National Outlook Moving Into the Eighties

By John Russell Seattle-First National Bank Seattle, wa.

T HE VALUE of the dollar is I sinkingl the price of gold is rocketing; and inflation remains intransigent. The Fed moves to stabilize exchange rates...

Is it 1979 or 1978? It could be either. Last year's dollar rescue effort was successful for about six months until it became clear that inflation was not relenting and that the administration had no coherent policy for dealing with energy shocks.

Will this year's answer by the Federal Reserve be any more successful than last year's? The proffered solutions are notably different. The 1978 policy was essentially a stop-gap emergency support effort to buy time while a depreciated dollar improved our trade balance and while inflation

(hopefully) cooled during an anticipated economic slowdown.

No such luck.

The revolutionary government in Iran cut oil exports by a third, giving OPEC hawks the oppor- tunity to ram through 250lo price rncreases. Almost as bad, a modest slowdown in domestic demand was not enough to appreciably retard price gains, especially in housing.

This year's remedy, however, is a very hard dose of monetary restraint. In early October, the discount rate was raised 100 basis points, and reserve requirements were imposed to boost the cost of purchased money to commercial banks.

More importantly, the Fed promises to weigh reserve growth more heavily while relying less on rnterest rates to measure the stringency of monetary policy. The new attitude at the Fed insures that the recession, which probably tory in the marketplace as there was in 1969 and 1974. Additionally, there is no high inventory level at the mill.

On November l5th, there was over a billion feet of lumber on open interest sold or bought into the futures market for deliverv through September of 1980. It's ; new factor in the distribution of forest products that didn't exist in that magnitude in 1969 or 1974. Although this market involves basis trading, species correlations and forward pricing in a complex manner, it does affect the lumber

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Sfory at a Glance

began early last Spring, will be worse during the next six months than it was during the last six. Sharply higher interest rates will induce sharp drops in inventory accumulation, residential construction, and consumer purchases of big-ticket items.

The important question for the 1980s is not so much "how deep this recession?" though that is not entirely clear, but rather, "how rapid the ensuing recovery?" Will the Fed continue its past pattern of pushing up reserves fast to lower interest rates and reliquify the (Please turn to page 35)