A History of the Federal Reserve, Volume 2, Book 2, 1970-1986 by Allan H. Meltzer

Author:Allan H. Meltzer
Language: eng
Format: mobi
Published: 2011-01-13T09:07:00+00:00

Historically high interest rates in the United States relative to foreign rates strengthened the dollar. As interest rates declined after March the dollar depreciated. The Federal Reserve, the Treasury, and foreign central banks intervened using outright purchases and borrowing on swap lines or repaying.

Member bank borrowing declined also in April. The staff anticipated $2.75 billion in early April, but the weakening economy and the surcharge on borrowing by large banks reduced the total. By the end of April, the staff expected borrowing of $L.25 billion including $6oo million to a distressed bank.SS Staff forecasts of shortterm changes were often wrong, and this was particularly true of borrowing. Under the method used to set growth of nonborrowed reserves, forecast errors for borrowing often resulted in large errors in total reserve growth.

At the April 22 meeting, several members recognized that the recession was a test of reserve control. These members wanted to maintain a firm policy. Others wanted to lower interest rates and increase money growth in response to recession. Frank Morris (Boston) stated the case for maintaining a restrictive policy.

If we abandon, for all practical purposes, our money growth targets at the first occasion we find interest rates that are uncomfortable, then how is the market going to have any confidence that when we require uncomfortable interest rates on the up side we will not then also abandon our money growth targets? We would be right back where we have been.... We've simply got to ride it through. (FOMC Minutes, April 22, i98o, 13)

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