March 27, 1990 FOMC Record of Policy Actions

FOMC minutes

taken on the recommendation of the Manager for This action was Domestic Operations. The Manager had advised that the current leeway of $8 billion for changes in System Account holdings might not be sufficient over the intermeeting period because of a large projected rise in Treasury balances at the Federal Reserve Banks after the tax payment date in mid-April. 3. Authorization for Foreign Currency Operations At this meeting, the Committee reviewed its operations in the foreign currency markets. Transactions for System Open Market Account in those markets are carried out within the general framework of policy on exchange rates established by the U.S. Treasury in consultation with the Federal Reserve and are implemented at the Federal Reserve Bank of New York, typically in conjunction with similar transactions for the U.S. Treasury's Exchange Stabilization Fund (ESF). Members commented that such operations at times can serve a useful purpose, especially in helping to avert or to correct disorderly conditions in the foreign exchange markets. At the same time, many expressed strong skepticism that intervention operations can by themselves have a lasting effect on the value of the dollar in foreign currency markets, given that the effects of these operations on bank reserves are routinely sterilized. However, some argued that even sterilized intervention can, in some circumstances, have desired effects on exchange rates, especially if carried out in concert with parallel operations by the monetary authorities of other nations or if such operations signal adjustments to fiscal or monetary policies.

very large purchases of foreign currencies Over the past year, System holdings to historically high levels, although had raised were still moderate compared with relative to U.S. imports such holdings members expressed concern that the those of other countries. Some the risk of sizable losses if the increased System holdings carried dollar were to strengthen substantially. While recognizing the potential difficulties that were involved, a majority of the members agreed that continued System operations in the foreign exchange markets in association with Treasury transactions can serve a useful purpose. Such operations can contribute to national economic objectives under certain circumstances, and the System should continue to participate in the formulation of exchange rate policy. However, they also felt that the cumulative amount of foreign currency operations for System Account might have been more limited than had been the case over the past year. At the conclusion of this discussion, the Committee approved an increase from $21 billion to $25 billion in the limit on holdings of foreign currencies that is specified in paragraph 1.D of the Committee's Authorization for Foreign Currency Operations. That limit applies to the overall open position in all foreign currencies held in the System Open Market Account and is based on historical acquisition costs. The limit had been increased in steps from $12 billion in May 1989 to $21 billion in December 1989. While purchases of foreign currencies had been relatively limited in recent months, such purchases in combination with accruing interest on holdings had raised the total to nearly $21 billion at the time of the meeting.

Votes for this action: Messrs. Greenspan, Corrigan, Boehne, Boykin, Johnson, Kelley, Ms. Seger, Mr. Stern. Votes against these actions: Messrs. and Angell, Hoskins, and LaWare. LaWare dissented because they did Messrs. Angell, Hoskins, and to provide System funding for additional intervention in the not want They were uncomfortable with the large foreign exchange markets. holdings of foreign currencies now in the System Account and felt that intervention policies could lead to sizable additional aggressive in such holdings. Messrs. Angell and Hoskins also expressed increases concern that the intervention carried out over the past year had undermined the credibility of the System's monetary policy by contributing to uncertainty concerning the System's priority toward achieving price level stability. Mr. Hoskins also believed that intervention was ineffective unless accompanied by changes in monetary policy that would be inconsistent with price stability objectives. Mr. LaWare felt that massive and frequent operations tended to reduce the effectiveness of intervention when the latter might otherwise prove useful in countering disorderly conditions in the exchange markets. Agreement to "Warehouse" Foreign Currencies On September 19, 1989, the Committee had approved an increase from $5.0 billion to $10.0 billion in the amount of eligible foreign currencies that the System was prepared to "warehouse" for the Treasury and the ESF. Currently, a total of $9.0 billion of such currencies was being warehoused for the ESF. The purpose of the facility is to supplement as needed the resources of the Treasury and the ESF for financing their purchases of foreign currencies. Warehousing involves spot purchases of foreign currencies from the Treasury or the ESF and

simultaneous forward sales of the same currencies at the same exchange rates to the Treasury or the ESF. Under a longstanding interpretation by the Committee and its General Counsel, warehousing transactions are open market operations in foreign currencies that are authorized under the Federal Reserve Act. Warehousing is included under paragraphs 1.A and 1.B of the Committee's "Authorization for Foreign Currency Operations" and its use is referenced under paragraph 3.B of the Committee's Foreign Currency Directive. At this meeting, the Committee agreed to accommodate any further Treasury and ESF requests for financing under the warehousing facility up to a limit of $15 billion. Votes for this action: Messrs. Greenspan, Corrigan, Boehne, Boykin, Johnson, Kelley, Ms. Seger, and Mr. Stern. Votes against these actions: Messrs. Angell, Hoskins, and LaWare. Messrs. Angell, Hoskins, and LaWare indicated that in light of the significant policy issues raised by the duration and scale of the intervention activity, they were unable to concur, as a matter of policy, with the Committee's decisions to increase further the authorization for warehousing foreign currencies. Messrs. Angell and Hoskins also were concerned that substantial increases in the authorized limits on holdings of foreign currencies by the Federal Reserve System for the U.S. Treasury and the ESF under the warehousing authority were inappropriate in the absence of a definitive indication of Congressional intent in this area. The transactions in question, which are repurchase agreements that have the characteristics of a loan to the Treasury, could be viewed as avoiding the Congressional appropriations process called for under the Constitution.