Bluebook

Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Strictly Confidential (FR) Class I FOMC December 18, 1981 MONETARY POLICY ALTERNATIVES Prepared for the Federal Open Market Committee By the staff Board of Governors of the Federal Reserve System STRICTLY CONFIDENTIAL (FR) CLASS I - December 18, 1981 FOMC MONETARY POLICY ALTERNATIVES Recent developments (1) M1-B growth, adjusted for shifts into NOW accounts, rose to an 81 percent annual rate in November, and continued rapid in early December. The strength in M1-B reflected a marked pickup in other checkable deposits, while demand deposits also rose a little the first three quarters of the year). (in contrast to marked declines over The exceptional strength in OCDs growth may be associated with the public's desire to accumulate passbook savings type assets in light of uncertainty about the near-term course of economic activity and interest rates. Growth in M-B over the October to December period probably will be at about a 7¾ percent annual rate (assuming an appreciable decline in Despite the recent pickup, the level of M1-B over the last half of December). QIV '80 to QIV '81 growth in adjusted M1-B will be only about 2 percent, well below the Committee's 3½ to 6 percent longer- (Recent monetary and reserves data are shown in the table on the run range. next page.) (2) M2 expansion surged to a 16½ percent annual rate in November, and is estimated at a 14½ percent annual rate over the two-month October to December period--considerably more than expected at the time of the last meeting. funds M2 growth was buoyed by continued brisk inflows to money market and by a turnaround in savings deposit flows to a modest increase following a steady decline for more than a year. For the QIV '80 to QIV '81 period, M2 is expected to grow at a 9½ percent rate, above the Committee's 6 to 9 percent longer-run range. Reflecting the strength in M2, M3 growth Key Monetary Policy Aggregates (Seasonally adjusted annual rates of growth) S Dec. '81 Dec. '81 over over over Oct. '81 Sept. '81 QIV '80 QIV '81 Oct. Nov. Dec.- M-B (shift adjusted) 3.1 8.8 6.8 7.8 6.3 1.9 M2 8.1 16.5 12.6 14.6 12.5 9.5 7.9 16.0 12.8 14.5 12.4 L0.2 M3 5.7 12.3 12.2 12.3 10.1 11.2 Bank Credit 8.5 3.2 n.a. n.a. n.a. 1.9 7.5 14.1 10.9 7.9 7.0 -10.3 0.1 11.7 5.9 0.5 4.4 -0.6 5.8 9.0 7.4 4.8 4.8 743 189 498 265 424 165 - Money and Credit AgZregates M2 plus retail RPs / .a. 3/ Reserve Measures- Nonborrowed Reserves-4/ Total Reserves Monetary Base Memo: (Millions of dollars) Adjustment Borrowing Excess Reserves 1/ December 1981 estimated on the basis of partial data. 2/ Retail RPs have been estimated based on an August 31, 1981, universe survey and subsequent partial FRB and FHLBB samples. 3/ Growth rates for reserve measures are adjusted to remove the effects of discontinuities 4/ resulting from phased changes in reserve ratios under the Monetary Control Act. In addition, reserve data for QIV '80 have been adjusted to remove the distorting effects of the reduction in weekend reserve avoidance activities that occurred in late 1980. Nonborrowed reserves include special borrowing and other extended credit from the Federal Reserve. MEMO: FOMC long-run targets (Percent increase) MI-B (shift adjusted) M2 M3 Bank Credit QIV '81 over QIV '80 3k to 6 6 to 9 64 to 9 6 to 9 -3also has accelerated recently, and remains well above the upper end of the Committee's longer-run range. Bank credit expansion slowed in November to a 3 percent (3) annual rate, due mainly to a continued reduction in holdings of U.S. government securities and a further moderation in the growth of business loans. The weak loan growth, coupled with stronger inflows to core deposits, allowed commercial banks to run off large time deposits for the second consecutive month in November. S&Ls, however, continued to issue such deposits at the appreciable pace of other recent months, with the premium over offering rates of commercial banks reduced from the unusually high spread of last summer. (4) Total reserves are expected to grow at a 6 percent annual rate over the last two months of the year, reflecting the increase in required reserves associated with the strength in the aggregates. Non- borrowed reserves are likely to expand at about an 11 percent rate over this interval as adjustment borrowing in October level. December will be down from its In the first two weeks of the intermeeting period, adjust- ment borrowing averaged only about $200 million. As M1 and M2 strengthened, the increase in required reserves was accompanied by a rise in adjustment borrowings. During the past two statement weeks, borrowing averaged $380 million; this was less than the $450-500 million implied by the reserve path, as banks economized on excess reserves.1/ The reduced level of borrowing early in the period, and the one percentage point decline in the discount rate to 12 percent on December 3, contributed to a further easing 1/ Reserve paths and adjustments made since the last Committee meeting are shown in appendix. -4in the federal funds rate to the 11 from to 12 percent area in early December 13 to 13 1/2 percent at the time of the November meeting. Most recently federal funds have been trading in a 12 to 12 1/2 percent range. (5) Both short- and long-term interest rates continued to decline early in the intermeeting period, responding to the further easing in money market conditions and the weakness of economic activity. Rates subsequently backed up, however, owing to strength in the monetary aggregates, reports of Administration estimates of a greatly enlarged budget deficit, and a rise in the funds rate to levels above the discount rate. At present, market rates are generally above levels prevailing at the time of the previous Committee meeting, but the prime loan rate is down one percentage point and primary mortgage rates have dropped about 3/4 of a point. (6) After declining through late November, with the recent rise in U.S. the dollar rebounded short-term interest rates to post a small net advance on a weighted average basis since the last Committee meeting. Political developments abroad and more favorable inflation expectations for the United States also contributed to the strength of the dollar. -5Background for preliminary consideration of target ranges for 1982 (7) The growth ranges for the aggregates in 1982 tentatively set by the FOMC in July are 2-1/2 to 5-1/2 percent for M1, 6 to 9 percent for M2, 6-1/2 to 9-1/2 percent for M3, and 6 to 9 percent for bank credit. With the exception of M1, these are the same ranges that were set for 1981. The M1 range is a reduction from the 1981 range of 3-1/2 to 6 percent for M-B, shift adjusted.1/ (8) As statistical background for consideration of the annual targets for 1982, the table on the next page shows actual growth of money supply measures for the years 1977 through 1981. Annual growth in M-B measured from QIV to QIV decelerated gradually over the last few years, followed by a sharper drop-off in 1981, particularly on a shift-adjusted basis. But whether the marked deceleration in shift-adjusted M1-B this year accurately measures the degree of greater restraint depends in part on whether there was a downward shift in money demand (relative to nominal income and interest rates). 1/ In the degree that there was such a shift, slower growth The nomenclature "M1" represents the same measure as M1-B. It is assumed that, consistent with earlier FOMC discussion, the distinction between M1-A and M1-B will be dropped and that M1-A will not be published (though its components will be). Moreover, it has also been assumed that the FOMC will not wish to continue with the "shift-adjusted" concept. It has been a year since NOW accounts were introduced nationwide and the great bulk of the conversion of outstanding savings and other interest-bearing deposits into newly established NOW accounts has apparently already taken place. It is likely that the public learned about nationwide NOW accounts more rapidly than they did when these accounts were first introduced in New England, when significant conversions of accounts continued over several years. This is supported by reports from a sampling of banks in midNovember that suggest the stock adjustment is about over. In addition, growth in the number of NOW accounts has tailed off considerably since summer. Nonetheless, it should be recognized that further structural shifts of funds into NOW accounts might develop, and need to be adjusted for, should, say, regulatory changes by DIDC change the nature of the the account. -6Annual Growth in Monetary Aggregates 1977 - 1981 [(1) - measured QIV over QIV; (2) - measured year over year] 1977 1978 1979 1980 1981 M-B (1) (2) 8.2 7.7 8.2 8.2 7.5 7.8 7.3 ( 6 . 7 )1/ 6.3 (6.0) 4.7 (1.9) 6.9 (4.5) M2 (1) (2) 11.5 13.0 8.3 8.9 8.9 8.9 9.6 8.9 9.5 9.7 M3 (1) (2) 12.6 12.3 11.2 11.7 9.8 10.4 10.2 9.5 1/ 11.2 11.6 Figures in parentheses are shift-adjusted. would not indicate more restraint but would represent an accommodation to the shift in public preference away from narrow money assets to other assets. is difficult to judge the extent of sach hifts in practice. It Econometric results, supported by more direct evidence of changing cash management practices, this year. suggest a fairly substantial downward shift in desired M1 balances This would indicate that the "effective" deceleration in money could be considerably less than measured. (9) With regard to the broader aggregates, there has been no measured deceleration over recent years .M And this year, their growth has been above the upper limits of the ranges set for them, markedly so in the case of M3. However, the broader aggregates, like Ml, have also been subject to demand shifts. If, for instance, allowance were made for shifts from market assets to money market funds, the growth in the broader Ms would 1/ Growth rates were higher in 1977 than over the 1978-81 period, but growth in the earlier year was still being influenced by the low level of market rates relative to deposit ceiling rates. -7- be reduced, particularly in the past two years.1/ In addition, broader Ms have been subject to other structural changes this year, such as the further deregulation of time deposit accounts by removing the cap on the SSC ceiling rate effective at the beginning of August, a more active use of retail RPs by depository institutions, and the introduction of ASCs at the beginning of October. (10) Among the considerations entering into the Committee's decision about ranges for the aggregates in 1982 would be the need to continue to show determination to slow money growth over time. In that context, the Committee's intention to continue a policy of gradually reducing growth over time would be signalled by a lower target range for 1982 than for 1981, even if actual growth in M1 next year were to be more rapid than the relatively low rate of this year (on a QIV to QIV basis). Committee practice, in Following past the range for M1 next year would take off from its the fourth quarter of 1981, 2/ not shift adjusted. which is level given by the actual level of M1-B, Another approach would be to take off from the targeted level for 1981 (say, either the bottom or the midpoint of the 1/ Estimates based on responses from Michigan surveys and on assumptions about institutional behavior in the absence of money market funds suggest that M2 growth could be reduced by a percentage point or so in the past two years, more in 1981 and less in 1980. 2/ The series does not link onto shift-adjusted M1-B because the latter series excludes that portion of NOW accounts which represents funds that would, in the absence of nationwide NOW accounts have been in other interest-bearing assets in 1981. Those accounts, totaling about $12 billion in the fourth quarter of 1981, are of course included in M1. -81981 range).1/ However, to the extent that there was in fact a downward shift in money demand in 1981, such an approach would lead to a higher level of money in 1982 than was warranted by the Committee's basic policy intentions. (11) From another viewpoint, though, a higher range for M1 (taking off from the actual QIV '81 level) or perhaps a further widening by raising the upper end, might be considered on the grounds that it may be needed to encourage satisfactory economic recovery, especially if the view is also taken that there may be no, or only a minor, downward shift in money demand relative to income and interest rates next year. An increase in the upper end of the range might also be considered to allow for the possibility that either significantly lower market interest rates (a possibility, for example, if inflation improves more than anticipated) or actions by DIDC to make NOW accounts significantly more attractive would occasion a surge in such deposits and substantial upward pressures on M1. The offsetting risk to such an approach, however, is the possibility that 1/ The relevant range for this purpose would be the 6 to 8-1/2 percent growth in measured M-B that was indicated by the Committee in early 1981 to be consistent with the basic shift-adjusted target of 3-1/2 to 6 percent. The 2-1/2 point difference between the two reflects the estimate made than of shifts into NOW accounts from interest-bearing assets. In the event it appears that such an estimate was approximately correct. The shift appears to have been equivalent to about a 2-3/4 percent differential. The increase in NOW accounts outside the Northeast (net of transfers from ATS accounts) in 1981 (QIV '80 to QIV '81) was about $45 billion, with the fraction coming from interestbearing assets estimated at just over 1/4 for the year on the basis of reports from depository institutions. At mid-year, the staff had estimated an increase of $50 billion, with about the same fractional shift from interest-bearing assets. Thus, the behavior of NOW accounts on balance has been about as expected. M1-B growth was weaker than targeted-whether shift-adjusted or not--because of shortfalls in currency and demand deposits that presumably at least in part reflected a downward shift in money demand. -9public would construe an increase in the tentative range as reflecting a diminution in the Federal Reserve's determination to curb money growth, given the need to finance large budgetary deficits. (12) Reductions, rather than increases, in the tentative M1 range, or at least in the lower end of it, might be considered if a continued sizable downward shift in money demand (given income and interest rates) is anticipated next year. The staff's GNP projection, based on 4 percent M1 growth, assumes a shift on the order of 2-1/2 percentage points on the basis of our conventional quarterly money demand equation. The low end of the tentative range provides scope for a larger shift. If market interest rates remain high next year-and we are projecting that rates will, on average, exceed current levels-there will be continued incentive for financial innovations, such as the proposed sweeps of NOW and demand deposit accounts into money market funds, that may work to reduce M1 balances considerably. (13) Attainment of the tentative 1982 ranges for the broader Ms would represent a deceleration in their measured growth. From that view- point, there may be little need to consider a further lowering of those ranges at this time. While some little lowering might not be inconsistent with a view that price increases will be lower in 1982 and that real income growth will be weak (particularly if one held the view that such a combination would lead to weaker nominal income growth than the 8-1/2 percent projected by the staff), the credibility of a reduced range might be in doubt given this year's results. Moreover, with more deregulation possibly in prospect for next year, a case might also be made for adjusting the ranges upward, at least for M2, to accommodate a more favorable competitive position for depository institutions relative to market instruments. A -10- more particular question may also be raised about the interpretation for purposes of monetary policy of a possible increase in M2 from a liberalization of tax and deposit ceiling rate regulations on IRAs; indeed, whether these accounts should be included in M2 is uncertain given their role as a vehicle for long-term savings. The staff currently projects in 1982 M2 would grow by 8-1/2 percent, and M3 just a shade faster, given M1 growth of 4 percent (the midpoint of the tentative 2-1/2 to 5-1/2 percent range) and our nominal GNP projection. (14) Uncertainties about the impact of ongoing changes in financial technology on the public's holdings of deposits and closely related assets argue for retaining long-run target ranges for money as wide as 3 percentage points. Indeed, given the particular uncertainties about M1 at this juncture in the development of financial services and markets, one might even argue that its range should be somewhat wider. the issues noted in paragraphs (11) and (12), In addition to the interpretation of M1, and its proper setting as a target, could be affected by its changing composition. With relatively more of the aggregate held by consumers in NOW accounts, which behave in part like savings accounts, the sensitivity of M1 demand to both interest rates and income-and in turn the impact of M1 supply on income-could be affected. However, we estimate that no more than roughly 5 percent of M1 represents NOW accounts that have been shifted from saving balances. -11Near-term Targets (15) The upper panel of thetable below presents three alternative specifications for the monetary aggregates during the first Growth rates are measured from a QIV '81 average base-in quarter of 1982. part because of the very preliminary nature of the December estimates of the aggregates-with the alternatives designed to achieve growth of M1 by March consistent with the upper, middle, and lower ends, run range for that aggregate in respectively, 1982. of the FOMC's tentative long- Implied growth rates over the three month December-to-March period, based on the staff's estimates, are shown in the second panel. current December Possible ranges for the inter- meeting federal funds rate are indicated in the last line of the table. (More detailed and longer-run data for the monetary aggregates may be found on the following page, and charts indicating the relationships of the alternative targets to the Committee's tentative longer-run ranges for 1982 may be found on the next three pages.) Alt. A Alt. B Alt. C 4 9 2½ 8½ Growth from QIV '81 to March '82 5½ 10 M1 M2 Implied growth from December '81p/ to March '82 M1 4¼. 2¼ M2 8¾ 7½ 6½ 10 to 14 11 to 15 12 to 16 ¾ Federal funds rate range p/ preliminary Alternative Levels and Growth Rates for Key Monetary Aggregates M3 M2 M1 Alt. A Alt. B Alt. C Alt. A Alt. B Alt. C Alt. A Alt. B Alt. C 1981--October November December 433.0 437.0 439.9 433.0 437.0 439.9 433.0 437.0 439.9 1798.8 1823.6 1842.7 1798.8 1823.6 1842.7 1798.8 1823.6 1842.7 2143.8 2165.8 2187.8 2143.8 2165.8 2187.8 2143.8 2165.8 2187.8 1982--January February March 441.3 442.9 444.6 440.7 441.6 442.4 440.1 440.2 440.2 1855.4 1869.0 1883.4 1853.9 1866.9 1877.6 1852.6 1863.1 1872.6 2203.2 2220.0 2237.7 2201.7 2217.9 2231.9 2200.4 2214.1 2226.9 1981--October November December 3.3 11.1 8.0 3.3 11.1 8.0 3.3 11.1 8.0 8.1 16.5 12.6 8.1 16.5 12.6 8.1 16.5 12.6 5.7 12.3 12.2 5.7 12.3 12.2 5.7 12.3 12.2 1982--January February March 3.8 4.3 4.6 2.2 2.2 2.2 0.6 0.3 0.0 8.2 8.8 9.2 7.3 7.p 7.5 6.4 6.8 6.1 8.4 9.2 9.6 7.6 8.3 8.1 6.9 7.5 6.9 Depember 1981 - March 1981 4.3 2.3 0.3 8.8 7.6 6.5 9.1 8.1 7.1 1981--QIII QIV 1982--QI 0.5 4.6 5.8 0.5 4.6 4.6 0.5 4.6 3.3 10.3 9.6 10.5 10.3 9.6 9.7 10.3 9.6 9.0 10.3 9.6 10.0 10.3 9.6 9.4 10.3 9.6 8.9 1980 QIV - 1981 QIV 1981 QIV - March 1982 1.91 5.5 1. 4.0 1.91/ 2.5 9.5 10.2 9.5 9.2 9.5 8.4 11.1 10.0 11.1 9.2 11.1 8.5 4.51- 4.51 9.7 9.7 9.7 11.6 11.6 11.6 Growth Rates Monthly Quarterly Average 1 Annual Average 1981 over 1980 1/ 4 .5 Based on MI-B adjusted for shifts to nationwide NOW accounts in 1981. Chart 1 CONFIDENTIAL (FR) Class II-FOMC Actual and Targeted M1 MI Billions of dollars 1480 - Actual Level' S Short -Run Alternatives -1 470 -4460 2'% -4 40 -1 430 --1 420 O' I' F I I11111111111111 N 0 J 1981 1 0*cember leel Is protected. M I A M I J I 1982 J A I I I S O 410 N D Chart 2 CONFIDENTIAL (FR) Class II FOMC Actual and Targeted M2 M2 Billions of dollars -12000 SActual Level -- S Short -Run Alternatives 1980 -11960 - 1940 1920 1900 A' / '1880 .-'. / -9 / */ .; f / -- i1860 ' / .. x -11840 -t 1820 1800 -4 1780 C 0 I N N I 0 0 I 1981 Seoember level Is projcted. I J I F I M I A I M I J I J 1982 I A I S I O I N O Chart 3 CONFIDENTIAL (FR) Class II FOMC Actual and Targeted M3 M3 Billions of dollars - 2400 9'/*% - Actual Level1 ..* Short -Run Alternatives 2350 2300 2250 2150 *NOTE; O N 0 J 1981 1 December level is poectd. F M A A. B. and C aflerra M J e ua IndisanglluWiUle on th J 1982 A S 0 scale. 100 N D -13(16) Alternative B calls for M1 growth from QIV '81 to March at a 4 percent annual rate, but probably involves M2 growth slightly above the upper end of its range. Growth of M1 from the estimated December level to March would be at a slower 2¼ percent rate since the level of December is high relative to the fourth quarter average. Growth of M2 over that period would also be relatively moderate-at a 7-1/2 percent annual rate--for the same reason. (17) Assuming a continued downward shift a slower pace than last year, in and a small increase in M1 demand, though at nominal GNP in the first quarter, such a slowing in M1 growth from the recent pace may be accompanied by little net change in short-term interest rates over the next several weeks. However, both the economic outlook and the state of money demand (given income and interest rates) are highly uncertain at this juncture, so that an even wider range than usual should be placed around, interest rate projections. For instance, strong downward pressures could develop--more consistent with a normal cyclical pattern of short-term ratesif the economic recession does not tend to abate early next year as assumed in the GNP projection. even with a weak GNP, On the other hand, if upward pressures could emerge, the demand for money were relatively strong either because of a return to historical relationships or because economic uncertainties caused the public to continue to save more than earlier in and to hold part of this saving in (18) the year NOW accounts. The alternative B specifications would require expansion in total reserves at a 2 percent pace from December to March.1 / Assuming adjustment borrowing in the $450 million area, nonborrowed reserves would increase at a 1-1/2 percent rate and, at the present discount rate, the 1/ Abstracting from any impact on required reserves from shifts from reservable deposits to nonreservable IBF liabilities. -14- federal funds rate in the intermeeting period would likely fluctuate up in a 12 to 13 percent range. The 3-month Treasury bill could be expected to trade in the 11 to 11-1/2 percent area, as sizable first quarter Treasury financing demands make themselves felt in an environment in which the money market shows no sign of easing. (19) Private short-term credit demands are likely to remain weak, partly as borrowing is fairly strong in bond markets and partly in connection with projected inventory liquidation. Corporate borrowers who had postponed bond issues in December because of the rebound in long-term rates, may come back into the market early next year if they come to believe that the cost of staying out will be higher than expected-especially with enlarged Treasury offerings in prospect later in the year. Should corporate bond yields remain near current levels, there may be some scope for a further drop in interest rates on home mortgage commitments given the relatively wide spread existing between bond and mortgage rates. Even though thrift operating losses can be expected to moderate further at the projected shortterm interest rate level as high cost deposits are rolled over, their deposit growth is not expected to be robust; this, together with continuing uncertainties about future rate developments, is likely to discourage them from aggressively offering mortgages. (20) Alternative A calls for a 5-1/2 percent growth target for M1 from the fourth quarter to March and 4-1/4 percent from the estimated December level to March, and involves a greater risk that the level of M2 in the first quarter will be above the upper limit of its tentative long-run range. This alternative would entail growth in total reserves at a 4 percent annual rate over the first three months of the year. Assuming a level of adjustment borrowing of around $250 million, nonborrowed -15- reserves would grow at a 6 percent rate. Such a pace of reserve provision would likely be associated with a federal funds rate near or a little below the current 12 percent discount rate. That probably would be accompanied by a decline in short-term rates from recent levels, with the 3-month bill perhaps around 10 to 10-1/2 percent. Bond yields are likely to decline some, but declines might be limited by a sizable pickup in bond offerings as the market viewed the decline as opening another "window". With an indication of lower borrowing costs, thrift institutions would be somewhat more willing to cut mortgage rates further and increase commitment activity. (21) The contemplated modest decline in short-term interest rates under alternative A might be accompanied by a tendency for the dollar to decline on exchange markets. However, any decline could be short-lived, or limited, as foreign central banks take advantage of any strengthening in their currencies to lower their own interest rates further in light of continued weak performance of their economies. (22) Alternative C--which calls for virtually no growth in M1 between December and March--may be expected to bring M2 into the upper part of its tentative long-run range by March. Essentially no growth in total reserves would be involved, and assuming adjustment borrowing of $650 million, nonborrowed reserves would decline at about a 2-1/2 percent rate in the first quarter. A federal funds rate of perhaps 13 to 14 percent in the inter- meeting period would be implied. Such a move in the funds rate would surprise market participants, and a fairly substantial rise in other market interest rates, at least temporarily, would tend to develop. The 3-month bill rate would probably move to near 12-1/2 percent, the corporate bond rate might approach 16 percent, and new issue volume would probably drop significantly -16- as firms return to short-term credit markets. would retrace part of their recent decline. Residential mortgage rates The higher than expected level of interest rates would tend to strengthen the dollar further in foreign exchange markets and limit reductions in foreign interest rates. (23) As 1982 progresses, short-term interest rates likely will rise to levels above those currently prevailing, assuming M1 grows at the midpoint of the FOMC's tentative range. The table below shows interest rate forecasts for the year, assuming alternative B for the first quarter and midpoint growth of M1 thereafter. Greenbook GNP projection. These assumptions lie behind the Selection of alternative A might involve a larger rise in rates later in the year to compensate for the greater nearterm monetary stimulus associated with this approach if the Committee desires to slow money growth later in an effort to achieve midpoint growth for the year. Alternative C, on the other hand, by exerting near-term restraint would probably be associated with lower rate levels later in the year, reflecting not only the greater scope for faster money growth at that time but also possibly weaker economic activity. 3-month Federal Treasury Funds Bill Recently Offered Fixed Aaa Corporate Rate Mortgage Bond Commitments 1981 IV 13 11¾ 16 17¾ 1982 I 12¾ 11 15 16½ II 14 12 15 16 III 15 13 15¼ 16¼ IV 15½ 13½ 15¼ 16¼ -17Directive language (24) Given below is a suggested operational paragraph for the The specifications adopted at the meeting on November 17 are directive. shown in strike-through form. IN THE SHORT RUN, THE COMMITTEE[DEL: moderate a noting after , shortfall in October from the target path set M1-B of growth in seeks meeting,] last the at behavior of reserve aggregates con- sistent with growth of[DEL: M1-B]M1 AND M2 [DEL: from to December] October FROM THE FOURTH QUARTER OF 1981 TO MARCH at [DEL: an] annual [DEL: rate] RATES (after flows of impact the for allowance of about [DEL: 7]____ percent[DEL: NOW into with growth around rate annual an at M2 of accounts)] and[DEL: 11] ____percent RESPECTIVELY. consultation if it The Chairman may call for Committee appears to the Manager for Domestic Operations that pursuit of the monetary objectives and related reserve paths during the period before the next meeting is likely to be asso- ciated with a federal funds rate persistently outside a range of [DEL:11 15] to ____ TO ____ percent. Appendix I RESERVE TARGETS AND RELATED MEASURES INTERMEETING PERIOD (millions of dollars; not seasonally adjusted) Reserves Targets for 5-week Average (5-week Average Basis) Date Reserves Pat Conseructed November 25 to December 23 Total Nonborrowed Reserves Reserves (1) November 17 (FOMC Meeting) 20 30 December 4 11 18 (2) Projection of Reserves Demanded (5-week Average Basis) November 25 to December 23 Implied Adjustment Borrowing For Remaineek entStateOn a ing Required Excess 5-week Avg. of Intermeeting Reserves Reserves Reserves Basis Period (3) (4) Total (5) (6) 41,209 40,809 41,209 40,984 225 400 41,209,/ 41,252- / 41,2525/ 41,52641,389- 40,8092/3/ 40,894F,40,95241,243:: -' 41,154' -' 41,209 41,277 41,305 41,621 41,488 40,984 41,085 41,081 41,379 41,289 225 192 224 242 199 400 383 353 378 334 / (7) 400 425 453 496 500 1/ Represents borrowing in remaining statement weeks (as intermeeting period progresses) implied by each weekly updating of the 5-week average nonborrowed path. The movement in implied borrowing represents deviations in total reserves from target as well as the implications of compensating to whatever extent, for misses in nonborrowed reserves from target in the earlier weeks of the reserve period. 2/ Total and nonborrowed reserves paths adjusted upward by $43 million due to changes affecting the reserves multiplier. 3/ To prevent unexpectedly low borrowings in the week of November 25 from distorting the nonborrowed reserves path, the 5-week average nonborrowed reserves path was adjusted upward by an additional $42 million. 4/ To prevent the unexpectedly low borrowings in the weeks of November 25 and December 2 from distorting the nonborrowed reserves path, the upward adjustment to the 5-week average nonborrowed reserves path noted in footnote 3 was raised to $100 million. 5/ Total and nonborrowed reserves paths adjusted upward by $274 million due to changes affecting the reserves multiplier. 6/ To prevent the unexpectedly low borrowings in the week of November 25 and December 2 from distorting the nonborrowed reserves path, the upward adjustment to the 5-week average non borrowed reserves path noted in footnotes 3 and 4 was raised to $117 million. 7/ Total and nonborrowed reserves paths adjusted downward by $137 million due to changes affecting the reserves multiplier. 8/ To prevent the unexpectedly low borrowings in the week of November 25 and December 2 froe distorting the nonborrowed reserves path and to avoid a sharp change in bank reserves positions just prior to the Committee meeting, the upward adjustment to the 5-week average nonborrowed reserves path noted in footnotes 3, 4, and 6 was raised to $165 million. Chart 2 STRICTLY CONFIDENTIAL (FR) Class L.-FOMC 12/21/81 M1-B M1-B Billions of dollars 7-450 SActual Level ** Level Adjusted for Impact of Nationwide NOW Accounts 6% 440 3%% -- 430 *... *.e 6e. *S.**.e* - 420 - 400 Percent annual rate of growth' Actal Aug. Adjusted 7.5 Sept. -2.8 Oct 6.6 -3.7 3.3 Nov. 11.1 3.1 8.8 1980 QIV-Nov. 4.8 2.0 390 I 0 I N 1980 I D I ___ J F I I M A M I J J A I I I S O 380 N D 1981 1 Blmal on a mdoltb of telownlg mammed rrMges fr Ue popoalon of OCD growth (lapatfom tnd) omilg from demand dspolts: 75-0 percent in Jmmuy id 70-75 pwerct in subequmt montr. Chart 3 STRICTLY CONFIRENTIAL (FR) clas M2 M2 pmt - FOMC 12/21/81 Billions of dollars ' 11840 Actual Level - -1820 -11800 1780 :1760 -1740 -11720 -11700 Percent annual rats of growth r I I U ..N 1980 Aug. 11.7 Sept. 6.6 Oct. Nov. 1980 QIV-Nov. 8.1 16.5 9.6 1680 -- 860 1640 I I J I F I M I A I M I J I J 1981 r I A S I O N Chart 4 STRICTLY CONFOENTlAL IFR) Cass.- FOMC Billions of dollars 2200 SActual Lavel S- 2150 -2100 S- Pe2rcent annual o grovt rate 2050 - 2000 rate of growth 13.5 Aug. 9.2 Sept. 5.7 12.3 11.2 Oct. Nov. 1980 QIV-Nov. 1950 1981 1980 '1350 - Actua Levl 1300 Percent annual rate of growth 10.4 Aug. 10.6 8.5 3.2 8.8 Sept. Oct. Nov. 1980 QIV-Nov. N 1980 Lev O J F M A M J J I S S A S A 1250 0 1961 adJusted beginflng in February to remov doiscaunUiy du to abaorptkon by on* bank of a nontlben afflUae. N 0 1200 Table 1 Selected Interest Rates December 21, 1981 Percent Short-Ten Peod Federal funds Treasury bills market auction 3_mnonthl 1ye-r CD seconday I market -month 3-monh 8 3l| -1--4 8 Long-Term ____rm comm. paper 3-month bank prime rate 6 7 T0 U.8. government constant maturity yields 3-year I 1 10-year I 30-year o corporate Aa utility new I recently Iuy o 12e 11 ! municipal ond B1 home mortgages secondary market primary NMAI GNMA auction security 14| 1980--High Low 19.83 8.68 16.73 6.49 14.39 7.18 15.70 6.66 20.50 8.17 19.74 7.97 21.50 11.00 14.29 8.61 13.36 9.51 12.91 9.54 14.51 10.53 15.03 10.79 10.56 7.11 16.35 12.18 15.93 12.28 14.17 10.73 1981--igh Low 20.06 12.04 16.72 10.20 15.05 10.64 15.85 10.70 18.70 11.51 18.04 11.26 20.64 15.75 16.54 12.55 15.65 12.27 15.03 11.81 17.62 14.05 17.72 13.98 13.21 9.49 18.63 14.80 19.23 14.84 17.46 13.18 1981--Nov. Dec. 15.85 18.90 13.73 15.49 12.66 13.23 13.61 14.77 15.68 18.65 15.18 18.07 16.06 20.35 13.31 13.65 12.68 12.84 12.37 12.40 13.85 14.51 13.91 14.38 9.56 10.11 14.21 14.79 15.53 15.21 13.55 13.62 1981--Jan. Feb. Her. 19.08 15.93 14.70 15.02 14.79 13.36 12.62 12.99 12.28 13.88 14.13 12.98 17.19 16.14 14.43 16.58 15.49 13.94 20.16 19.43 18.05 13.01 13.65 13.51 12.57 13.19 13.12 12.14 12.80 12.69 14.12 14.90 14.71 14.17 14.58 14.41 9.66 10.10 10.16 14.90 15.13 15.40 14.87 15.24 15.74 13.55 14.13 14.18 Apr. May June 15.72 18.52 19.10 13.69 16.30 14.73 12.79 14.29 13.22 13.43 15.33 13.95 15.08 18.27 16.90 14.56 17.56 16.32 17.15 19.61 20.03 14.09 15.08 14.29 13.68 14.10 13.47 13.20 13.60 12.96 15.68 15.81 14.76 15.48 15.48 14.81 10.62 10.79 10.67 15.58 16.40 16.70 16.54 16.93 16.17 14.59 15.31 15.02 July Aug. Sept. 19.04 17.82 15.87 14.95 15.51 14.70 13.91 14.70 14.53 14.40 15.55 15.06 17.76 17.96 16.84 17.00 17.23 16.09 20.39 20.50 20.06 15.15 16.00 16.22 14.28 14.94 15.32 13.59 14.17 14.67 16.30 17.21 15.73 16.82 17.33 11.14 12.26 12.92 16.83 17.29 18.16 16.65 17.63 18.99 15.76 16.67 17.06 Oct. Nov. 15.08 13.31 13.54 10.86 13.62 11.20 14.01 11.53 15.39 12.48 14.85 12.16 18.45 16.84 15.50 13.11 15.15 13.39 14.68 13.35 16.94 15.56 17.24 15.49 12.83 11.89 18.45 17.83 18.13 16.64 16.61 15.10 Oct. 7 14 21 28 15.46 14.93 15.32 14.87 14.25 13.44 13.43 13.29 14.11 13.44 13.55 13.60 14.22 13.50 13.80 13.62 16.04 15.21 15.16 15.30 15.44 14.67 14.65 14.74 19.29 18.71 18.00 18.00 15.94 15.29 15.37 15.61 15.31 14.86 15.04 15.45 14.74 14.39 14.61 15.01 16.94 16.96 17.21 17.38 17.16 12.73 12.53 12.99 12.99 18.63 18.53 18.39 18.44 17.74 18.51 16.80 16.30 16.36 16.97 Nov. 4 11 18 25 14.79 14.01 13.17 12.42 12.70 11.55 10.54 10.20 12.74 11.83 10.97 10.64 12.72 11.51 10.97 10.92 14.67 13.43 12.29 11.64 14.21 13.05 12.04 11.26 17.86 17.29 16.93 16.39 14.58 13.65 12.81 12.69 14.61 13.73 13.12 13.15 14.35 13.76 13.18 13.08 17.20 16.88 15.89 14.65 14.52 12.44 11.43 11.71 11.98 18.37 18.02 17.70 17.21 16.82 16.45 16.08 15.15 14.62 14.68 2 9 16 23 30 12.48 12.04 12.26 10.41 10.26 10.84 10.84 10.82 11.50 10.70 10.77 11.60 11.51 11.67 12.54 11.26 11.39 12.20 15.93 15.75 15.75 12.96 13.17 13.60 13.23 13.45 13.67 12.99 13.19 13.42 14.96 15.44 14.77 15.18 15.28p 12.18 12.89 13.00 16.90 16.94 n.a. - 14.96 16.76 15.36 - 15.49 12.22 12.38 12.27p 10.82 11.14 10.87 11.65 11.68 11.50 12.62 12.61 12.85 12.25 12.23 12.42 15.75 15.75 15.75 13.70 13.68 13.58p 13.84 13.71 13.49p 13.55 13.48 13.30p Dec. Daily-De,. 11 17 18 - NOTE: Weekly data for columns 1, 2, 3, and 5 through 10 are statement week averages of daily dat. Weekly data in column 4 ae average rates st in the auction of 6-month bills that will be issued on the Thursday following the end of the statement week. For column 11, the weekly date is the mid-point of the calendar week over which data are averaged. Columns 12 and 13 are 1-day quotes for Friday and Thursday, respectively, following the end of the statement week. Column 14 s an average of con. trat interest rate on commitments for conventional first mortgages with 80 percent loen-to-value o- 14.62 14.85 ratios mad by a sample of insured savings and loan associations on the Friday following the end of the statement week. The FNMA auction yield is the average yield in a bi-weekly auction for short-term forward commitments for government underwritten mortgages; figures exclude graduated payment mortgages. GNMA yields are average nt yields to investors on mortgage-backed securities for immediate delivery, assuming prepayment in 12 years on pools of 30-year FHA/VA mortgages carrying the coupon rate 50 basis points below the current FHA/VA ceiling. FR 1367 (7/1) Table 2 Net Changes In System Holdings of Securities 1 December 21, 1981 Millions of dollars, not seasonally adjusted Period 1976 1917 1978 1979 1980 1980--Qtr. Il 1981--qtr. I II III 1981-June Treasury bi. e chennl within 1-year 1.5 &10 over fO tot total 642 553 1,063 434 811 5,18 4,660 7,962 5,035 4,564 863 4.361 870 6,243 -3,052 472 517 1,184 603 912 3,025 2,833 4,188 3.456 2,138 1,048 758 1,526 523 703 -3,298 -58 137 100 541 -- 236 - 321' - -2.514 -23 115 122 469 607 164 64 89 182 2,135 2.912 4 Treasury coupons nol purchases* Federal agencies not purchases 0 | o 1 | | ver 10 within 1-year I 105 -47 131 217 469 792 45 317 398 203 428 104 5 29 114 213 24 24 total 1,225 1,379 308 Oct. Nov. -1,116 1,750 891 1,433 127 454 668 3,507 -2,892 -1.774 -2,597 2,462 1,234 100 -2,157 -1 -1,381 1,107 -23 636 976 -2,555 2,944 3,855 -1,694 -1,352 425 179 1,502 2,200 1,379 275 1,768 -843 -500 -1,131 2,333 2.747 - - - FRPs 6,227 10,035 8.724 10,290 2,035 976 100 Net Iota 204 July Aug. Sept. Not rhnge oul ingh 100 -- 133 360 - -- 494 -209 1981--Oct. 7 14 21 28 -169 -414 131 -454 -169 -429 131 -454 -7,855 8,095 5,064 -7,234 Nov. 4 11 18 25 -211 116 : 1,383 276 133 -211 116 1,383 770 4,634 -2,451 1,975 -216 2 1,273 150 822 -- 1,263 150 1,547 439 -1,685 -160 Dec. 9 16 23 30 LEVEL-Dec. 16 729 36.1 11.8 16.6 78.2 2.3 5.3 1.0 0.6 9.1 139.7 -2.0 I Change from end-of-period to end-of-period. 6 In addition to the net purchases of securities, also reflects changes in System holdings of bankers' 2 Outright transactions in market and with foreign accounts, and redemptions (-) In bill uctions. acceptances, direct Treasury borrowing from the System and redemptions I-) of agency and Trea ury coupon Issues. 3 Outright transactions In market and with foreign accounts, and short-term notes acquired In exchange for maturing bills. Excludes redemptions, maturity shifts, rollovers of maturing coupon 6 Includes changes in RPs (+), matched sale purchase transactions (-), and matched purchase sale issues, and direct Treasury borrowing from the System. transactions (+). 4 Outright transactions in market and with foreign accounts only. Excludes redemptions and maturity shifts. STRICTLY CONFIDENTIAL (FR) CLASS II-FOMC Table 3 Security Dealer Positions and Bank Positions Millions of dollars U.S. government securities dealer positions _ _ _n bills cash cash couIupons futures and forwards s coupons 1980--High Low 8,838 1,972 2,263 -1,482 1981--High Low 15,668 1,273 4,633 965 -12,865 -5,930 1980--Nov. Dec. 3,047 4,287 149 20 1981--Jan. Feb. Mar. 9,985 13,317 13,597 Apr. May June December 21, 1981 Member bank resrve Underwriting syndicate positions corporte bonds I municipal bonds lon borrwing at RB adjustment seasonal Extended ICLWJ al) total 3,298 12 174 5 816 0 3,438 215 -4,676** -2,514 2,597 334 309 99 464 2,912 561 -7,068 -9,812 -2,663 -2,751 1,963 1,571 97 116 * 3 2,059 1,690 1,584 1,812 3,415 -11,976 -12,203 -11,561 -2,884 -2,798 -3,251 1,204 1,135 789 120 148 196 22 21 15 1,395 1,303 1,000 8,518 1,676 5,547 3,149 2,745 3,278 -7,277 -6,486 -9,934 -3,050 -2,822 -2,925 1,168 1,154 1,139 162 269 291 8 5 7 1,338 2,228 2,037 July Aug. Sept. 2,950 4,324 5,611 3,314 2,242 1,614 -8,340 -10,071 -9,830 -3,012 -2,972 -2,856 1,429 1,105 933 247 235 222 3 80 301 1,679 1,420 1,456 Oct. Nov. 4,781 5,037** 1,629 3,821** -8,575 -7,120** -3,655 -4,307** 591 403p 152 438 5 16 p 1,181 6 63p 95 p Oct. 7 14 21 28 5,640 5,577 4,247 4,056 1,280 2,133 1,071 1,889 -8,110 -8,919 -8,419 -8,001 -3,438 -3,953 -3,789 -3,351 577 529 656 576 156 158 155 147 413 423 444 464 1,146 1,110 1,255 1,187 Nov. 4 11 18 25 5,108 5,908 4,705 2,494 3,713 3,259 -10,242 -8,530 -6,299 -3,884 -4,427 -4,338 651 134 130 101 4,349* 4,727** -5,986* -4,302** 452 111 126 123p 1,237 1,009 561 337p 2 9 16 23 30 4,484** 3,691** -6,444** -4,632** 3,200** 1,070P* 2,779** 5 74p** -6,383* -4,782p* -4,676** 2 -4, 06p** Dec. NOTE: Government securities dealer cash positions consist of securities already delivered, commitments to buy (sll) securities on an outright basis for immediate delivery (6 business days or le), and certain "when-isued" securities for delayed delivery (more than 5 business days). Futures and forward positions include all other commitments involving delayed delivery; futures contracts are arranged on organized exchanges. Underwriting syndicate position conists of issue in syndicate, excluding trading positions. 34 145p 151p 463 p 198p 69 p 41p 30 p 65p 12 5 p 125p 135p 3 17 p 8 61 p 398p Weekly data are daily averages for statement weeks, except for corporate and municipal issuein syndicate, which are Friday figures Monthly averages for excess reserves and borrowing are weighted averages of statement week figures. Monthly data for dealer futures and forwards are end-of-month figures for 1980. * Strictly confidential FR 136 (781) 

Federal Reserve (1981, December 21). Bluebook. Bluebooks, Federal Reserve. https://whenthefedspeaks.com/doc/bluebook_19811222

@misc{wtfs_bluebook_19811222,
  author = {Federal Reserve},
  title = {Bluebook},
  year = {1981},
  month = {Dec},
  howpublished = {Bluebooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/bluebook_19811222},
  note = {Retrieved via When the Fed Speaks corpus}
}