Meeting of the Federal Open Market Committee December 15-16, 1987 A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D. C., starting on Tuesday, December 15, 1987, at 3:15 p.m., and continuing on Wednesday, December 16, 1987, at 9:00 a.m. PRESENT: Mr. Greenspan, Chairman Mr. Corrigan, Vice Chairman Mr. Angell Mr. Boehne Mr. Boykin Mr. Heller Mr. Johnson Mr. Keehn 1 Mr. Kelley Ms. Seger Mr. Stern Messrs. Black, Hoskins, and Parry, Alternate Members of the Federal Open Market Committee Messrs. Guffey, Melzer and Morris, 2 Presidents of the Federal Reserve Banks of Kansas City, St. Louis, and Boston, respectively Mr. Kohn, Secretary and Staff Adviser Mr. Bernard, Assistant Secretary Mrs. Loney, Deputy Assistant Secretary Mr. Bradfield, General Counsel Mr. Patrikis, Deputy General Counsel Mr. Truman, Economist (International) Messrs. Lang, Lindsey, Prell, Rolnick, Rosenblum, Scheld,1 Siegman, and Simpson, Associate Economists Mr. Sternlight, Manager for Domestic Operations, System Open Market Account Mr. Cross, Manager for Foreign Operations, System Open Market Account 1/ Present for Wednesday session; participated in Tuesday session via telephone conference from the Federal Reserve Bank of Chicago. 2/ Entered meeting after action to approve minutes of meeting held on November 3, 1987. 12/15-16/87 Mr. Coyne, Assistant to the Board, Board of Governors Mr. Promisel, Senior Associate Director, Division of International Finance, Board of Governors Mr. Slifman, Associate Director, Division of Research and Statistics, Board of Governors Mr. Madigan, 1 Assistant Director, Division of Monetary Affairs, Board of Governors Mr. Small, 1 Economist, Division of Monetary Affairs, Board of Governors Ms. Low, Open Market Secretariat Assistant, Division of Monetary Affairs, Board of Governors Mr. Guynn, First Vice President, Federal Reserve Bank of Atlanta Messrs. Balbach, Beebe, Broaddus, J. Davis, T. Davis, and Ms. Tschinkel, 2 Senior Vice Presidents, Federal Reserve Banks of St. Louis, San Francisco, Richmond, Cleveland, Kansas City, and Atlanta, respectively Messrs. Fryd1 and McNees, Vice Presidents, Federal Reserve Banks of New York and Boston, respectively Mr. Guentner, Manager, Federal Reserve Bank of New York Ms. Rosenbaum,3 Research Officer, Federal Reserve Bank of Atlanta 1/ Attended portion of meeting on Tuesday. 2/ Attended Wednesday session only. 3/ Attended Tuesday session only. Transcript of Federal Open Market Committee Meeting of December 15-16, 1987 December 15, 1987--Afternoon Session CHAIRMAN GREENSPAN. I think we are all present, with the exception of Frank Morris who, hopefully, is on his way from the airport and Si Keehn, who never was able to make it. I trust you're on the other end of the wire, Si. MR. KEEHN. Mr. Chairman, I'm here with Karl Scheld and I hope you can hear us. CHAIRMAN GREENSPAN. We can hear you quite well. I'd like to alter the order of the agenda and ask our Managers to report tomorrow morning rather than today and use this afternoon for the more generic discussions. I hope and I trust that Messrs. Kohn, Sternlight, and Lindsey are prepared. Is that okay? Without objection, I will request a motion to approve the minutes of the November 3rd meeting. VICE CHAIRMAN CORRIGAN. So moved. SPEAKER(?). Second. CHAIRMAN GREENSPAN. No objection. The first topic of discussion, item number 4 on the agenda, is a discussion of borrowings and the federal funds rate as guides to open market operations. Mr. Kohn. MR. KOHN. Thank you, Mr. Chairman. [Statement--see Appendix.] CHAIRMAN GREENSPAN. Mr. Sternlight, would you like to add anything to that? MR. STERNLIGHT. I have very little to add to either what was in the memorandum or what Don has just outlined. Maybe the one point is that, as Don just mentioned in his comments, the market is fairly well aware of this current emphasis on the funds rate in the implementation of policy, with greater weight placed on day-to-day funds rates. From comments that I hear, the market seems to be fairly understanding of it. Some of the people I regard as more thoughtful observers in the market would be troubled, I think, if they thought there was a long-term reversion to something that could be called "pegging of the funds rate." That's exaggerated, but I think that's what it would tend to become to be known as. That carries with it the baggage of a past association with periods of what many regarded as inadequate policy responses in times of excessive money growth. I don't think that argues that one has to go back immediately to what was being done--particularly since in the very near term, we will have all the uncertainties associated with the year-end period--but it is something to keep in mind as we look a little further at it. CHAIRMAN GREENSPAN. Are there any questions for either Mr. Kohn or Mr. Sternlight? 12/15-16/87 MR. HOSKINS. In your opinion, if we were to make a change, is the tenor in the market a lot different now than it was, say, right after October 19th? MR. STERNLIGHT. Well, I think the market has calmed down considerably from the extremely turbulent and nervous state of late October. I would hesitate to say it's totally back to normal. I think there is still some background nervousness and we are getting into a period when there's a lot of uncertainty anyway, just because of the possibility of pressures associated with the year-end. MR. PARRY. Well, that has been true in certain markets but in terms of demand for borrowing, things are still very different from the pre-October 19th period. In fact, it looks as though that difference now may be as great as it ever has been. Isn't that correct? MR. JOHNSON. Yes, I agree with Bob on that. Borrowings actually have declined under the same spread, or even a wider spread for a while. MR. STERNLIGHT. Borrowing has been very light, and we have scratched our heads about what the reasons for that might be. We do hear some comments to the effect that some banks are saving their recourse to the discount window, perhaps anticipating pressures around year-end. There may be some who just want to take extra pains to avoid the window because they are concerned that their own credit ratings could be coming under some review, and they just don't want to subject themselves to any additional attention that might come from using the window. Seasonal borrowing is just about at its low point. I know it doesn't stand up all that well in the correlations, but I still think that some-- MR. JOHNSON. Just a technical question: Based on the research, which has a larger variance in normal times--borrowed reserves or the funds rate? MR. KOHN. Do you mean under which circumstance would the funds rate vary more? MR. JOHNSON. Well, assuming that we're targeting borrowed reserves, is there more noise around borrowed reserves or the funds rate? MR. KOHN. It's hard to compare them; one is dollars and one is basis points. MR. JOHNSON. I know that, but I mean in terms of the percentage variation or standard error. MR. STERNLIGHT. You can get a good deal of variation even when you're following a borrowings target more closely, just because one incident can bring banks in for some special reason and you have to make allowance for that. Even on a borrowings target, I have often had to report to the Committee that borrowing was considerably higher for this or that particular reason. But-- 12/15-16/87 CHAIRMAN GREENSPAN. I'm not even sure that you could get an answer without adjusting for the fact that there is not a unitary elasticity between the change in the funds rate on the one hand and the change in borrowings on the other. I think it is mainly the case that a percentage change in borrowings would be a lot larger unless you normalize it to the-- MR. JOHNSON. I'm trying to think of some way to normalize it and I can't; I'm thinking apples and oranges but I'm just simply-- CHAIRMAN GREENSPAN. I think the answer is self-evident, if you think about it. It is feasible to peg the funds rate, but there is no possibility of pegging borrowing. MR. JOHNSON. If we are trying to hit a borrowings target, I'm just asking whether we get as much variation around that target as we get around the funds rate that results out of that borrowings target. I don't know whether there is any information there, but I still think it might be interesting to know. MR. KOHN. Okay. The standard deviation of borrowings around the path assumption from early 1984 through mid-1987 has been about $170 million; excluding the year-end periods, it has been about $160 million. The root mean square error of the funds rate around what the Desk thought it ought to be was about 20 basis points over that same period. CHAIRMAN GREENSPAN. Unless you have [unintelligible] to answer that question. MR. JOHNSON. I don't know how you compare the two, but it sounds like similar magnitudes of variations. MR. ANGELL. [You could] use coefficients of variation, but it would seem to be smaller for the funds rate. MR. JOHNSON. The funds rate? I guess what I'm saying is that if you could hit your borrowings exactly, it's really a loose way of targeting the funds rate.