Federal Reserve officials, tracking financial institutions, brokerage firms and the economy in general in the wake of the recent stock market plunge, so far have found no indication of serious damage.
Senior Fed officials expressed amazement at the end of last week that the huge stock market decline has had so little fallout. While many brokerage firms have suffered large losses, only a few smaller firms have failed.
No one appeared ready to declare the crisis over, but the more time that passes without any major institutional or firm failures -- which could send shock waves through the markets -- the more relaxed Fed officials have become.
Officials said no financial institution has sought federal help, such as large loans from the Federal Reserve, because of market-related losses. Although bank loans to brokers and others involved in the market jumped by $5 billion or more shortly after the plunge, officials took that as a sign that standby lines of credit were being used in a normal way following a unexpected shock that called for more cash.
Since Oct. 19 -- "Black Monday," when the value of U.S. stocks fell by more than $500 billion -- the Federal Reserve Board in Washington has had daily telephone conference calls with officials in the system's 12 regional Federal Reserve banks. The calls have helped keep the banks informed about what was being done to try to calm the markets, while officials at the banks have reported on what careful inquiries around their regions had turned up in the way of economic effects.
Early on the Tuesday morning following Black Monday, Fed Chairman Alan Greenspan issued a brief statement saying that the central bank stood ready to supply however much cash was required to keep the U.S. economy growing steadily. Since that time, the Fed has pumped enough money into the banking system, through the purchase of government securities, to lower short-term interest rates between 1 and 2 percentage points.
The Fed's principal policymaking group, the Federal Open Market Committee, or FOMC, will meet tomorrow to set a course for monetary policy in the coming weeks. The major question on the agenda, according to one Fed official, will be how long the central bank should continue to keep the money spigots open.
Fed Governor Wayne Angell told a House Banking subcommittee Friday that the Federal Reserve could permit a "slight bulge" in the money supply without it having any inflationary consequences as long as the added uncertainty in financial markets causes people and firms to hold larger cash balances than they normally would.
Other Fed officials said the fact that rates on three-month Treasury bills have come down significantly more than many other short-term rates, and that the difference in rates on three- and six-month Treasury bills has widened substantially, are signs of this desire to increase what economists call "precautionary balances."
The demand for three-month Treasury bills often goes up in times of market uncertainty. The T-bills pay interest yet can easily be turned into cash at any time, and they are much less risky than longer-term investments, even other U.S. government securities.
But Angell also said the Fed would at some point withdraw the added cash from the banking system to avoid adding to future inflationary pressures.
The FOMC members -- Greenspan, the other five Fed governors and five of the 12 Federal Reserve Bank presidents -- will have somewhat more freedom to choose a monetary policy course than they did at their last meeting on Aug. 18. At that time -- and until after the stock market plunge -- the Reagan administration and the Fed were committed to trying to keep the value of the dollar from falling below set levels compared to the Japanese yen and West German mark.
One way of doing that was to raise short-term interest rates, which the Fed did in late August and early September. It acted to try to calm a jittery, weakening bond market in which rates on long-term bonds were rising rapidly.
The reasons for the bond market jitters were complex, as always, but one element was that many bond traders expected the Fed to have to boost rates in order to prop up the dollar. Moving in anticipation of an expected event, as markets normally do, traders then bid up rates, said one Fed official.
In September, the Fed raised its discount rate -- the interest rate it charges on loans to financial institutions -- from 5.5 percent to 6 percent and simultaneously began to make cash less readily available to the banking system, steps that generally increased short-term interest rates.
The discount rate has not been cut. However, cash has been flowing to the banks in a sufficient quantity to drive short-term rates down once more. Rates on long-term government bonds have also come down by nearly 1.5 percentage points, to about 9 percent.
When the market more or less forced the Fed's hand in September, some senior Fed officials were not all that reluctant to act, because they felt the economy was expanding rapidly enough that some restraint was probably needed anyway. In particular, the industrial sector was growing strongly as the demand for U.S. exports rose.
But the market slump has called all that into question. Most analysts, including some Fed officials, expect the big drop in U.S. wealth to cause consumers to be more cautious in their spending and to make some businesses rethink capital investment plans. There is little information available about how much of an impact the market decline will have, Angell said.
"No one would suggest that it would tend to cause consumer or business spending to be increased," Angell told the hearing. "It's very important that we ... keep track of what happens as it happens and respond to forces as they occur."
Given the lack of hard information about the future impact of the market plunge, analysts said the FOMC likely will decide this week to keep the money flowing. Besides, if the fall in stock prices does take a percentage point or two out of economic growth in 1988, it will hold down inflation and push off the point at which the Fed would have to tighten monetary policy in response to a faster rise in prices, said a Fed official.
Some analysts outside the Fed note that all of this has happened on the eve of an election year. The concern generated by Black Monday may make it harder for the Fed to move against inflation if central bank officials decide that is necessary. For instance, Sen. John Heinz (R-Pa.) last week introduced a bill directing the Fed to cut its discount rate to 5 percent this week to make sure the nation stays out of a recession.
"It has increased everyone's tolerance for inflation," said economist George von Furstenburg of Indiana University. He said he believes that the political impact of the market's record drop will make it far harder for the Fed to tighten its policies in 1988.
As a consequence, von Furstenburg, unlike most other forecasters, has raised rather than lowered his prediction for economic growth over the next year. Instead of 2 percent growth or less next year, he now thinks it will be "a solid 3 percent."