funds. We are saying they have enough new powers coming on with S. 1720; let them get experience in these first, and then we will change. In other words, a two-step approach to the thrifts; a one-step as far as Glass-Steagall is concerned, with the commercial banks. I am one who believes in deregulation, not only because it is the Adminstration's policy, but because I am a competitor, and I think the less the Government impedes competition, the better off the actual players are. I would therefore much rather see us deregulate others to compete with the money market funds than to try to regulate money market funds in order to slow them down to make the competition more equal. Senator DIXON. Thank you. Now, finally, I am sure you are aware--as we all are-that you can get as many opinions from the Congress as you can from lawyers. And we have all read the many different comments about the modest drop in interest rates recently. Some say that interest rates will moderate further. Some say it is a short, cyclical matter, and that interest rates will go even higher toward the end of the year. So I know it is entirely speculative. But is there any light at the end of the tunnel? Secretary REGAN. There is a light. And it is not an oncoming train. [Laughter.] I think that the interest rates have peaked, Senator, and I think that although they never come down in a straight line that interest rates will be lower at the end of the year than they are currently. And I think the reason, of course, is that inflation is coming down. If you look at all the signs-industrial production is off, automobile sales are off, retail sales are barely keeping even with inflation, leading indicators are down-I think the whole thing points to the fact that we are in a flat period. The President called it yesterday a recession. He said a light one; I agree. I think that in this type of period you naturally expect interest rates to come down, and I think that is what we will see. Now, to the extent that we keep a slow, steady monetary growth, we will pull out of this recession, without too much damage, and as that happens, I hope we have the thrift industries ready to do what it has done so successfully in the past, and that is to help the housing industry. Senator DIXON. Thank you, Mr. Secretary. The CHAIRMAN. Mr. Secretary, there are a large number of additional questions here, but as I get to the bottom of the stack they become more and more technical. Your time is valuable. So what I would like to do is submit additional questions to you for response in writing. And I am sure some of the other members who could not be here this morning would like to do that as well. [The answers to the following questions from Senator D'Amato were received in time for the publication of this volume. Answers to further questions of Secretary Regan will be printed in part II of this hearing record:] 85-952 0-81-4 QUESTION 1: Senator D'Amato's questions regarding be fore The Senate Banking Committee In today's prepared testimony with regard to "Expanded Powers for Thrift Institutions," you attribute a major portion of the thrift industry's problems to the imbalance between increasingly rate sensitive liabilities and long-term relatively rate insensitive assets. Under your chairmanship the DIDC has established a new 4 week averaging formula for the rate on a six month money market certificate at an estimated cost to savings and loans of $300 million. The DIDC has totally removed interest rate ceilings on IRA and Keogh Accounts effective December 1, a move which many fear will precipitate a rate war of dangerous proportions. And finally among other things, the DIDC increased the passbook ceiling by 50 basis points at an estimated cost to savings and loans of $500 million, with you yourself questioning the wisdom of such an increase less then one month later. Mr. Secretary, would you tell the committee what strategy the DIDC is going to adopt to improve the imbalance between asset yield and liabilities which is currently plaguing our thrift industry? ANSWER: The DIDC's strategy to improve the imbalance between asset and liability yields has two major thrusts. The first includes supporting the expanded asset and liability powers for thrift institutions that are proposed in S.1720. The expanded asset powers should enable thrifts to invest some of their deposits more profitably in higher yielding, shorterterm consumer and commercial loans. The second is the DIDC's decision to deregulate interest rate ceilings primarily by The DIDC's deregulation strategy has been implemented by several recent actions: (1) As you mentioned, the DIDC has authorized the creation of a new market rate deposit instrument available only when placed in an individual retirement account (IRA) or Keogh plan. These retirement savings are generally longerterm, stable funds. The DIDC hopes that by allowing depository institutions to pay market rates for these funds that the institutions will be able to compete with other market rate investment alternatives for the large increase in retirement savings that should (as a result of the Tax Act of 1981) become available on January 1, 1982. We believe that "a rate war of dangerous proportions" will not result from this action. Well managed institutions will offer market interest rates that they can invest at a profit, offering higher rates would not be necessary or prudent. (2) The Committee has published for public comment a proposed schedule for progressively deregulating time deposits starting with a new three and one half year and over deposit category. This new time deposit category would have no Federally set interest rate ceiling and other characteristics that would make it attractive to depositors. The Committee has received repeated requests from depository institutions for a systematic method of phasing out rate ceilings in order for the institutions to plan their business in advance. (3) The Committee also voted to allow, but not require, depository institutions to change their MMC rate calculations to pay the higher of the current average auction rate on 26-week T-bills plus 25 basis points or a 4-week moving average of past auction rates on 26-week T-bills. Thus, when Treasury interest rates are declining faster than the rates paid by money market funds (MMFs), depository institutions will be able to compete for and retain maturing MMCs instead of seeing them withdrawn and deposited in higher yielding MMFs or other market rate instruments. Depository Institutions requested this competitive feature and the DIDC has given them the option to use or not use it as they see fit. When Treasury bill rates are declining, this alternative rate could increase the cost of MMCs for those institutions who offer the higher rate, however, the cost of the MMCs would be less than the cost of replacing the MMCs with money borrowed from the FHLBB or from commercial banks. When Treasury bill rates are rising faster than other market rates, some depository institutions might choose to lower their costs on MMCs by offering the lower average auction rate. (4) The Committee also voted to increase the ceilings on the passbook savings slightly. Congress in the Depository Institutions Deregulation and Monetary Control Act of 1980 required the DIDC to consider increasing the ceiling on passbook accounts no later than 18 months after passage of the bill. The Congressional mandate, the flood of letters from savers, the Federal subsidy that depository institutions will receive in the form of the All Savers Certificates (ASC) and the belief that increasing the passbook ceilings might help to stem the outflow of passbook savings (which reached an annual rate of 84 Billie of 1981) were all factors that users sed Pheap mamka the DIDC to vote for an increase in the peekin pasting rate. ず Subsequent to this action, I have been told Mi Mutte institution executives that consumpta as ehikring kunta from their passbook accounts to the Agra, They had utt, stat that the shifting of deposits is inpressing the industry'a earnings problems. 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