Prior discussion:
speaker: CHAIRMAN VOLCKER.
text: I say I don't know how we can do it in the current institutional setting because we don't control discount window borrowing under any of these proposals in the short run. That is a question to which I will return. But, can the discussion proceed on the basis of working within the framework of an immediate nonborrowed reserve technique with an eye on total reserves, leaving the question of emphasis open? Or do we [want to discuss] going back to federal funds or take another step toward some other kind of aggregate? Is there anybody who wants to argue the case for any of these extremes? 

MR. GRAMLEY. "And, although we can't measure it, it does have some adverse effects on investment proceedings."

Full utterance: I'd like to argue the case for going back to the federal funds target, not because I think the Committee is likely to agree with me or go in that direction but because I think the value of using that technique needs to be kept in mind when we ask ourselves what we are doing with the present technique or how we are going to improve it. First, we have to recognize that the way we communicate our [policy actions] to economic activity today is through movements of interest rates. Interest rates are the cutting edge of policy. We have eliminated almost completely the changes in credit availability that were so important in years past. And I think one could argue that it's unconscionable for the central bank not to be concerned about the cost of credit, the cost of money, when that is what is communicating its effects to the real economy. Second, I would argue that increasingly over time in recent years we have found that instability of money demand has become a very, very large problem in an operating technique of this kind. I'm not at all sure that that is going to go away. It may well be a characteristic that's endemic in a system in which there is so much inflation that interest rates get to a point where people are moving assets from one area of the financial markets to another and where financial institutions are innovating to make this possible. We may find that five years from now we have problems every bit as large as we face prospectively in 1981 in trying to interpret what is happening to the narrow money measures. Third, as I mentioned, I think under present institutional arrangements we can operate to control the growth of money quite as precisely with the federal funds target procedure as we can with reserve targets. Finally, I think it is important that this technique we adopted does indeed communicate a lot more of the variability in interest rates in the short-term end to the long-term end. And, although we can't measure it, it does have some adverse effects on investment proceedings. Even if people could hedge this interest rate risk, they are going to pay to engage in this hedging transaction. Mr. Chairman, I think you are right--and this is what we need to keep in mind--that there really is only one reason why we should have abandoned the federal funds target procedure to go to the reserve target. And that is because if we operate on federal funds, we explicitly take responsibility for what is happening to interest rates and then this becomes a very, very difficult world to live in. But we need to keep that in mind. If that's the reason we are on this new strategy and no other, then we can go about conditioning how we apply the new strategy in ways to take advantage of the economic aspects of operating on a federal funds target.

Opinion: no