tion

possibility

of a continuing

resolu-

to allow reduced,

these

activities at least

to be carried for a time

on at some, October its exof a lapse even if 1.

albeit

level. of such overall

after

In the absence piration, in annual it persists ments the

a resolution, effects still weeks.

or following demand

on aggregate should

appropriations for several

not be large. under most

Spending

entitleThe

and to protect amounts

life

and property about

would

continue. of GDP each

remainder week,

to only rate. should

.15 percent

at an annual in spending

Moreover, be small

multiplier

effects

from

the cut draw

as government

employees the size of

on savings

to maintain could

consumption--though increase over time

the knock-on employees

effects

as some concerned

exhaust

their

liquid

assets

or become

about

the nature would perhaps

of an eventual be called even with back

settlement. to work and boost

Ultimately, spending from would catch

employees resume,

a temporary There

some

up in deferred policy Indeed,

purchases.

is probably a brief would effect

little

monetary

can or should attempts

do about the

such

mild

shock. be and the

to offset the

shock

likely

inflationary, fact that

given

lags

in the

of policy off,

government to make

workers,

even while available

laid

are and

unlikely services

themselves

to produce

goods

in the private The second The

sector. of the confrontation estimates without will be about

stage staff

the debt

limit.

currently

that without resorting to

an increase extraordinary the Treasury later

in borrowing measures, will

authority--and such

as a drawdown to meet date

of trust

funds-by no FOMC would governtake

be unable 15.-the

its obligations

than November

of the next effects lapse.

scheduled

meeting. be less ment

In one sense, than with continue

the macro

of default since the

an appropriations to incur

would

obligations--it to get paid. could on the

would

just

a little failure effects

longer to meet

for the

obligers

But the disruptive of of a

obligations

promptly and

have

on the financial transactors might

markets counting

liquidity The

individual

on payments.

extent handles

the disruption number

depend issues

on how the that would

government have

of technical

a bearing

on the

intensity will

of liquidity

pressures.

The markets' impact

reaction of the

be affected on the The

as well eventual

by the perceived size of the deficit

impasse package.

reduction with broad

odds

on a significant and even

disruption spending are

implications not zero. the

for markets However, there

small--but aspect to

may be a self-limiting the problems created

situation; impasse,

the worse the

by a debt may be default also

ceiling likely

sooner it.

the political effects risk

process from

to deal with to predict,

Permanent some

are hard debt.

outside

premium

on Treasury

Thus, agreement give basic come

the

confrontational budget

process is not,

of reaching likely to

on the federal

by itself,

rise to developments policy of the stance process from

that would

dictate

a change

in the

of the Committee. could that be a fiscal embodied

Of course, policy that

the outdiffers forecast-may be handicap

substantially or in the subject

now

in the staff themselves

expectations

of markets, volatility
as

which

to considerable Moreover,

as participants noted, reserve

the outcome. could debt

Peter

management or a dictate

be complicated ceiling crisis;

by either the latter

an appropriationslapse in particular through to meet might

a more

flexible

provision

of credit window

open market highly variable

operations

and the discount

demands

for

reserves delayed.

as planned

payments

and

receipts

are

unexpectedly

However, budget policy. policy

the Committee to affect range

might

see reasons

for the of

confrontation For might one, the

the near-term

tactics

of possible

outcomes

for fiscal likely could under careto add

appear

wider

than usual

right

now but which

diminish weight

appreciably to arguments B.

in the next for a "wait

few months, and see" will

position

alternative fully fiscal

In addition, policy

people might

be looking

for how monetary policy.

respond

to emerging risk being inten-

An easing, and adding already

in particular, uncertainty

might

misinterpreted, tions ness to markets

about

policy

displaying downward because

considerable pressure

skittish-

and tendencies were

toward undertaken policy,

on the dollar. not directly to be which

If an easing related careful it could already

of reasons might for such

to fiscal it had

the Committee case

want

a clear,

credible

action, felt it

enunciate. had such

However, there rather

if the Committee might than

a case. time

be something delaying actions

to be said data, to of

for acting since become "even

at this

for more

perceived larger keel"

impediments not smaller

to policy after October battle

are likely

1, and a period could be lengthy. the case that the

through

the budget

In the context easing would be made

of the staff

forecast,

for

primarily

on the grounds

Committee stance

was

not

seeking

the

slightly nominal gradual be even

restrictive funds opening rate

policy in that

implied with

by an unchanged the associated a case would the risks

forecast, output extent weighted interest

up of an to the to be short-term shortfall inflation in the of

gap. you

Such judged

stronger growth lower

on economic so that

toward rates

the downside, were needed

real

to avoid

a noticeable the underlying

in aggregate picture nominal easing upward

demand,

or you judged

to be more funds rate.

favorable, Markets year, The

arguing have

for a reduction in some odds

built perhaps forecast

by early tilt

next

though staff

a subsequent sees no change funds in

to rates.

long-term is offset now seem

rates,

as disappointment restrictive

on the

steady

rate

by a more

fiscal

policy the

than markets outlook does

to anticipate.

Nonetheless, flat

staff

imply curve, time

persistence perhaps

of an unusually some

slope

of the yield backup over of

suggesting and

risk

of a small rates

in intermediate which The would

long-term

in the absence

an ease,

add to restraint. has a slight funds rate. downward tilt C to

staff

forecast

inflation would while. might

under

an unchanged

Alternative after a

produce This

a more

noticeable was

disinflation

alternative

not named

for "Connie", policy

but

it

be useful

to consider

it and alternative

strategies tion,

against

the background to your

of the proposed later discussion.

legisla-

in part

as prelude

Alternative that would monetary economy tive achieve

C can be seen price that stability

as a step by running

in a strategy a restrictive slack in the

policy--one

deliberately

creates

to put downward

pressure

on inflation. many

An alternadis

is the

"opportunistic"

strategy from

of you have

cussed

in the context As this

of getting strategy

low inflation frequently

to price

stability. described, unemployment leans harder

has most does

been the

the Federal rate above

Reserve

not seek rate, but

to raise

the natural

effectively

against

shocks

to the economy that would

that would it. The inflahas would of not

increase resulting tion

inflation pattern

than would

those

decrease

be one of successively and troughs. for how which This

lower strategy Reserve

rates

at cycle

peaks

interesting report under

implications the Mack take

the Federal asks

bill,

for an estimate stability; like "two it's

the time clear

it will

to get to price has an answer

that

Senator

Mack

recessions"

in mind. The for choosing and the simplest between economic models do not provide C tight money price a basis

the Alternative strategy

strategy stability.

11 opportunistic"

to achieve give

In such models, the output loss

the two approaches associated with

the same to price

answer

for

getting

stability.

That

loss

does

not depend of high

on whether rates

a shortfall or because

in demand of, for by in

occurs

because

interest

example, easier these

tightening

fiscal

policy

that

is not offset holds

monetary models

policy. regard

A similar to supply

observation shocks.

with

A drop

in oil inflation as well leaving

prices, under

for example,

may be used strategy.

to move but

to lower just

an opportunistic in the form where

it could gain

be taken inflation

of a transitory

in output,

it was. is far more are many discussing, more complex possible than these models, than of the in

The world course, and there been

strategies when you

two we have

especially

factor in the

the subtleties "real world". into account

and uncertainties The legislation

of making does instruct

policy you

"to take and output This period episodes the sento

any potential with the goal

effects of price

on employment stability." transition

in complying tence price when clearly

applies

to the current also

stability prices

and possibly from

to subsequent In that

deviate

stability.

regard,

Committee on the way shortfalls find that

may

see its job as damping stability,

the variance hard

of output large it may ratios

to price

leaning

against And

in employment the speed ways

as well

as overshoots. affects

of adjustment that influence

sacrifice

in complicated strategies.

the choice

of policy

Restrictive is a strategy has

monetary

policy, price

as in alternative

C,

for attaining features

stability--and explicit

one that

the attractive certain But

of being

in its intent complex stra-

and more tegies.

in its execution

than more

it clearly

is not the only to think

possible about

path. policy

Nonetheless, choice context

it is interesting

today's in the

in the context of policy

of the bill. today

and the bill

choices

and subsequently.