The Honorable Henry S. Reuss
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Second, incoming economic data in recent weeks have suggested to economic and financial observers that the so-called economic pause was over and that more rapid economic growth would soon be resumed. The expected strengthening of private credit demands therefore exerted some upward pressure on interest rates--particularly on intermediate and long-term issues.

Finally, the announcement of the administration's proposed fiscal package and the recent Treasury financing had a marked effect on interest rates, especially in longer-term markets. The fiscal package was announced after the market closed on Friday, January 7. At the opening of the market on the following Monday, yields on intermediate- and long-term issues were 10 to 20 basis points higher. Announcement of the Treasury financing on Wednesday, January 26--which included about $3 billion of new cash--was again followed by yield increases of about the same magnitude. These rate increases reflected anticipations about the effect that increasing credit demands by the Federal Government would have on markets, especially in a period when private credit demands might also be expected to strengthen.

As 1977 progresses, the trend of interest rates will depend fundamentally on the pace of economic activity as well as on progress made in curbing inflation. As private credit demands strengthen, it may become increasingly difficult to finance at current interest rates the large Federal deficit expected this calendar year. On the other hand, any improvement in the outlook for inflation will tend to moderate interest rate pressures associated with expanding economic activity. In other words, if prices were to increase less rapidly, investors and savers would become more willing to make funds available at lower interest rates because they would expect the real value of their saving to be better maintained. It is well to keep in mind that reduction in the rate of inflation has been a very significant factor in the general decline of interest rates during the past two years.

Sincerely yours,

Arthur F. Burns

The CHAIRMAN. On page 6 of your statement you say, "Mortgage interest rates are gradually declining." Well, I would agree that they certainly ought to be declining, but the data to which I have access, which is in our Economic Indicators, show that home mortgage interest rates for the last period reported, which is December, were at 9.10 percent, which I believe is the highest figure in history. They have gone up steadily from 1971, as indicated on page 30 of the indicators, and therefore you must know something I don't know.

[This series contains estimates of effective rates on conventional mortgages reflecting fees and charges as well as the contract rate. Although all currently estimated mortgage series may have significant defects, this series appears to be a better guide to consumer costs for mortgages than alternative series which neglect fees and charges which should be included in calculating the actual rate paid.]

Dr. BURNS. I am sure there are many things you know that I don't know. There are some things I know that you don't know. [Laughter.]

The CHAIRMAN. And this is one I am dying to know, too.

Dr. BURNS. There are various series on interest rates on mortgages, and they vary a good deal in reliability. The series that I pay most attention to, and which I think is most reliable, is a series that is based on data compiled from about 120 savings and loans associations. It reflects the average interest rate on conventional mortgage loans for one-family homes.

The series which is available weekly, reached a peak of over 10 percent in the week ending September 27, 1974. According to the latest reading, it is 8.73 percent. At the beginning of 1976 it stood at 9.10 percent, and it came down gradually during the year.

One thing to remember is that the demand for mortgages is extraordinary, not only to finance new construction, but also to refinance existing mortgages. Mortgages are being refinanced not only in connection with real estate activity, which has been at record levels, but also-in view of the increase in the equity that many individuals have in their homes-in order to finance various family needs. The extraordinarily high demand for mortgages has served to moderate the decline in interest rates.

The CHAIRMAN. I have one final question. You have made the point very ably that the thing to look at increasingly is M2 and M. rather than M, because M, is getting a little passe because people don't keep as much in demand deposits as they used to.

That being so, and given the need to stimulate jobs which you acknowledge, why is the Fed keeping its present M, band while lowering its M2 and M3 band, particularly since in the fourth quarter actual M2 growth is over the top of the band? It would seem to me you would have done just the opposite, or better still, left it alone.

Dr. BURNS. These are very delicate questions, and they rest heavily on judgment. Three months ago we reduced the upper limit of the range for M1. This time we reduced the lower limit for M2 and M3. Actually, the changes were minimal.

But, you see, we are torn between various conflicting motives. How fast should we move in lowering our monetary growth ranges? In a deliberative body, as you can well understand, there is a variety of views on that subject.

Initially our M, growth range was 5 to 72 percent. We lowered the lower limit in January 1976, and the range became 412 to 71⁄2 percent. In April we lowered the upper limit, and the range became 412 to 7 percent. In November we lowered the upper limit, and the range became 412 to 612 percent.

We are retaining that range. We might have lowered it. We didn't. The CHAIRMAN. Mr. Moorhead?

Mr. MOORHEAD. Thank you, Mr. Chairman. And welcome, Chairman Burns.

I appreciate this excellent statement you have made. I am only disturbed by one point. In the beginning of your statement you say, you present the report of the Federal Reserve Board on the condition of the national economy, and it seems to me that the problem facing the Congress is this economic stimulus package which has been presented to us. And, except in a very general way at the end of your statement, you don't give us your view as to whether you consider the package too large or too small, whether you think the balance between expenditures or tax reductions or rebates is proper, nor do I get from your statement-I can't tell whether the statement assumes that the Congress will approve the package, disapprove it, or change it. On what assumption was it made?

Now, those are really two questions, sir.

Dr. BURNS. I was hoping and praying that I would not be asked this question. [Laughter.]

Let me say, first of all, that I think that President Carter has gone about the problem of diagnosing the state of the economy and devising a program with very conscientious care. He has put together a fiscal package which is smaller, more prudent, than many had urged on him-many members of my profession, and many others.

The package has a certain balance between tax reductions and expenditure increases. It also allows for cutbacks that might be made in planned expenditures in 1978 in the event that the economy expands briskly.

Taking it all in all, and considering the advice that the President has received from all sides, including the business community, I think he has done quite admirably.

I, however, have different views. As far as I can judge, the economy is improving on its own, and it is not clear to me, as of this day, that any stimulation is required. And I might say I am quite sure that President Carter and his advisers will be watching economic developments and will be responsive to new facts-as they emerge.

I don't want to talk about interest rates for the reasons I have indicated, but certainly an increased demand for loan funds by the Federal Government will affect financial markets and, in and of itself, will tend to release forces working toward higher interest rates. That is the way markets have always behaved.

Mr. MOORHEAD. Dr. Burns, do I understand-I realize you are trying to be very polite, but you are saying that you are happy that the stimulus package was not any larger, as some of your profession recommended, but that politely you would prefer a smaller package, or none at all? Is that correct, sir?

Dr. BURNS. I would have preferred to wait a little; yes. But I must say that what concerns me most, and where I have the largest doubt, is with regard to the proposal to send a check of $50 to practically every living American. The Treasury doesn't have this money. The Treasury has to go out and borrow it.

I don't think it's a good habit for the Treasury, for the Congress, for our country, to get into. I think this is an inefficient way of stimulating the economy. All that it can do, as far as I can judge, is to stimulate retail trade for a few weeks. I've yet to find a businessman who would be willing to increase his spending on new plant or equipment-which must pay its way over the next 5 or 20 or 25 years— just because retail trade has gone up for a few weeks.

But, these are my views. I am probably in a distinct minority. I was born some years ago. I need hardly announce that fact. I have inherited certain attitudes. I still believe that people should not receive any gifts of money from their government. I still believe that people should earn the money they receive.

I recognize, of course, that private charity is an important feature of our lives, as it has been through the ages. That is a lesson that the Bible keeps repeating. I recognize also that in our modern society people lead lonely lives in cities, and are subject to all kinds of hazards that people were not subject to when they lived largely on farms. I recognize that there is considerable room for assisting those who are in need-those who are handicapped, those who are poor-and that government must play a role in that.

But I don't see why Members of this Congress, or I, or millions of other citizens should be receiving gifts from the Federal Government. I think we should be contributing to the cost of the Government. That is our duty as citizens.

These are very old-fashioned views, but they are still mine.

Mr. MOORHEAD. Mr. Chairman, my time has expired. Thank you very much.

The CHAIRMAN. The Chair will say, in passing that Chairman Burns is not in as much a minority, at least in this room, as he may think. He can't look behind him, but I have never seen such a rash of headnodding and partner-nudging as went on during that statement. Mr. Stanton?

Mr. STANTON. Thank you, Mr. Chairman. You took the words right out of my mouth. Doctor, don't be too surprised with what happens to the $50 package.

Dr. Burns, first let me compliment you on your statement. It is excellent. And further, in your statement, your appearance today, as it has in the past, has added an element of stability and confidence in the economy.

I was pleased with your outlook and optimism for 1977, and I'm fully aware of the warning signals that you have given us.

We're also aware, Doctor, that these 5 minutes go by pretty fast up here. And the first two questions, I wondered if you would just give an answer for the record or send it to the chairman, and the chairman could send it out to all of the members.

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But, first I would be interested in any recommendations that you might have, as Congress has charged you with this responsibility, of controlling the monetary aggregates, and in view of the developments of the electronic transfer systems and NOW accounts, and loss of membership in the Fed, I personally would be interested-and I am sure the committee would-in any recommendations you might have to improve the ability of the Fed to measure and control monetary aggregates. That would be question No. 1.

[The following material was submitted by Dr. Burns for inclusion in the record at this point:]

The development of NOW accounts and related interest-bearing transactions balances, as well as the erosion of membership in the Federal Reserve, pose potentially serious problems for the Federal Reserve's ability to control the monetary aggregates. This is because both of these developments tend to increase the share of the nation's money supply that is not subject to System reserve requirements.

To prevent significant deterioration in the System's ability to control the monetary aggregates, I would suggest that "transactions balances" at financial institutions other than member banks be made subject to reserve requirements set by the Federal Reserve. By "transactions balances" I mean deposits against which checks or drafts can be written, including all demand deposits, NOW accounts, credit union share drafts, and similar balances.

I might add that the erosion of membership in the Federal Reserve not only threatens to weaken the System's ability to control the monetary aggregates but might also adversely affect the soundness of the banking system. Nonmember institutions do not have the ready access to credit at Federal Reserve Banks discount windows that members have and thus are more subject to disruptive pressures from unexpected deposit and loan flows.

The principal reason for the erosion of membership is the competitive dis advantage at which member banks are placed relative to nonmember banks by the requirement that they hold a large portion of their reserves in non-interest bearing form.

Whether or not nonmember banks are made subject to System reserve requirements, I would suggest that interest be paid on all reserve balances held at Federal Reserve Banks. Such interest payments would tend to reduce the incentive for member banks to leave the System. If reserve requirements are extended to nonmember banks, the payment of interest on reserves would provide some compensation to them for the cost of holding reserves.

Mr. STANTON. Second, as we get back to the administration's economic package, and if it is adopted in much the same form that it has been put out, it is obvious that we will see many weeks when the money supply figures and M, will increase at a very rapid rate for short periods of time.

I just wondered if you would comment later on a suggestion that perhaps you could include in your weekly statements appearing in the papers on Friday several more lines which would give a 52-week moving average for the M1, M2, and M3, and thus showing the change in the monetary aggregate over a large period, say, over 12 months.

Dr. BURNS. That may be a good idea. I will discuss it with my staff. I think there may be an advantage in doing that.

I must say to you in all honesty, I wish that we had never started publishing weekly figures on the money supply. They are sheer noise. They only mislead and confuse. But if we discontinued them, there would be an outcry from the press and probably from a good many Congressmen, that the Federal Reserve is withholding information. Therefore, we keep on putting out these figures. They are doing nobody any good, in my judgment.